Finance Minister Pranab Mukherjee, in his Union Budget, reiterated the government’s commitment to raise the minimum threshold of public holdings in all listed firms. The average float in listed companies is less than 15% now and the plan is to raise it to 25%, to help make the Indian capital market more deep and liquid.

The Securities and Exchange Board of India or Sebi, country’s capital market regulator, feels it should not be done in a hurry and corporations should be given time to dilute promoters’ stake. Sebi chairman C.B. Bhave said the new rule should be applicable to all listed entities, and the public sector undertakings or PSUs should not be given any relaxation in this regard.

Incidentally, PSUs enjoy a special status when it comes to the appointment of independent directors. Under a clause of listing norms, all listed companies should have 50% independent directors on the boards but the PSUs have not been following the norms.

In an exclusive interview with Mint, Bhave spoke on a number of critical aspects of Indian market, ranging from the issues that come on the way of extending trading time to the status report on peer review that Sebi decided to undertake in the wake of India’s largest corporate fraud (Satyam Computers Services Ltd) to pricing of qualified institutional placements (QIPs), disclosure of pledge of shares by promoters, anchor investors in stock exchanges and why the regualtor has not yet allowed MCX Stock Exchange Ltd (MCX-SX), India’s newest stock exchange, to kick off equity trading.

Edited excerpts:

Are you working on a road map for at least 25% public listing of firms, as outlined by finance minister in his Budget speech?

Actually it is a proposal that the government had made for amending the rules under the Securities Contract Regulation Act. It had put out a discussion paper and asked for public comments on that. The process is being concluded through consultations. Now the government will take action to amend those rules.

Sebi was consulted on this. We have suggested that we need a phased approach. We ourselves have allowed companies to come out with 10% offers and so on. So when we ask them to make it 25%, we need to give them time.

We also need to ensure that the listed public sector undertakings (PSUs) and private companies are treated on par. There are many listed PSUs with less than 10% public holding. We should have one rule for all.

We have pointed out that Clause 49 (of the listing agreement) does not make two classes but the government is simply not appointing adequate number of independent directors for some of the companies.

It is not possible to administer a rule if one set of companies cannot follow it for reasons beyond their control.

So the government will take all implications into account before coming out with such a rule because it is not desirable to have two separate classes of listed entities.

If the rule is changed, will Sebi be able to handle so many primary issues?

It doesn’t have to be a primary issue. The promoters can divest in the secondary market. There is no prohibition on promoters selling stakes. You don’t want any discrimination. But you have different sets of norms for information technology (IT) firms that can continue to have 10% public float. 

That is not desirable. Earlier the feeling was that many companies including IT companies would raise money abroad where this kind of 25% rule doesn’t apply. Had that happened, the Indian market would have been deprived of good issues. At that point, the norm was lowered to 10%. Then there were representations from other sectors. So, whoever came to the market through book building route was allowed an issue with 10% public shareholding.

What’s the latest on the Satyam Computers Services Ltd probe? Your interim report has suggested banning the audit firm.

We do not make our findings or contents of an investigation report public while the process is on.

When Sebi concludes its quasi judicial process or makes any decision in the matter, it will be made public. Peer review or a second audit of firms will possibly help you to avoid Satyam-type frauds.

Where are you on peer review?

The peer review is on its way. Must be some 60-70% complete. I think we are fairly close to completion.

How long will it take?

I hope it happens in the next couple of months but we are running into the issues of conflict of interests and so on. We have to handle that. We are happy so far with the process. The total result is not yet with us.

Sebi had asked promoters of listed Indian firms to reveal their pledge of shares. How about pledged shares of unlisted firms?

This issue did come up in the meeting of primary market advisory committee when this step was considered. That time the committee’s advice was to go step by step. Let the actual pledging be disclosed first.

Is there any legal problem?

That is something we have to examine. The committee was aware of the fact that there could be an issue with indirect pledging. The first step has been taken.You have allowed anchor investors in stock exchanges.

Actually what has been allowed in stock exchange is that certain entities like banks, financial institutions, depositories or clearing corporations can hold up to 15% stake as opposed to a limit of 5% for any other investor. Stock exchanges are infrastructural institutions and it was considered desireable that other similar institutions could be allowed to hold a higher stake so that the exchanges get appropriate investors with sufficient interest in running them.

So foreign exchanges can buy up to 15% stake in Bombay Stock Exchange and National Stock Exchange?

No. While we have said that exchanges can buy up to 15%, the amendment on the foreign investment side has not taken place. No single foreign entity can buy 15% stake as yet. That is in the hands of the government. BSE and NSE both have foreign exchanges as their equity holders.

