‘Strengthen corporate governance in start-ups’

The International Advisory Board (IAB) of SEBI has observed that entry barriers to ensure participation of only sophisticated investors in the initial stage for technology start ups, is a good idea, given the high-risk high-return trade-offs involved in financing and the regulatory concerns of ease of raising capital versus investor protection.

Need for framework Outlining the necessity of a relevant framework to enable financing of start-ups, the IAB felt the need for a balanced regulatory approach towards valuation of start-ups as the conventional approach might not be applicable in the early stage of their operation.

However, the need of adequate disclosures, including suitable caution to investors about valuation, cannot be overemphasised. SEBI may also evaluate if licensed sponsors may assist in strengthening the corporate governance of start-ups besides, implementing learning-based changes going forward, the IAB said.

To enhance the participation of institutional investors in the governance of investee companies, the IAB suggested that SEBI may set up a code (akin to the Stewardship Code of the UK) based on the approach of ‘comply or explain’.

Due diligence checks On the merger of the commodities market regulator FMC with SEBI, the IAB observed that SEBI needed to conduct a thorough due diligence and gap analysis before articulating its vision for the commodity derivatives segment. This included studying the risks and structure of the market, including aspects, such as contract design, warehouse receipts and quality control of underlying commodities in the initial period with an emphasis on avoiding crisis in the market during this period. Following this, SEBI could take up market development activities, the IAB felt.

On compensating the victims of insider trading, the IAB said that the biggest challenge was identification of the victims and the amount of loss suffered by them in the process. The need to strengthen market infrastructure and complement insider trading rules were emphasised as insider trading and compensation of victims could not be looked at in isolation.

The use of name and shame for persons indulging in insider trading was a possible solution to deter people from doing this to earn quick money.

SEBI constituted the IAB in September, 2011 to seek guidance from international experts on future direction for the organisation, taking into account relevant global experiences, emerging challenges and latest developments in the regulatory space.

The current members of the IAB, include UK Sinha, Chairman, SEBI, Viral Acharya (Professor, New York University Stern School of Business), Jane Diplock (Independent Director, Singapore Exchange), Russell Loubser (former CEO, Johannesburg SE), Blair Pickerell (Chairman Asia, Nikko AMC) and Dr Andrew Sheng (former Chairman, Securities and Futures Commission of Hong Kong).

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