Letting investment banks carry out activities that are not regulated by the Securities and Exchange Board of India (SEBI) in order to ease the compliance burden is seen as exposing the system to risks and vulnerabilities as well as fostering conflict of interest situations.
On Wednesday at its board meeting, SEBI relaxed norms for investment bankers, permitting them to retain non-regulated activities and not hive it off into a separate entity as it had directed in December last year.
The move is a concession to pressure from the investment banking lobby and part of the regulator’s thrust on ease of doing business. “The failure to mandate segregation invites significant risks,” said Sonam Chandwani, Managing Partner, KS Legal & Associates.
“Non-regulated activities, by their very nature, elude SEBI’s supervisory grasp, creating fertile ground for conflicts of interest and systemic vulnerabilities,” she said.
When SEBI had floated the consultation paper last year on the issue of permitted activities by investment bankers, it had pointed out that some of them, such as private placement for unlisted companies, advisory services for projects and syndication of rupee term loans were outside the purview of the regulator.
“It may be pertinent to note that undertaking such activities may pose significant regulatory and systemic risks as such activities are outside the jurisdiction of SEBI,” it had said. Subsequently, it had directed the hiving off of these non-regulated activities into a separate entity with a separate brand name within two years. After receiving feedback from the industry, it decided to defer the decision at its board meeting in March.
Market experts pointed out that the concerns raised by the regulator in its consultation paper are still valid.
If an investment banker, while advising on a public issue, is also engaged simultaneously in handling the private placement for an unlisted entity, the absence of a structural separation could compromise due diligence standards, incentive structure and have an impact on investor confidence as well as market stability, they pointed out.
Though the relaxation does ease the burden of more compliance and the necessity for complex restructuring of their organisations, “it smacks of a compromise that subordinates robust governance to expediency,” Chandwani said.
A senior partner with a law firm that regularly engages with top investment banks said that there is fear of regulatory arbitrage between regulated and unregulated activities and the framework needed to be tightened further.