SEBI mulls new rules to protect investors, deepen markets

At the SEBI board meeting, the market regulator is likely to consider some wide-ranging reforms in its regulations for mutual funds and initial public offers

Mumbai: Market regulator Securities and Exchange Board of India (SEBI) will consider new rules on Thursday to protect the investors' interest and to expand the country's investment culture with greater and more cost-effective access to products like IPOs and mutual funds, reports PTI.

At its board meeting scheduled here, SEBI is likely to consider some wide-ranging reforms in its regulations for mutual funds and initial public offers (IPOs), sources said.

The proposals expected to be discussed at the meeting include provision for a “safety net” guarantee for IPO investors, as also some tax incentives for the new investors.

Besides, the regulator is also likely to consider the introduction of e-IPO, which would allow investors to bid for IPO shares electronically and without any physical paperwork.

In addition to being a cost-effective way, the e-IPO is likely to make it easier for investors across the country to tap the IPO market. Besides, the regulator is also likely to consider ways to encourage investors and distributors in the mutual fund space. SEBI chairman UK Sinha had met finance minister P Chidambaram on Tuesday.

Thursday’s meeting also holds significance for being the first board meeting of the capital market regulator after an announcement by the new finance minister P Chidambaram that various decisions could be made soon to attract more investors to mutual funds and other investment products.

In his first press conference after assuming charge, Mr Chidambaram said last Monday that a number of decisions would be taken soon to encourage more people to invest in mutual funds, insurance polices and other instruments.

A major tax incentive proposal relates to stock investments as well, as SEBI would consider finalising the fine-print of Rajiv Gandhi Equity Scheme, which was announced in this year's Union Budget and aims to provide tax benefits to first time investors in the stock market.

At the upcoming board meet, SEBI is also likely to discuss a new definition for 'small or retail investors’ as there is some ambiguity in current regulations.

For IPOs, the investors putting in up to Rs2 lakh are considered retail investors. However, listed companies distinguish small and large individual shareholders as those holding shares worth up to Rs1 lakh and those holding shares worth more than Rs1 lakh, respectively.

For mutual funds, the regulator will consider giving the fund houses flexibility in using their expense ratio. At present, the fund houses are required to divide their expense ratio (an amount deducted from investors’ funds) as per a fixed formula between the fund management fees and other expenses.

There have been demands from some section of the mutual fund industry to allow levying an additional charge of 2% from investors. However, the demand has faced opposition from within the industry and was being seen as return of the controversial entry-load (a charge levied on new investors), which was scrapped by SEBI in 2009.

The introduction of any fresh charge could be seen as an anti-investor move and therefore SEBI is not very comfortable with any such idea, the official said, while adding that there could be certain tax incentives to attract investors to mutual funds. Measures would be discussed to help the mutual fund distributors as well, he added.

According to a senior official, the key proposals for reforms in primary market include introduction of a “safety net” guarantee for the investors buying shares through IPOs.

As per the proposed mechanism, a certain portion of the investment made by retail shareholders in the IPOs could be guaranteed for a fixed period, which could be six months, even if the shares’ value plunge below the IPO allotment price during this time.

This “safety net” mechanism is being considered only for the small retail investors, who would be compensated by the promoters and other entities selling shares through IPOs in the event of the company’s shares plunging below a certain threshold limit within a time frame set by SEBI.

As per the current regulations, the companies are allowed to provide such “safety nets” in their IPOs, but it is not mandatory to make such provisions and only a few companies have provided this facility for investors in the past.

SEBI is of the view that a mandatory “safety net” provision would also help in fair pricing of IPOs, besides providing investors some sort of capital protection guarantee.

Many companies and investment bankers have come under the criticism for over-pricing IPOs after their shares fell below the public offer price levels in several cases.

Sources said the companies could be allowed to pass on the costs of “safety net” provision to the investment bankers, who are primarily responsible for fixing the price of shares to be sold through IPOs.

Besides, SEBI is also considering changes in the profitability eligibility criteria for companies allowed to come out with IPOs, while some changes could be made in FPOs (Follow-on Public Offer) and other methods of share sale by already listed companies.


BSE, NSE among top 5 emerging market bourses: SEBI

Listing out a total of 14 stock exchanges across emerging countries, SEBI said the BSE stood at fourth position and the NSE at fifth among these bourses in terms of cumulative market capitalisation of all their listed companies

Mumbai: The Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) are among top five bourses across the emerging economies of the world in terms of market capitalisation, the Securities and Exchange Board of India (SEBI) has said in its latest monthly report, reports PTI.

Listing out a total of 14 stock exchanges across emerging countries, SEBI said the BSE stood at fourth position and the NSE at fifth among these bourses in terms of cumulative market capitalisation of all their listed companies.

