Market regulator Securities and Exchange Board of India (SEBI) wants to align interest of asset management companies (AMCs) and their employees with the unit-holders of the mutual fund (MF) schemes. For this, part compensation to key employees would be given in the form of units of MF schemes and AMC would be made to invest a minimum amount in their schemes. Further, SEBI is developing an investor charter for investors in the securities market that will focus on the rights and responsibilities of investors and grievance redressal mechanism.
To align the interest of the AMCs and key employees of the AMCs with the unit-holders of the mutual fund schemes, SEBI says it is considering that a part of the compensation of key employees may be in the form of units of the mutual fund scheme(s), in which they have a role or oversight.
"Further, to align the interest of the AMCs with the unit-holders of the mutual fund schemes, a mechanism is being considered where AMCs may invest a minimum amount in the schemes based on the risk value and assets under management (AUM) of such schemes," it added.
Talking about measures for MF schemes in its annual report for FY20-21, the market regulator says, a user-friendly platform, which is interoperable amongst registrar and transfer agents (RTAs), is in the process of development and is expected to be functional in 2021-22.
SEBI says it is trying to enhance liquidity risk management measures for debt schemes. "As a part of enhancing liquidity risk management measures in mutual funds, a framework is being developed to determine the minimum percentage of assets that an open-ended debt-oriented scheme should hold. Proposals for other liquidity management tools including a swing pricing framework are also being examined," it says.
SEBI says a proposal to empower the investors to take informed decisions is underway. According to this proposal debt schemes would be classified in terms of a potential risk class matrix consisting of parameters based on the maximum interest rate risk and the maximum credit risk that can be taken in a scheme. This would be in addition to the present categorisation and Risk-o-Meter disclosures.
The market regulator says, "It is proposed to have a charter for SEBI and separate charters for entities regulated by SEBI. It is also proposed to prescribe timelines for various investor related activities in the charter."
"The investor charter will not only help to bring in more transparency in the investment process but also encourage investors in the market to invest with better knowledge," SEBI says.
Further it aims to standardise benchmarks. "An exercise on standardisation of benchmarks of mutual fund schemes is being carried out to bring uniformity in performance evaluation across schemes," SEBI added.
Globally, passive funds such as index funds and exchange traded funds (ETFs) have emerged as some of the largest asset classes. Passive funds are low-cost products, well diversified in nature and perform in line with the market indices providing an alternative to actively managed funds to retail investors.
According to SEBI, passive funds in India have tremendous scope to grow as the assets under management (AUM) under passive funds in the country is still low as compared to its global peers.
"It is proposed to examine possible measures to the development of passive funds covering various aspects such as increase in the liquidity for exchange traded funds (ETFs) on the exchange platforms by efficient market making, better disclosures and transparency regarding ETFs, introduction of new ETF products, reviewing the criterion regulatory requirement for new players with focus on passive funds," it says.
According to the regulator, equity market is dynamic and keeps evolving with changing market conditions. For this, it says, regulations need to be in tune with the changing market dynamics and practices, while striking a balance between market regulation and development.
SEBI has proposed some changes in its review of regulatory provisions for equity markets. These includes
• reviewing provisions related to shares with superior voting rights;
• harmonising the regulatory provisions dealing with sweat equity and share based employee benefits;
• examining alternatives to the reverse book building process for determining the delisting price under SEBI’s delisting regulations; and
• reviewing the SEBI (Merchant Bankers) Regulations, 1992.
The market regulator says it will continue its ongoing process of reforms in the primary market to facilitate fund raising and increase both issuer and investor confidence.
Some of the key measures proposed by SEBI towards this, include revisiting the lock-in period for the minimum promoter holding, review of existing provisions related with price band and review of the regulatory framework for preferential issue.
SEBI says it will be revisiting the period of lock-in of the minimum promoter holding in case of public issues where the objects of the issue are other than capital expenditure and project finance.
The market regulator will also examine the proposal to shift in a phased manner to the concept of ‘controlling shareholder’ from the existing concept of ‘promoter’.
Further it will review the existing provisions related with the price band and other features of book building and fixed price issues.
To enhance governance, SEBI says it will focus on further strengthening the regulatory framework for independent directors and whole-time directors and norms governing related-party transactions.
With the increasing focus on sustainable finance, the regulator says, concerted efforts would be made towards creating awareness and facilitating the implementation of sustainability disclosures by listed entities.
In the area of digitisation of disclosures, SEBI says it will leverage technology for reducing time for listing from the closure of public issues. The use of technology will also be enhanced for monitoring the quality of disclosures made by listed entities, it added.
SEBI says it has rolled out several measures in the recent past to facilitate liquidity in the secondary market. "One additional proposed step is aimed at creating a set of market makers who will be present in the market most of the time both on the buy side as well as the sell side of investment grade corporate bonds."
"We are working out appropriate eligibility criteria for such market makers to ensure that financially sound entities with the requisite expertise are encouraged to participate.
"Simultaneously, the issues of funding the cost of inventory holding of these entities through various mechanisms - by putting in place a back-to-back arrangement with the issuers, by creating a repo market for corporate bonds which can fund the inventory holding of the market makers, are also being examined," it added.