Plugging gaps

The flurry of regulatory changes announced by the Securities and Exchange Board of India (SEBI) after its recent board meeting have helped clear the air over some important issues. For instance, the correct procedure to be followed while winding up a mutual fund scheme was a topic for extensive debate following Franklin Templeton’s debt fund crisis last year. SEBI has now clarified that majority of trustees should decide on the winding up or premature redemption and then obtain consent of majority of unit-holders present and voting. Securing a simple majority may be all too easy for fund-houses, given the poor participation rate in such voting. Also, larger investors can sway the voting result with each unit eligible for a vote. The regulator can consider making the voting procedures more stringent so that fund houses do not take decisions which are unfavourable to investors.

Similarly, the changes made in valuation of shares in preferential allotments help settle the debate stoked by the PNB Housing Finance transferring controlling stake to private equity player, Carlyle at market price. This had led to heated discussion over the need to use an alternative valuation method, in cases where controlling stake changed hands. The market regulator has done well to clarify that a valuation report from a registered independent valuer will be required when control of the company is transferred or in case of allotment of more than 5 per cent of stake. This clarification along with the stipulation that a committee of independent directors should give their recommendation on such preferential issues will ensure that the right value is realised for the company and other shareholders.

The Board has given ample attention to the primary market where activity is now at its peak with companies rushing to make offers while the demand is good and new investors getting lured by mouth-watering listing returns. SEBI is trying to fix regulatory gaps here by adopting many of the proposals in the discussion paper issued in November. In the absence of specific details regarding the end-use of IPO proceeds, it is difficult to monitor their utilisation. The amendment to the ICDR regulations capping the funds earmarked for inorganic growth, without identifying the target company, at 35 per cent of the total amount raised and 25 per cent of amount being raised by the issuer, will help prevent misuse of offer proceeds. Similarly, ensuring that existing shareholders of issuers without track record continue to hold a substantial portion of their shares after the issue will ensure that the investors retain skin in the game and do not peddle dubious businesses. Asking anchor investors to sell half of their investments after 90 days is only fair since many investors make investment decisions based on the anchors in the offer. Expanding the price band to 5 per cent fixes another anomaly in primary issuances. Creating a sub-category in the non-institutional investor category of investors however appears a little ad-hoc. The regulator can instead holistically review the limits for retail and NII categories and revise them upward, taking inflation into account.

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