SEBI has cited data from the World Federation of Exchanges (WEF) in its monthly report for June 2012.

The BSE stood at the fourth position with a market cap of $1,101.87 billion as on 30 June 2012, up 6.36% from $1,035.91 billion at the end of previous month.

The NSE stood at fifth spot with market valuation at $1,079.39 billion at June-end, an increase of 6.42$ from $1,014.21 billion in May.

Among emerging countries, Shanghai Stock exchange (China) was ranked as number one with a market cap of $2,410.87 billion, followed by Shenzhen Stock Exchange (China) at $1,149.17 billion and BM&FBOVESPA (Brazil) at $1,127.24 billion.

Overall, the major stocks listed in both developed and developing countries recorded upward trend in market value at the end of June 2012.

Among developing regions, the market capitalisation of Mexican Exchange grew by 12.2% during June 2012 and that of Johannesburg Stock Exchange by 7.11%.

On the other hand, Shanghai Stock Exchange plunged by 5.8% during the month followed by Shenzhen Stock Exchange 4.1%.

Besides developed markets, the market capitalisation of NYSE Euronext (Europe) recorded a growth of 7.78%, followed by London Stock Exchange Group (7.30%) and NASDAQ OMX Nordic Exchange at 6.62%.


Economy & Nation Exclusive
Unreliable situation from Reliance

If Reliance was aware of the steep fall in gas production; it ought to have taken alternative steps to obtain the gas to cover the shortfall, and ensure its subsidiaries lay the pipelines on schedule, so that the country does not suffer

The supply position of gas from the D-6 block is precarious and Reliance Industries’ supplies has been unreliable in as much as the total production has come to a meagre 30 mmscmd (million metric standard cubic metres) as against the 80 mmscmd promised for delivery by this time.
British Petroleum (BP) chief Robert Dudley, however, has identified D-6 as the “golden block” of the Krishna-Godavari (KG) basin and only as recently as February this year, BP had bought 30% stake in the oil and gas owned by Reliance at $7.2 billion. This deal includes the gas fields in the KG basin.
According to the information available, the block currently produces 1.16 billion cubic feet of gas per day from 350 sq km out of the total 7,500 sq km area. There are several other discoveries within the block, where the price has been fixed at $4.20 per mmBtu (million metric British thermal unit), and which is likely to reviewed in April 2014.  Dudley is optimistic that this price structure will have to change in relation to the imported spot price, which is currently around $16. This is likely to go up rather than down, but, in any case, is much higher than the un-remunerative contracted price of $4.20 per mmBtu which is valid till April 2014.
Only recently, it may be recalled, that the KG-D6 Management Committee had approved the capital expenditure of $1.06 billion for 2012-13.
In a relative development in the KG block, it looks likely that ONGC may be able to secure Japanese involvement in its search for oil and gas. However, it has declined to identify the exact location or their prospective partner in the proposed exploration.
In this case, although the Director General of Hydrocarbons has accepted the availability of in-place gas reserves, the estimates made by ONGC (at 4.257 trillion cubic feet) varies widely to 3.988 tcf.  Despite the above variation in estimates, DGH has assessed that actual recovery factor may be in the region of 2.315 tcf, which remains to be seen.
Meanwhile, the Parliamentary panel has pulled up Reliance Gas Transportation for not laying down the cross-country gas pipelines on schedule. A total network of some 2000 km of pipeline was to be laid by Relogistics Infrastructure, a subsidiary of RGTIL. And, it appears the main reason for the delay in completing the pipelines has been the contention that there is “insufficient gas to feed” these lines.
While it is true that due to declining production of gas from the KG basin, had the pipelines been operative, there would have been no gas to pump out and distribute. This project was cleared in 2007-08 but regrettably four years later, we have hardly scratched the surface!
One does not know even if the land has been acquired for the purpose and the required formalities completed in terms of compensation for the affected landowners, and their rehabilitation, if and where necessary
The biggest worry now should be that, if and when this matter is reviewed, there are 100% chances for price escalation clauses to become applicable and the whole project cost would balloon in terms of current cost of pipes versus future costs due to increased raw material cost factors.
Therefore, it is a pity we are back to square one on the issue. In fact, one may rightfully argue that if Reliance was aware of the steep fall in production of gas; they ought to have taken alternative steps and measures and the foresight to initiate purchase agreements to obtain the gas to cover the shortfall, and ensure their subsidiaries lay the pipelines on schedule, so that the country does not suffer. And, of course, their marketing arm could have renegotiated the price for gas supplies, based on imports, with the consumers.
Under the circumstances not only should Reliance be penalised for this huge and irreparable loss, but government must review and reconsider if RGTIL's license should be cancelled?

(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce and was associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US. He can be contacted at [email protected].)


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