SEBI floats 'crowdfunding' rules for start-ups

Given the high-level of risks associated with this new way of fund-raising, SEBI also proposed that only 'accredited investors' be allowed to participate in crowdfunding activities

Market regulator Securities and Exchange Board of India (SEBI) has proposed new norms for 'crowdfunding' or collection funds through web-based platforms and social networking sites. This move is aimed to help start-up companies raise capital and also check misuse of such avenues.


Under the proposed norms, crowdfunding platforms can be provided by only SEBI-registered entities, while companies can raise up to Rs10 crore in a year through this route.


Given the high-level of risks associated with this new way of fund-raising activity, SEBI has also proposed that only 'accredited investors' be allowed to participate in crowdfunding activities.


Such investors would include institutional investors, companies, high network individuals (HNIs) and financially-secure retail investors advised by investment advisors or portfolio managers. Besides, the crowdfunding investment of retail investors would be capped at Rs60,000 or 10% of their networth.


Also, only those entities would be allowed to raise funds through crowdfunding which are not associated with a business group having turnover of more than Rs 25 crore. Entities with an established business, already listed on an exchange or being in existence for four years or more would be barred too.


Those engaged in real estate and financial sector businesses would also be barred from using this route.


Crowdfunding is emerging as an innovative way of raising funds by pooling money from people through Internet, but lack of regulations for such activities has given rise to concerns of possible defrauding of investors.


Among others, social and professional networking websites like Facebook, LinkedIn and Twitter have been used for such fund-raising exercises, while money-pooling also takes place on some dedicated websites for such activities.


Taking cue from financial market regulators in the US and the UK, the SEBI floated a 66-page 'consultation paper on crowdfunding in India', wherein it has proposed a new set of guidelines to regulate such activities.


The final norms would be issued after taking into account comments from public and other stakeholders till 16th July.


Under the proposed norms, the issuer entities and their promoters and directors would need to meet 'fit and proper' criteria of SEBI, while they cannot use multiple platforms to raise such funds within a year.


Also, issuers cannot directly or indirectly advertise their offering to public in general or solicit investments from the public, while they would need to compulsorily route all crowdfunding issues through a SEBI recognized platform.


Issuers will also be barred from directly or indirectly incentivise or compensating any person to promote its offering.


Sensex, Nifty move higher ahead of Fed meet – Tuesday closing report

Despite Tuesday’s strong gains, a follow through rally may be tough

The Indian market on Tuesday covered most of the past two day’s losses in the last hour of the trading session. The indices witnessed a range bound session up to 2.20pm after which it shot up.

The market opened flat and trended sideways for a long time. The S&P BSE Sensex hit a low of 25,105 while NSE Nifty hit a low of 7,509. Following the late spurt, the benchmarks hit a high at 25,546 and 7,638. Sensex closed at 25,521 (up 331 points or 1.31%), while Nifty closed at 7,632 (up 98 points or 1.30%). The NSE recorded a volume of 107.34 crore shares. India VIX fell 1.60% to close at 17.6950.

Except for FMCG (0.29%) all the other indices closed in the green. The top five gainers were PSU Bank (3.05%), CPSE (2.61%), Energy (2.51%), PSE (2.48%) and Bank Nifty (2.28%).

Of the 50 stocks on the Nifty, 39 ended in the green. The top five gainers were ONGC (4.43%), Axis Bank (3.99%), Asian Paints (3.94%), PNB (3.77%) and IndusInd Bank (3.61%). The top five losers were M&M (1.34%), United Spirits (0.89%), Hero MotoCorp (0.82%), Hindustan Unilever (0.75%) and Dr Reddy (0.52%).

Of the 1,576 companies on the NSE, 1,156 companies closed in the green, 376 companies closed in the red while 44 companies closed flat.

In response to the wholesale price index (WPI) inflation jumping to a five-month high, Finance Minister Arun Jaitley was quoted by the media as saying that the rising inflation was due to the hoarding of food stocks. He said that the Centre is committed to ease supply side bottlenecks and has also asked states to take firm measures against hoarders to check speculation.

Reserve Bank of India (RBI) governor Raghuram Rajan Tuesday said on the sidelines of an industry event that since India has sufficient foreign reserves and the current account is also low, one shouldn't worry too much about the external side at this point.

ONGC (4.07%) was the top gainer in the Sensex 30 pack. It may raise its stake in Cairn India's Rajasthan oil fields as a condition for agreeing to allow the company to operate the block after expiry of contractual period. ONGC, which currently holds 30% stake in the block, has told the Oil Ministry that the production sharing contract can be extended beyond 2020 if all parties to the contract agree on mutually agreeable terms. Hero MotoCorp (0.83%) was among the top two losers among the Sensex 30 stocks. Hero MotoCorp is looking to start selling bikes in the US next year, hoping to create a niche market for its products.

