The Securities and Exchange Board of India’s (Sebi) board on Wednesday made sweeping changes in the expense ratio of mutual funds, removed obsolete regulations for stock brokers and allowed debt issuers to incentivise investors, among others.
However, the implementation of the high-level committee report on conflict of interest has been kept in abeyance for now, as the board felt that there should be a detailed discussion on this after certain sections of employees expressed their concerns and operational modalities.
Decoding the BER
The significant change was made in the mutual fund expense ratio. Mutual fund investors are expected to pay lower expense now because the market regulator has made clear demarcation between statutory and regulatory levies, brokerage fees and the base expense ratio (BER). So, the total expense ratio will include BER, brokerage, regulatory and statutory levies.
Also, with the sharp cut in brokerage fees from 12 paise to 6 paise in the cash market and 5 paise to 2 paise in the derivative market (exclusive of levies), investors are expected to benefit from this change. However, the market regulator has not unbundled the research and brokerage, as proposed initially.
“This model is not feasible today, and attempts to implement it elsewhere were unsuccessful. It led to a decline in sell-side research coverage, which is detrimental not only to brokerage clients but also to retail investors who rely on such research for independent investment decisions,” said Sebi Chairman Tuhin Kanta Pandey.
A simpler new regulatory framework has also been introduced to simplify operational and compliance requirements that will lead to a 44% reduction – from 162 to 88 pages. Further, the number of provisos have been reduced from 59 to fewer than 15.
An important change has been introduced in the ICDR (Issue of Capital and Disclosure Requirement) regulations for non-promoters who have pledged their share before the initial public offering (IPO). Since non-promoters with pre-issue capital have to lock-in their shares for six months, Sebi has amended the ICDR that depositories shall record these securities as non-transferable for the lock-in period. Also, subsequent to the release of the pledge, depositories have to ensure that the shares are locked-in for the balance period. The board also approved proposals to rationalise disclosures in the abridged prospectus that will be given.
Deepening the Bond Market
The board made amendments to the Listing Obligations and Disclosure Requirements (LODR) based on recommendations of a Sebi panel of experts. It aligned the timeline for transfer of unclaimed amount by an entity having listed non-convertible securities with Companies Act in line with a public consultation.
To deepen the bond market further, it also announced it will permit debt issuers to offer incentives in public issues to certain categories of investors. This will be in the form of additional interest or a discount for senior citizens, women etc. The board also amended Credit Rating Agencies (CRA) regulations to let them rate instruments under other Financial Sector Regulators (FSR). This “would be beneficial for the development of the overall debt market,” said Sebi.
Regarding IPO pricing, Pandey made it clear that the current policy of Sebi is to not interfere. “When there are some worries about transactions, we place guardrails. We are bringing clearly, whether to subscribe. Indian markets have to mature not go into herd mentality. There should be more informed calls,” Pandey said.
“Markets are free, and people should choose,” he said. Sebi is looking at different aspects for creating a pre-IPO platform, added Pandey
To make business easier for shadow banks (NBFCs), ARCs, insurers and REITs, Sebi relaxed the threshold for High Value Debt Listed Entities (HVDLEs) including provisions on Related Party Transactions (RPT).
Credit rating agencies, which come under different regulators, will now have to clearly segregate and label their Sebi-regulated and non-regulated instruments in reports and releases. Further, there has to be separate disclosures on websites, have separate email ids and advertising as well.