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SEBI's finetuning of market regulation

Corporate restructuring has been made easier

THE OUTCOME of the year-end meeting of the board of the Securities and Exchange Board of India (the 101st such meeting) might have disappointed those who were hoping that a further, last minute, extension would be given to corporates to comply with the new Clause 49 of the listing agreement dealing with governance matters. For much of last year, it seemed as though Clause 49 was the only regulatory issue. Although the SEBI had, after shifting the deadline in March by nine months, ruled out a further extension, there was an unrealistic expectation of some more time for compliance. In the event, the SEBI board merely clarified some procedural aspects but left the implementation date unchanged.

For all the heat that it has generated, implementation of the revised Clause 49 has obviously not been the only or even the most significant item in the regulatory agenda. The SEBI's last board meeting for 2005 took some major policy decisions aimed at enhancing investor protection and rationalising rules regarding take-overs. The decision to make share registrars send public issue refunds through the electronic clearing (ECS) rather than through registered post is one of the investor protection measures. However, for now, the utility of this measure is restricted to some 15 centres with ECS facilities.

Rating of public issues

Investors will, in the near future, have the benefit of having their public issues rated by an approved agency. However, rating is not going to be mandatory. The choice is left to the issuer. Rating of equity issues is more complex than for debt instruments.

Even in the latter case, its present popularity and near universal coverage should not obscure the fact that plenty of regulatory push was needed to make them popular. For instance, in 1998, it was an RBI decision that forced non-banking finance companies and other deposit taking entities to have their schemes rated. Many could not get a satisfactory rating. Rating along with compulsory registration with the RBI caused a shakeout in the NBFC segment.

One is not sure whether history will repeat itself. Apart from the complexities in rating equity, the fact that the choice (of going in for a rating or not) is left to the issuer suggests that these will be tentative steps. The regulator expects the participants to go through a learning curve.

Interestingly, the cost of an IPO rating is expected to be met by stock exchanges or from the corpus of investor education and protection funds.

The move is probably intended to ensure that the exercise is impartial. But given the professionalism of the rating agencies, fear of a biased rating is unfounded. The danger, however, lies in investors as well as the rating agencies thinking that the exercise is fool proof.

Simpler disclosure norms

The SEBI has also decided to rationalise disclosure requirements. This means that repetitive disclosures, made in issues subsequent to the public issue, can be done away with .The caveat here is only companies with a satisfactory track record of disclosures — to the stock exchanges for existing companies or in offer documents for new companies — will have this exemption.

As a rule, rationalisation, with its connotation of simplifying issue material, is to be whole-heartedly welcomed. No one disputes the fact that present day application forms along with abridged offer documents have become literally unintelligible to the common investor. Very few, if ever, get to see the full prospectus and fewer still have the patience to go through one from cover to cover. But then, offer documents including application forms will have to have proper disclosures and meet all the statutory requirements. Striking a balance between investor friendly simplicity and legal/statutory requirements is not easy at all.

The SEBI's latest decision ought to be seen as a step on the long and difficult road to simplifying public issue literature.

Promoters' stake

The regulator has made corporate restructuring easier in some cases. Till now, a promoter group with a 55 per cent stake which wants to increase its stake through creeping acquisitions or preferential allotments had to make an open offer to other shareholders for at least 20 per cent of the capital. That requirement has been done away with and promoters can now acquire shares to increase their stake to 75 per cent of the capital.

The requirement that 25 per cent of the shares should be in public hands remains but promoters who acquire more than 75 per cent stake are allowed to keep the excess for a limited period before offloading them. There is now harmony between continuous listing requirements and the take over code.

At its last board meeting for 2005, the SEBI also cleared in principle the establishment of exchange traded bullion funds and revived the investor identity scheme of MAPIN using biometric features. Both these merit a separate column.

C. R. L. NARASIMHAN

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