Nine decisions that Sebi has taken in the interest of investors

• Follow

Ever since the outbreak of the Covid-19 pandemic more and more retail investors entered the stock markets. This is evident from the fact that the number of registered investors which has gone up to 7,22,28,575 as of July 2, 2021, recording a 41.07% increase on a year-on-year basis. This number is more than the population of Thailand, the United Kingdom, France, or Singapore. And in such a situation, markets regulator Securities and Exchange Board of India’s (Sebi’s) role has expanded from regulating the markets to improve governance practices thereby safeguarding the interest of retail investors. Here are some key decisions that Sebi has taken in the recent past to democratise market participation and improve governance.

Peak margin

With a view to safeguarding the interest of retail investors, market regulator Sebi in July 2020 notified the peak margin rules. The rationale behind the peak margins was to maintain some discipline in terms of trading, investment, broker funding, or taking leverage positions or intraday positions. As a result, the said rule is expected to keep the markets and system strong as well as efficient.

As per Sebi’s notification, the peak margins rule was to be implemented in four stages. Between December 2020 and February 2021, traders were supposed to maintain at least 25% of the peak (maximum) margin. This margin was raised to 50% between March 2021 and May 2021 in phase two. As a part of the phased adoption starting June 1, 2021, traders are expected to have 75% of the peak margin available with the broker i.e. intraday leverage provided for Equity Cash and F&O Intraday would be 1.33X going forward. In the last and fourth phase by Sep 2021, clients should have 100% of the peak margin obligation available with the broker during the day.

AT1 Bonds

The Franklin Templeton fiasco forced markets watchdog Sebi on March 10 to come up with new guidelines for treating additional tier-1 (AT1) securities issued by banks as having 100-year (perpetual) maturity, held by mutual funds. Citing the notification mutual fund industry expressed a grim scenario concerning the circular and said that a revaluation of such bonds would lead to huge losses. After the finance ministry intervention, SEBI revised its guidelines and said that the deemed residual maturity of Basel III AT-1 bonds will be 10 years until March 31, 2022. It will be increased to 20 years from April 1, 2022 to September 2022, and 30 years for the subsequent six-month period. From April 2023, the residual maturity will become 100 years from the date of issuance of the bond.

Apart from the revaluation of AT1 bonds the market regulator has also laid down certain investment limits on perpetual bonds. Mutual funds should not be investing more than 10% of the scheme’s corpus in perpetual bonds. And the exposure should not be more than 5% to a perpetual bond of the same company.

Skin in the game – key employees

In April this year, SEBI notified that a minimum of 20% of the salary/perks of key employees of asset management companies (AMCs) will have to be paid in mutual fund units.

Key employees of the AMCs include — Chief Executive Officer (CEO), Chief Investment Officer (CIO), Chief Risk Officer (CRO), Chief Information Security Officer (CISO), Chief Operation Officer (COO), Fund Manager(s), Compliance Officer, Sales Head, Investor Relations Officer, heads of other departments and dealer of the asset management firm.

As per the April notification, these rules were supposed to come into effect from July 1, 2021. However, the market regulator has postponed the implementation to October 2021. The deferral, in effect, provides mutual fund companies enough time to re-align pay systems to guarantee that employees are able to comply with the standards while ensuring that the abrupt change in regulation does not have a negative impact on their lives and lifestyles.

Skin in the game – mutual fund house

The markets regulator has amended the country’s mutual fund regulations, directing AMCs in the country to put in a minimum amount of money from their own account every time a mutual fund scheme is launched. Sebi said that AMCs will have to make such an investment contribution as a “skin in the game” in proportion to the varying amount of risks associated with the MF scheme, which essentially means higher the risk of losses bigger has to be the minimum contribution made by the AMC itself.

At present, as skin in the game in the MF schemes AMCs are required to provide an investment of 1% of the amount raised in the new fund offer or Rs 50 lakh, whichever is less. Sebi’s new move will not only make AMCs more cautious while launching MF schemes but also, curb misselling and ensure that fund managers allocate the public money judiciously to curb risks of losses. Sebi is yet to come out with a framework for the new rules.

Relaxing REITs and InvITs

In another major move, Sebi has relaxed the investment norms by amending the Real Estate Investment Trusts (REITs) Regulations, and Infrastructure Investment Trusts (InvITs) Regulations, 2014. According to new rules trading can be done in a lot of one unit with a minimum application value of Rs 10,000 and Rs 15,000 in the case of REITs and InvITs. The reduction in lot size brings them in line with the equity markets.

Currently, the minimum investment amount in the case of REITs is Rs 50,000 and for InVITs it is Rs 1 lakh. Earlier the minimum investment limit for REITs was Rs 2 lakh which was brought down to Rs 50,000. REITs were first introduced in India in 2007.

Independent directors

In another key development, Sebi overhauled the norms pertaining to the appointment, removal, and remuneration of independent directors in order to curtail the sway of promoters over them. The regulator has said the appointment, re-appointment, and removal of independent directors shall be through a special resolution, which requires 75% votes in support instead of 51%, as in the case of an ordinary resolution.

Also, the nomination and remuneration committee (NRC), which selects candidates for appointment as independent directors, will be required to have two-thirds IDs, as against the existing requirement of a majority. Further, the NRC will have to disclose and justify the skill-sets while selecting a candidate. Key managerial personnel and their relatives or employees of the promoter group will have to observe a three-year cooling-off period before they get appointed as an independent director.

Sebi has also tightened rules related to the resignation of independent directors. The regulator has said the new framework will come into play from January 1.

Insider trading

To crackdown on insider trading, Sebi increased the reward under the informant mechanism by tenfold to Rs 10 crore from the current Rs 1 crore.

Accredited investor

In its recent board meeting, Sebi has come up with a framework for accredited investors, with relaxations for high-value investment vehicles. According to Sebi’s consultation paper, an accredited individual investor is someone who satisfies at least one of three conditions. One, the investor has a net worth of  Rs 7.5 crore, with at least half of it in financial assets. Two, the investor has an annual income greater than Rs 2 crore. Three, the individual has an annual income greater than Rs 1 crore and net worth greater than Rs 5 crore with at least half this amount in financial assets. For trusts and body corporates, the net worth threshold is Rs 50 crore.

Currently, those interested in portfolio management schemes (PMS) and alternative investment funds (AIFs) must invest at least Rs 50 lakh and Rs 1 crore, respectively; these thresholds won’t apply to accredited investors. Second, current rules mandate AIFs to make diversified investments, with strict conditions for the launch of schemes, and extension of tenure. Sebi has proposed to allow the formation of AIFs where these rules are more relaxed, creating a potential high-return, high-risk investment avenue, but open only to accredited investors. They must invest a minimum of Rs 70 crore in such AIFs.

Final clarity on the framework for creating accredited investors is in the works.

Investment adviser administration and supervisory body

To ensure the investment advisers’ agenda is in line with that of investors and to avoid misselling of financial products Sebi has appointed BSE Administration and Supervision Ltd (BASL), a subsidiary of BSE, to grant recognition to registered investment advisers (RIAs) and supervise them.

BASL is required to supervise RIAs, including both onsite and offsite, redress grievances of clients and IAs, take administrative action including issuing warnings and referring to SEBI for enforcement action, according to the circular.

In addition, it will have to monitor activities of RIAs by obtaining periodical reports, submit such reports to SEBI and maintain a database of RIAs.