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A host of far-reaching changes for market players lined up for Sebi board meet today

Under the leadership of Chairperson Madhabi Puri Buch, SEBI has instituted several incisive reforms that are altering the market landscape

March 29, 2023 / 06:16 AM IST

The Securities and Exchange Board of India (Sebi) is all set to clear several far-reaching proposals which, in its fold, include a categorical elimination of permanent board memberships, approval of new ESG framework revolving around ratings and disclosures, as well as far more efficient and effective trade settlement mechanisms for retail investors.

These and a few other developments will be on the table as the Sebi board meeting gets underway today.

It is under the leadership of the chairperson Madhabi Puri Buch that the market regulator has instituted a host of incisive reforms that are altering the landscape not just for institutional investors but also injecting greater accountability for market participants such as brokerages, ESG rating providers, MIIs, including stock exchanges, clearing corporations and depositories.

Also read: Sebi eases FPIs onboarding process

What's in it for retail traders and investors?

Earlier in February, the market regulator released a consultation paper that cemented the guardrails set up for the protection of the interests of retail traders and investors, even if such a move comes at the cost of denting the earnings of brokerages.

Evidencing the need to secure funds of retail investors better, SEBI, in its consultancy paper observed: "On January 6th, the day of the last running account settlement, approximately INR 46,000 crores of investor funds was held with brokers and CMs. Anecdotal evidence suggests that the number may be even higher on other days. It may also be noted that India’s 1355 stock brokers are not subject to all the regulatory safeguards that other client fund-accepting financial institutions are."

The proposal mooted by the regulator seeks to mitigate the fund-related risk by mandating daily upstreaming of all investor funds from stock brokers and CMs to clearing corporations. While this proposal could reduce the float income implicitly enjoyed by brokers and CMs, the risk of fund misuse in the ecosystem should reduce substantially. In addition, investors will retain the flexibility to improve returns on their surplus funds using other duly authorized and suitable financial service providers.

What's in it for the AIFs?

In another public comment paper released in January, the market regulator sought to set up a standardised valuation approach for the investment portfolio of AIFs.

Unfortunately, extant AIF regulations focus on disclosures to investors and do not prescribe any guidelines on the principles/methodology/standards to be adopted. As such, managers of AIFs have the flexibility to adopt any valuation principle/methodology/standard by disclosing the same to investors in Private Placement Memorandums (PPMs)of schemes of AIFs managed by them. Presently, the modalities relating to the valuation of the investment portfolio of the AIFs are not disclosed in the PPMs at the time of submission to SEBI and also not reported to SEBI subsequently.

SEBI, in turn, has proposed objective and rigorous conditions for the appointment of a  manager of an AIF, while simultaneously mandating that category-III AIFs shall be required to undertake a valuation of their investment portfolio in unlisted securities by an independent valuer. The manager shall be required to disclose to the investors of the AIF details of the valuation principle/methodology/standard opted under the stipulated guidelines for each asset class of the scheme of the AIF as well as report on any changes in the valuation principles and the impact of the said changes.

What's in it for the board of directors and for India Inc's corporate governance?

Recently, the issue of board permanency has been raising quite a few storms. The matter came to prominence with the rather controversial fight between Diageo and Vijay Mallya where Mallya asserted his right to be the chairman of the board even when he was fleeing the law. Other instances include the examples of Sharad Parekh in Nilkamal Limited, and Onkar Kanwar (Chairperson) and Neeraj Kanwar (Vice-Chairperson) in Apollo Tyres Limited.

Permanent seat on a board is generally secured through two ways viz., (i) by having a clause inserted in the Articles of Association (AoA) of a company enabling the appointment of a permanent director, and/or (ii) by getting appointed on the board as a director not liable to ‘retirement by rotation’ and without any defined tenure.

In order to remedy this quandary, SEBI has proposed that as on March 31, 2024, if there is any director serving on the board of a listed entity without his / her appointment or re-appointment being subject to shareholders’ approval during the last 5 years i.e., from April 1, 2019, the listed entity shall take shareholders’ approval in the first general meeting to be held after April 1, 2024, for his / her continuation on the board of the listed entity.

Secondly, from April 1, 2024, subject to the other applicable provisions of law, the listed entity shall ensure that the directorship of all directors serving on the board or appointed to the board is put up to shareholders for approval at least once every 5 years.

Kaushal Shroff
first published: Mar 28, 2023 07:49 pm