Why Sebi’s primary market reforms disappoint

Author: Ashley Lee | Published: 30 Aug 2012
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The Securities and Exchange Board of India (Sebi) this month announced a raft of primary market reforms in a bid to facilitate retail investment and capital raising. But lawyers are unconvinced the changes will be effective

Key changes within Sebi’s suggested reforms include a provision to enable retail investors in second-tier cities to utilise the nationwide broker system of exchanges to distribute electronic IPOs, and access application forms on exchange websites. Every retail applicant will also be allocated a minimum bid lot as long as shares are available.

The reforms aim to foster greater retail investor participation by creating a more open architecture for IPOs as well as more corporate fundraising opportunities ahead of a June 2013 requirement for public companies to float 25 percent.

Lawyers are, however, skeptical the move will encourage retail participation in India’s markets.

Sandeep Parekh, founding partner of Finsec Law Advisors and former executive of legal affairs and enforcement at Sebi, said that many retail investors would rather look towards fixed deposits for stability and to bypass demanding know your customer (KYC) norms having lost money investing in the boom and bust cycles in 2001 and 2007.

“Fixed deposits are both safer and don’t require excruciatingly complex KYC norms which vary across different financial products,” he said. “A bank KYC is insufficient for a securities market KYC. It’s a painful process investing in equity markets when compared to the comparative ease of investing in bank deposits.”

Rohitashwa Prasad, senior partner at J Sagar Associates, said that the participation of retail investors in the short term was dependent on the equity markets outlook, and with respect to any particular issue, upon that company’s fundamentals.

Disclosure concerns
To encourage more corporate fundraising opportunities, Sebi also suggested a reduction in the average free float capitalisation requirements for companies from Rs 5000 crore to Rs 3000 crore. Additional means of rights and bonus issues to reach minimum public shareholding requirements were also proposed.

Sebi also specified that listed entities should file a comprehensive annual disclosure statement in addition to the existing requirements on the lines of 20F filing prescribed by the US SEC.

Lawyers were largely underwhelmed by the suggested changes, however. Srinivas Parthasarathy, Trilegal’s head of capital markets said Sebi should allow any offering of shares compliant with existing laws – so long as they effectively reduce promoter holding in a genuine fashion - instead of listing specific ways companies could raise capital to meet the 25 percent float.

Counsel were also surprised by the level of disclosure that may be required. Parekh explained that the 20F initiative was mooted when he was at Sebi after several years of work in a sub-committee on integrated disclosures. Aside from improving continuous disclosures of listed companies, further capital raising was considered cheaper, quicker and of a higher qualitative level since disclosures were already in the public domain.

Although Sebi has not yet clarified the measure, lawyers said the implementation of rules along the lines of the 20F filing would be an enormous step forward for India’s disclosure regime.

Parthasarathy said that the current disclosure regime was a fairly ambigious agreement between issuers and the exchange. The 20F initiative would put a formal framework around post-listing disclosure.

Ajay Vaidya, chief legal and compliance officer of Kotak Mahindra Capital agreed. “The small print has not yet been debated, but 20F is a high standard for annual disclosure,” he said.

Parthasarathy said that the information required in 20F might be similar to that necessary under the Issue of Capital and Disclosure Requirements (ICDR) for a prospectus. The information required for the ICDR was so comprehensive it has discouraged certain issuers from seeking IPOs, but Parthasarathy believed it would bring significant maturity in terms of disclosure post-listing.