Syndicate Bank (4.87%) was among the top six gainers in the ‘A’ group on the BSE while Godrej Consumer Products (2.14%) among the top three losers in the ‘A’ group on the BSE.

US indices closed flat with a positive bias. Data released on Monday showed industrial production climbed in May. Output at factories, mines and utilities rose 0.6% after a revised 0.3% drop in April, a report from the Federal Reserve showed. Home builders' confidence rose in June to the highest level in five months, but respondents were still a bit pessimistic, according to the National Association of Home Builders/Wells Fargo housing-market index released Monday.

A two-day meeting of the Federal Open Market Committee on US monetary policy begins today.

The International Monetary Fund (IMF) cut its growth forecast for the US economy this year and said the Fed may have scope to keep interest rates at zero for longer than investors expect. The institution now sees the the economy growing 2% in 2014, down from an April estimate of 2.8%. The IMF left a 2015 prediction unchanged at 3%, and said it doesn't expect the US to see full employment until the end of 2017, amid low inflation.

Except for Shanghai Composite (0.92%), Hang Seng (0.42%) and Straits Times (0.48%) all the other Asian indices closed in the green. Jakarta Composite (0.49%) was the top gainer.

China attracted $8.6 billion of foreign direct investment in May, down 6.7% from a year earlier, the Ministry of Commerce said in a statement Tuesday. The figure was down from April's $8.7 billion, which was 3.4% higher from a year earlier. FDI in the January-May period rose 2.8% on year to $48.91 billion.

European indices were trading marginally higher. US Futures were trading in the green.
British consumer prices rose 1.5% in May from the same month last year, down from a rate of 1.8% in April, the U.K. Office for National Statistics reported Tuesday.


FSLRC recommendations 'faddish and impressionistic': Rajan

The RBI governor, Dr Raghuram Rajan, on Tuesday attacked the recommendations of FSLRC by asking are we trying to solve a problem that does not exist?

The Reserve Bank of India (RBI) governor Dr Raghuram Rajan, while commenting on Tuesday on the report by Financial Sector Legislative Reforms Commission (FSLRC) said, the Central Bank is engaged in consumer protection framework as per the guidelines mentioned in the report. However, at the same time, he also opposed the idea of creating a Unified Financial Agency by merging all regulators, saying, "if it ain’t broke, don’t fix it!" It may be recalled that FSLRC has proposed a whole new draft law for the financial sector last year.


Speaking at the first State Bank 'Banking and Economic Conclave in Mumbai, the RBI governor said, "The FSLRC’s recommendations (on appropriate size and scope of regulators) seem somewhat schizophrenic. On the one hand, it emphasizes synergies in bringing together some regulators into one entity. But in the process it suggests breaking up other regulators, with attendant loss of synergies. There is no discussion of the empirical magnitude of the synergies gained or synergies lost, which makes the recommendations seem faddish and impressionistic rather than based on deep analysis. Indeed, across the world, we see a variety of organizational structures in existence, suggesting that there is no one right structure. If so, there should be strong arguments for departing from the status quo, which the FSLRC does not provide."


Talking about financial consumer protection laws which are lacking in India, he said, "In laying out the need for consumer protection, raising the issue of whether products sold are suitable for the target customer, and putting the onus on the financial institution to determine suitability, the (FSLRC) report has forced regulators to review their consumer protection frameworks. We, at the RBI are indeed engaged in such an exercise, informed by the valuable guidelines in the FSLRC report."


Indeed, the Reserve Bank of India has been quick in moving towards a fairer system of consumer protection rules and is engaging with different stakeholders in the process.


The FSLRC submitted its report in March 2013 and one of its key recommendations was the setting up of a Unified Financial Authority (UFA) that would merge the regulators of capital markets, insurance and banking. However, it turns out that FSLRC itself may have been an exercise in futility and a waste of taxpayers’ money. Each of its key members–YH Malegam (well-known chartered accountant and director on the RBI board for over 19 years), Kishori J Udeshi (ex-RBI deputy governor), PJ Nayak (ex-bureaucrat and former chief of Axis Bank) and JR Varma (academic)–voiced formal dissent against its core recommendations. The Commission made meagre attempts to engage with core stakeholders–the consumers of financial services–who have been getting a raw deal under every financial regulator.


