Regulator broadly accepts Jalan panel recommendations, sets norms for alternative investment funds
3 Apr 2012, Mint, BY ANIRUDH LASKAR, VYAS MOHAN & DEEPTI CHAUDHARY
PRADEEP GAUR/MINT Former RBI governor Bimal Jalan says he is pleased with the balanced view taken by Sebi after its board meeting. The Securities and Exchange Board of India (Sebi) on Monday allowed the country’s stock exchanges to raise capital from the public through the listing of their own shares, which was opposed by the Bimal Jalan committee in its 2010 report.
Stifling rumours of the report being dumped in the backdrop of widespread controversies, the markets’ regulator said it broadly endorsed the committee’s recommendations that will change the way stock exchanges, depositories and clearing corporations do business in India.
Despite its key recommendations being rejected, Jalan, a former Reserve Bank of India (RBI) governor and head of the committee on market infrastructure institutions (MIIS), said he was pleased with the balanced view taken by Sebi after its board meeting on Monday.
“Sebi has maintained our basic emphasis of investor protection,” Jalan said. “It has decided that the regulatory and commercial functions of the stock exchanges should be separated, which is consistent with our report. It has taken a balanced view.”
Sebi set up a seven-member panel in February 2010, headed by Jalan, to review the ownership and governance structure norms of MIIS. Its November 2010 report recommended several changes.
But the report was stuck at the finance ministry over suggestions against the listing of bourses and segregation of their regulatory and commercial roles.
“MIIS should not become a vehicle for attracting speculative investments,” the report had said. “Further, MIIS being public institutions, any downward movement in their share prices may lead to a loss of credibility and this may be detrimental to the market as a whole.”
All the stock exchanges opposed the recommendation.
Sebi also framed exit norms for regional stock exchanges,
R 8FA57 most of which are dormant and are looking to liquidate their assets. Sebi chairman U.K. Sinha had pointed out in an interview last year that this was one of the areas that hadn’t been addressed in the Jalan report.
The regulator said stock exchanges could be listed when they put in place an appropriate mechanism to tackle conflict of interest. No stock exchange will be allowed to list shares on its own equity trading platform, and to float an initial public offering (IPO), the exchange will need to complete at least three years of operations.
The exchanges will also have to set up a conflict resolution committee with majority external and independent members. Sebi will prescribe the minimum listing standards for exchanges.
Both BSE Ltd and National Stock Exchange of India Ltd (NSE) have in the past expressed their intention to sell shares.
Sebi said no single investor can hold more than 5% in exchanges, except for banks and financial institutions that may
® ® hold up to 15%. In line with the Jalan panel’s recommendations, Sebi mandated that stock exchanges should have a diversified ownership. “Fiftyone per cent of the holding of the stock exchanges will be held by the public,” it said.
Trading or clearing member representatives won’t be allowed on the boards of exchanges. That could pose difficulties for BSE, which has several brokers on its board, in the event of an IPO.
The new norms will require stock exchanges to have a minimum net worth of ` 100 crore, and the existing exchanges will be given three years to achieve this. The minimum net worth for other MIIS such as clearing corporations and depositories will be ` 300 crore and ` 100 crore, respectively.
Sebi will set up an expert committee to examine the viability of introducing a single clearing corporation or interoperability between different clearing corporations, Mint had reported on 31 January.
Depositories can also be listed, but not exchange clearing corporations. Both BSE and NSE have their own clearing corporations.
Sebi said a single stock exchange can’t hold more than 51% in a clearing corporation, and the combined holding of stock exchanges has to be at least 51%. A stock exchange holding 51% in one clearing corporation cannot hold more than 15% in any other such entity.
“It is a welcome and significant development, of considerable importance to the MII industry,” an NSE official said on condition of anonymity. “It should have a significant impact on the way the MII industry is structured.” BSE refused to comment. The regulator wants the non-core activities of MIIS to be assigned to a separate legal entity. When a related business of an MII delivers a service to another MII, it will have to provide equal and fair access to all. This means a depository or clearing corporation cannot prefer the trades made on the exchange that owns a majority stake in it.
Sebi also suggested changes in the compensation structure for key management personnel at MIIS.
To enable the exit of stock exchanges, Sebi said a bourse without any trading on its own platform or annual volume of less than ` 1,000 crore can apply for voluntary de-recognition and exit.
If a stock exchange entitled for voluntary de-recognition fails to achieve a turnover of ` 1,000 crore on a continuous basis or does not apply for voluntary exit within two years from the date of the regulator’s notice, Sebi will initiate a compulsory de-recognition process. There was no clear rule so far regarding such exits.
Out of India’s 25 stock exchanges, Sebi has de-recognized five. In September, Mint
Following recommendations: reported that Sebi was working on exit norms for exchanges.
Post-corporatization and demutualization of exchanges in 2004, several regional stock exchanges saw turnovers dwindling. As BSE and NSE expanded their network through franchises and brokers, firms preferred to be listed on these two, making regional stock markets unviable. There was no clear rule so far regarding ways to deal with assets of defunct exchanges and shareholders of companies listed on such exchanges.
Alternative investment funds
The regulator also proposes to regulate so-called alternative investment funds (AIFS) such as private equity (PE) funds, venture capital (VC) funds, infrastructure funds and social sector funds under an omnibus regulation.
The objective of the AIF regulations is to eliminate the investment risk of investors in privately managed funds.
All AIFS must register with Sebi. So far, most of these funds had been regulated under Sebi’s VC funds norms, which have now been repealed.
The regulation classifies AIFS under three categories.
The first category includes VC funds, small and medium enterprises funds, social venture funds and infrastructure funds. These funds could be given certain concessions by the government.
The second category includes PE funds, debt funds, fund of funds and others. Both these categories of AIFS will be close-ended and will not engage in leverage. The third category includes hedge funds and can be open-ended and may engage in leverage.
The categorization is a good way to bring clarity to fund structuring, said Vijai Mantri, chief executive officer and managing director at Pramerica Asset Managers Pvt. Ltd. So far, as most of these funds had been broadly classified as VC funds, it had become difficult to give targeted concessions to VC funds to promote start-ups.
“The disclosures are stringent. It is not possible to have all AIFS in one category. It’s a well-thought move,” Mantri said, adding that the regulators want the structures to be genuine.
According to new rules, the minimum contribution for a manager or sponsor in an AIF is 2.5% of the initial corpus (compared with 5% proposed earlier), or ` 5 crore, whichever is lower. Globally, limited partners (LPS, or investors in investment funds) seek a contribution of 1-2% of the fund size by its sponsors or general partners.
Also, such a contribution cannot be through the waiver of management fees. A management fee is usually 2% of the fund corpus offered on an annual basis for running the investment firm. According to the Sebi regulations, an AIF will not accept an investment of less than ` 1 crore from an investor. Further, the AIF shall have a minimum corpus of ` 20 crore. Also, the fund should not have more than 1,000 investors.
“Moving the 5% (contribution requirement) down to 2.5% in my mind is positive and now more palatable,” said Vivek Gupta, partner (mergers and acquisitions practice) at BMR Advisors. “Regulations like minimum investment of ` 1 crore and not having more than 1,000 investors is Sebi’s way of maintaining the sanctity of these Pe-type funds as genuine instruments for sophisticated investors to come in and invest without giving it too much public character.”
AIFS will not be permitted to invest more than 25% of the funds in one company and they are not allowed to invest in associate companies.