When are you allowing MCX-SX, the newest entrant in the stock market space, equity trading?

We have asked them that they should conform to the equity norms in terms of holding pattern. Initially, we had given them permission for currency trading even though they did not conform to that; and they were given one year to do this. I would not like to say anything more since this pertains to an individual application.

What about trading of interest rate futures?

No comments on this issue as well.

Are you serious about extending trading time?

That issue had come up before the secondary market advisory committee of Sebi. It had found that there are a lot of practical issues involved. As a matter of policy, the committee did not have any problem in extension of time but then people raised some concern that we make margin calls on brokers on an online basis. So, if the exchange is operating between 5 in the evening and 11 at night, to match with the timing of some of the foreign exchanges, then how does the brokers pay money because banks don’t operate at night.

We still have settlements at T+2 basis but this will effectively make one-day settlement. The committee found that there are too many nuts and bolts issues that needed to be addressed before a call could be taken on this. A sub-committee of exchanges plus some people from the secondary market advisory committee has been formed to get into these nuts and bolts issues and come back to the secondary market advisory committee.

How long will it take?

It depends on how quickly we are able to resolve the practical issues.

When do we see corporate bond trading under Sebi?

First, we have to address the settlement issues. Once we address the settlement issue, then we look at the price dissemination process. Everywhere around the world, corporate bond trading happens only over the counter. Is there any any way of bringing the trading to an exchange platform or not? We really need to study that. Globally corporate bonds are over the counter or OTC products? The reason people give us is that there are not too many participants. So it is essentially an institutional market.

Will you change the pricing norms for qualified institutional placements (QIP)?

The 15-day formula has been introduced not very long back and is quite a step forward from the six-month pricing (prevailing earlier). We need to let this formula work in the market for sometime before changing anything.

Do you smell a rat in sudden enthusiasm about QIPs? Most real estate firms are going for QIPs in a big way.

The real estate industry was deeply into debt and therefore if it is improving its leverage by getting more equity, we have no objection to it. Only thing is that equity should come at a price which is acceptable. The present formula of 15 days (two week average of a firm’s stock price), I think is good enough.

There is no special looking into it or probe in sudden rush for QIPs?

No. As long as they don’t flout the current regulations, why we should go for a probe? QIP by itself is not an undesirable phenomenon. Sebi is looking at some reforms at mutual fund industry.

We have been talking to the mutual fund industry on why there is no common database for all the mutual funds in such a manner that an investor who has invested in different schemes, shouldn’t get 15 different statements. He/she should get one statement giving all the details including the NAV (net asset value) of each fund.

Before the depository system was established investors used to have different certificates for the shares of each company in which they invested. Now they have one statement for all investments. Same thing should be possible for mutual funds also. 

The industry is grappling with it; they have some difficulties and but we are trying to telling them to resolve the issues quickly. This will reduce costs considerably.

Your investigation wing seem to have got teeth. How have you done that?

There is no change in regulations or rules. We have the same powers as in the past. It’s just a question of better focus on things and studying why it is that we are failing in certain places; what is lacking in our investigations; and making sure that you gather all the evidence that is needed.

We have an officer who has come from the police service. She has contributed tremendously to the investigation team’s efforts. These days your focus seems to be on consent orders and not fighting cases.

Fighting cases cannot be an end in itself. If the party is willing to undergo voluntary penalty and if an independent panel thinks the penalty to be commensurate with the alleged violation, consent is a desireable route to follow. In the past one year, many pending cases were disposed of through this route.

Financial crime has financial gain as the main motive behind violation the law. So, if you take away the financial gain from the offender and fine him, to that extent his tendency to step over the line gets curbed.

That’s why the feeling is that the consent proceedings will be far more effective in financial irregularities than in other places.

How do you ensure non-discretionary judgements?

We have set up a committee presided over by a retired high court judge which supervises this process. After Sebi’s internal committee negotiates a settlement with the concerned entity, the entire matter is put up before the high level committee. And if this committee approves, then only the matter comes to the members of the board and only if there is an agreement between all, then the consent goes through.

On our website, we have put out the numbers of how many cases were settled as also the number of cases the committee has rejected. So it is not a committee that simply approves whatever is put up to it.

The money recovered through this process is credited to the Government of India.The consent process also helps reduce litigation. In normal course, Sebi passes an order, than it may go to SAT (Securities Appellate Tribunal, the appellate body) and then even to the Supreme Court. Once the consent is agreed to, neither party has the liberty to go an appeal. So we are eliminating a whole lot of litigation in which people are unnecessarily kept engaged. 

(Content From Mint)



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