The Securities and Exchange Board of India (Sebi) Chairman, Tuhin Kanta Pandey’s recent statement that the market watchdog is in talks with the Ministry of Corporate Affairs to see whether the unlisted share market should be regulated is a subject that has been debated for quite some time.
Legal experts believe that the main focus must be on clarifying and broadening the regulator’s jurisdiction through legislative amendments. “If the government opts to regulate unlisted securities, introducing a new regulator is unlikely since the roles and oversight of Sebi and the Ministry of Corporate Affairs can be extended through legislative amendments,” said Vaibhav Kakkar, senior partner at Saraf and Partners.
Existing Legal Ambit
Empowering Sebi to supervise and enact formal regulation would be the logical step, he added.
Experts also said that Sebi has the power to regulate the unlisted space as these securities, particularly those of public limited companies, fall within the ambit of the Securities Contracts Regulation Act, 1956. However, shares of private limited companies generally don’t fall under this Act due to restrictions in transferability.
Pandey had also raised concerns about the stark differential between prices in the unlisted space and those discovered during the initial public offering (IPO). One such example of a major price differential, for instance, is Tata Capital, for which the grey market price had peaked over ₹1,100 in September last year.
However, a month later, the stock debuted at way less than half the price at ₹330 on the National Stock Exchange, only a slight premium to the ₹326 issue price.
Transparency and Compliance
The significant difference in prices is largely due to the absence of regulatory compliance requirements, said Jayesh H, Co-founder at Juris Corp. Oftentimes, investors pay and then wait for a week or more to get these unlisted securities, with no clarity as to how much of the purchase price is going into the pockets of the middlemen or trading platforms, he added.
Since most of these deals happen in the private space, the main challenge for any regulator would be the mechanism to monitor the activity.
In August last year, the Sebi Chairman had said that the regulator is considering a pilot programme trading shares of companies prior to their IPOs on a regulated platform, subject to certain disclosures. “Any such new mechanism (pre-IPO platform) will take a few months at least,” said Jayesh of Juris Corp. If well designed, it can go a long way to curb most of the current malpractices, he added.