The Securities and Exchange Board of India’s (Sebi’s) latest reforms measures—16 of them—come at a time when the stock markets are on the edge. However, this is a good time to take the bull by the horns; that explains Wednesday’s slew of measures such as introduction of an Asba-like mechanism for secondary trades, removal of permanent positions in board seats, allowing private equity firms to become mutual fund sponsors, a backstop facility to help MFs during stress, and the new Environment Social and Governance (ESG) norms. Some of these measures will surely improve corporate governance. For example, the removal of permanence of board seats gives shareholders a larger say in deciding on the tenure of board members and gives the Nomination and Remuneration committees more teeth.
The Asba-like mechanism in secondary trade—similar to initial public offers—ensures that brokers are unable to misuse clients’ money while the investor continues to earn interest income on the blocked amount. In fact, Sebi chairperson Madhabi Puri Buch’s sharp remarks that ‘…If another Karvy-like instance happens, it will be on our dead bodies…,’ gives an indication of how the regulator is looking to crack down on malpractices by certain market participants. In the past few months, it has actively gone after fund houses for cases of front-running. The regulator seems to be doing its job in earnest by being on a high-alert mode and letting every participant know that.
By strengthening and widening the existing eligibility criteria for sponsors, the regulator has introduced an alternative route to enable a diverse set of entities to become sponsors of MFs. This will make private equity eligible to become a sponsor of MFs—a move that has been long pending. The earlier mutual fund advisory committee had recommended this almost two years back. Last year, there were reports that Blackstone and KKR had shown interest in L&T Mutual Fund and IDFC Mutual Fund, respectively. However, they were unable to make the cut due to the eligibility criteria.
Of course, the introduction of the backstop facility—Corporate Debt Market Development Fund—that will purchase investment-grade corporate debt securities in times of stress may raise some eyebrows because of the argument that the government, which will provide 90% of the `33,000 crore fund, should not be protecting risk-taking investors. However, proponents of the move say there is an insurance cover of up to `5 lakh for bank depositors through the Deposit Insurance and Credit Guarantee Corporation, and hence, there is no harm in giving the mutual fund investors a parachute as well. And if an underwriting facility like a safety fund helps deepen the bond market, so be it. As we have seen during the debt fund crisis at Franklin Templeton in 2020, investors were unable to exit for a long time. In the past decade, the Reserve Bank of India has had to open a special window allowing mutual funds to borrow from banks several times during times of crisis. A safety fund could serve as an insurance cover and partially solve this problem. Buch had said in December that 45% of the circulars issued by the regulator till then were on improving the ease of doing business. The percentage is expected to rise significantly after her latest round of reforms.