Raising the bar

| Updated on July 01, 2021

SEBI’s latest regulatory changes can democratise market participation and improve governance

The flurry of regulatory changes cleared by the Securities and Exchange Board of India (SEBI) in its recent board meeting ease ground rules for some market players while tightening governance norms for others. The relaxations pertain mainly to a brand-new accredited investor framework, lower compliances for bond issuers and lower ticket sizes for Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). The tightening pertains to Independent Director (ID) appointments for companies and skin-in-the-game rules for mutual funds.

Whenever market players come up with new-fangled investment products, SEBI faces a regulatory dilemma on whether it must allow retail investors to participate in them for their return potential or keep them out because of their risks. So far, it has leaned towards the latter by setting very high minimum ticket sizes (₹50 lakh to ₹1 crore) for products such as AIFs or PMS. But this approach presumes that all retail investors with low net-worth are inherently poor at evaluating risk-reward and denies them genuine wealth-creation opportunities. The new accredited investor framework now mooted by SEBI will allow individuals, if they are qualified and can prove themselves to be well-informed, to opt into sophisticated products at their own risk. While details of how investors will be ‘accredited’ are yet to be fleshed out, this is an approach that has been tried-and-tested in Western markets. SEBI must however subject opaque products such as AIFs and PMS to better disclosure standards before implementing it. The decision to lower minimum subscription and trading lots for REITs and InvITs is a sound move that opens up these regulated, income-generating vehicles to retail investors.

SEBI’s discussion paper seeking to tighten procedures for appointment or removal of IDs in listed companies received a lot of push-back from market participants. In framing its regulations on this subject now, the regulator has stuck to its guns on important facets such as making special resolutions by shareholders mandatory for both appointment and removal of IDs and requiring public disclosure of their resignation letters. But it has watered down its norms on post facto ratification of ID appointments and put off the contentious recommendation on ESOP compensation to IDs. Perhaps wiser after the Franklin Templeton episode, SEBI has also decided to peg skin-in-the-game requirements for Asset Management Companies launching new funds to each scheme’s risk profile, instead of mandating a flat ₹50 lakh investment. Apart from deterring excessive risk-taking by fund managers, this new rule may have the happy effect of discouraging fund houses from deluging investors with risky thematic equity new fund offers based on market fancies.

Published on July 01, 2021

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