Dr Rajan, while welcoming a few recommendations of the FSLRC, like the need for a clear monetary framework and creating new institutions like Financial Resolution Authority, said he sees two fundamental problem areas in FSLRC recommendations: oversight of regulators, and appropriate size and scope of regulators.


"The logic for regulation according to the FSLRC is to deal with market failure or more colloquially, bad behaviour. The Commission talks about incomplete information or poor incentives as a reason for bad behaviour, but one of the most important reasons for the bad behaviour necessitating regulation is what economists call incomplete contracts; that is, the behaviour of the regulated entity (vis a vis customers, the public at large, the taxpayer, or the market) cannot be completely specified in contracts because it is too difficult to observe or verify in real time, or it can only be gauged across many contracts," he said.


"This means that while courts can enforce specific contracts, the regulator can sometimes do better," the RBI governor said. “A bank may attract a lot of complaints from its credit card customers. While no single customer may think the case worth taking to court, and while no customer may be able to prove the bank was in the wrong, the large number of complaints will suggest to the regulator that the bank needs to shape up. By comparing the nature of the complaints it gets from this bank’s customers with the complaints it gets from other banks, the regulator can gauge whether something is wrong with the bank and act. Similarly, if a particular product attracts a lot more complaints than other products, the regulator can ask the industry to modify the product appropriately, or even ban it."


According to the RBI governor, a lot of regulatory action stems from the regulator exercising sound judgement based on years of experience and in doing so, it fills in the gaps in laws, contracts, and even regulations. He said, "Not everything the regulator does can be proven in a court of law. Courts do not interfere in the specific decisions of a corporate board. Using the business judgement rule, they do not second-guess business decisions, and only pull up boards when there is a violation of the legal process of arriving at a decision. In the same way, there are a range of regulatory decisions where regulatory judgement should not be second guessed."


Appeals Against the Regulator's Actions

Talking about the dangers of excessive legal oversight, Dr Rajan said, “one reading of the FSLRC is that almost everything the regulator does, not just the framing of regulation or the process by which decisions are reached but also the exercise of regulatory judgement as well as policy decisions, is to be subject to legal appeal. This could create problems.” According to Dr Rajan "...the process by which the regulator reached a decision, as well as the conformity of the decision with basic principles such as natural justice, can already be challenged through a writ petition in High Court. Even now, some regulatory decisions can be appealed to the central government. But how much checking and balancing is enough? Do we want even policy decisions to be appealable? Can legal oversight become excessive?" he asked.


Dr Rajan said, “we ask ask tribunals to make judgements that they simply do not have the capability, experience, or information to make, and where precise evidence may be lacking. If we attempt to do this, we will undermine the very purpose of a regulator. Of course, one could trust the good sense of the tribunal to follow a 'regulatory judgement' rule and not intervene in a broad array of matters, but does this not imply a double standard — we trust the tribunal’s judgement but not that of the regulator. More likely, though, past experience suggests that entities like to justify their existence, and if set up, a tribunal will intervene more than necessary," he said.


He said, “in India, where the financial system is developing and many new regulations have to be framed (more so if we move to a principle based approach for legislation), and where the tribunals will have a significant amount of learning to do, the encouragement to appeal could paralyse the system and create distortions, as needed regulations are held up and participants exploit loopholes.”


Dr Rajan said, in every country, a healthy respect for the regulator serves to keep participants on the straight and narrow, especially for a developing country, where private behaviour is less constrained by norms or institutions, this is important. "But," he said, "to the extent that private parties with their high-priced lawyers can check the regulator, that healthy respect dissipates. So the final danger is that the regulator could become a paper tiger, and lose its power of influencing good behaviour, even in areas that are not subject to judicial review."


Market regulator Securities and Exchange Board of India (SEBI) is already under the Securities Appellate Tribunal (SAT) and some people ask why not bring other regulators under a Tribunal. Dr Rajan, feels, as long as the Tribunal only questions administrative decisions such as the size and proportionality of penalties, there is no problem. "But if it goes beyond, and starts entertaining questions about policy, the functioning of a regulator like the RBI, which has to constantly make judgements intended to minimize systemic risk, will be greatly impaired. Indeed, because of the tendency of any new organization to overreach to justify its existence, one should be careful about tying the financial regulator with further judicial oversight. Better to revisit these issues a few years from now when both regulation and oversight mechanisms are better developed," he said.


Unified Regulator

The FSLRC has proposed that all regulation of trading should move under one roof, all regulation of consumer protection should move under another roof, but the regulation of credit should be balkanized — banks should continue to be regulated by the RBI but the regulation of the quasi-bank institutions like non-banking financial companies (NBFCs) should move to the Unified Financial Agency, a regulatory behemoth that would combine supervision of trading as well as credit.


According to Dr Rajan, this balkanization would hamper regulatory uniformity, the supervision of credit growth, and the conduct of monetary policy. "while negotiations and cooperation between regulators can overcome organisational barriers, it is not wise to give a regulator a responsibility and leave the tools for exercising that responsibility in other hands. The RBI has responsibility for managing the internal and external value of the rupee, and more broadly, for macroeconomic stability. As a number of multilateral agencies and academics have recognized, the ability to shape capital inflows is now a recognized part of the macro-prudential tool kit. But by taking away control over internal capital inflows from the RBI, isn’t the FSLRC taking away an important tool from the RBI?" he asked.


"Undoubtedly our laws need reform, but that is no reason to try entirely new approaches to legislation, overlaid on entirely new regulatory structures, complemented by entirely new oversight over regulation. Undoubtedly, we have had, and will have, periods when regulators have not gotten along with each other. But is that a reason to merge some organizations and break up others, perhaps ensuring dysfunctionality along many other dimensions? After all, there is no single regulatory architecture that has emerged with distinction from the crisis. Instead, different regulatory architectures have succeeded or failed based on the circumstances of the country and the quality of the regulator. Undoubtedly, we have also had occasions when regulators have exceeded their remit or been high-handed. But is that a reason to subject their every action to judicial second-guessing? Is there a reason we need more checks and balances, or are we trying to solve a problem that does not exist," Dr Rajan asked.



Yerram Raju Behara

3 years ago

It is so exhilarating to hear Dr Rajan's views on FSLRC and there should be no legal overhang on regulatory policies and there should be no double speak on regulation. Excessive regulation leads to business loss at a time when banks have to take appropriate risks to enhance their profits and not hide their losses in fear of either existing or impending regulation.

MG Warrier

3 years ago

In May 2013, in response to an article in a financial newspaper, I had observed: “Not much research is needed to conclude that finance ministry and FSLRC, in a hurry to resolve certain minor issues, ignored the evolution of the role of RBI and the care with which RBI has nurtured the financial sector. Fed Reserve and RBI function in two different worlds. To say that time is not right for dismantling or truncating the RBI which is doing creditably well as is being admitted in several international forums, would be telling the obvious. The dissenting notes recorded by 4 out of 7 members who signed the final report are well-argued documents, which inter alia plead the case for maintaining the basic features of RBI and assert the need for allowing the central bank to carry on with its present mandates. One wonders what motivated the FSLRC Chairman to finalize the report ignoring the difference of views expressed especially by K J Udeshi, P J Nayak and Y H Malegam. It would appear that the Commission did not get opportunity to understand the present relationship between the RBI and GOI. The regulatory apparatus plus legislations in financial sector in India are in working condition. The FSLRC’s effort to re-invent them has pushed the present regulators and supervisors to a confused state, making the possibility of an intelligent debate on the issue remote. The idea of creating a Unified Financial Agency for all financial regulators except RBI, truncating RBI by separating Public debt Management and keeping the agency doing that work (presumably with the same work force) in RBI premises, later UFA subsuming even RBI, all give a feeling that the FSLRC was not allowed to ‘apply its intelligent mind’ and in the eagerness to satisfy all, and so fast, it has forgotten its own brief. Perhaps, the purpose would be served better, if RBI is allowed to function with its present mandate, a coordination committee sorts out issues among the remaining regulators. If GOI aim is to reduce the number of regulators, after necessary groundwork, merger of the regulatory agencies outside RBI one by one, as work stabilizes could be thought of. The twin goals of one Unified Financial Agency and managing the man-power-related issues that may arise with merger here could be better handled this way.” also had published an article covering the above issues. The terse indictment of FSLRC report coming from Dr Rajan gives one the satisfaction that in India, it is not easy even for governments to ‘cut and paste’ policy formulations to suit individual whims and get away, and wiser counsel will prevail, though this may take time. M G Warrier, Mumbai

Suiketu Shah

3 years ago

Dr Swamy is right.Rajan has to go.

Hemlata Mohan

3 years ago

Well said , Dr Rajan!.It is indeed necessary to keep policy making the preserve of the RBI and not allow the tool to monitor it to be with another.
Only thing to be ensured is that policies, howsoever good they are , should be revisited and reviewed periodically to ensure that they have been useful. Sometimes, creative destruction is what is needed .



In Reply to Hemlata Mohan 3 years ago

I'm so comfortable that RBI is in the hand of Mr. Rajan who donot play politics but work for upholiding the integrity of the institution he is heading. Mr. Rajan, we need people like you to talk fearlessly for us.

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