Regulator to soon issue circular to address FPI concern; Overhaul of consent and insider trading norms approved

The Securities and Exchange Board of India (Sebi) on Tuesday announced major changes to the fee structure for the Rs 25-trillion mutual fund (MF) industry, a decision that will hit the profits of asset management companies (AMCs) but result in savings for investors.

The regulator has capped the so-called total expense ratio (TER) for fund houses with equity assets up to Rs 500 billion at 1.05 per cent, down from as much as 1.75 per cent charged earlier. AMCs with lower assets under management (AUM) will be allowed to charge a higher TER, based on slabs. Sebi also said the industry would have to move to a full “trail model” for commissions. It also capped fees for exchange-traded funds (ETFs) at a maximum of 1 per cent.

“The mutual fund industry has grown by leaps and bounds. However, the benefits of economy of scale have not been fully shared with investors,” said Ajay Tyagi, chairman, Sebi.

The reduction in the TER could shave off profitability of large fund houses by up to 12 per cent. Share prices of listed AMCs HDFC MF and Reliance Nippon MF could see a correction, said experts.

The regulator “broadly” accepted the relaxations suggested by the HR Khan committee pertaining to the know-your-customer (KYC) requirements of foreign portfolio investors (FPIs), particularly non-resident Indians (NRIs). The move will help assuage overseas investors’ concerns at a time the rupee is weakening against the dollar.

Earlier this month, the Khan panel said Sebi’s controversial April 10 circular should be used for determining KYC and not for ownership. The panel also said NRIs should be allowed to invest and manage a foreign fund. Tyagi said it has broadly accepted all the proposals made by the Khan committee and will soon issue a final circular that will address most of the concerns, including high-risk jurisdiction issue.

Sebi also accepted the overhaul of consent framework and changes to inside trading regulations based on expert panel recommendations. The regulator will take a “principle-based approach” to enable settling violations such as insider trading through the consent route. However, any cases that impact the integrity of the market or create huge loss to investors will be kept out. The changes will help reduce the pending case burden at Sebi as earlier even small violations under insider trading were kept out of consent framework. The new consent regime has kept out fugitive offenders and wilful defaulters out of the ambit. Sebi also barred such entities from raising public funds.

Sebi will amend the so-called prohibition of insider trading (PIT) and prohibition of fraudulent and unfair trade practices (FUTP) based on recommendations made by TK Viswanathan committee to give itself more teeth crackdown against fraudulent activity. The new definition of “dealing in securities” will include employees, agents and also curb use of front entities for insider trading. Listed companies will also have to put in place systems to prevent misuse of price-sensitive information. More importantly, Sebi said it will seek powers from the government to intercept calls and electronic communication under the Telegraph Act. At present, such powers are only with central agencies like CBI and Income Tax department.

Tyagi said there are privacy issues with this proposal and the powers will have to be handled with outmost care. 

Sebi also gave an in-principle nod to a new unified payment interface (UPI)-based framework for IPOs to allow listing of a security in three days, down from six days at present. The regulator also approved a new framework for reclassification of promoter entities as ordinary shareholders. The move will require board and shareholder approvals. Sebi said it will introduce a new framework, which will be operational next fiscal onwards, that will push large corporate towards the bond market for their funding requirements. The move will help reduce the load on the banking system and help deepen the corporate bond market.

Sebi also approved interoperability among clearing corporations which will lead to better margin utilisation and help reduce cost of trading. The regulator said it will allow a “peer-to-peer” framework for interoperability.

On the National Stock Exchange (NSE) colocation matter, Tyagi said the regulator is examining the consent application filed by the exchange. The regulator has issued show cause notice to 30 entities in the matter. On the ICICI Bank disclosure issue, Tyagi said the bank and its chief have submitted their replies to the show cause notices issued by the regulator. Sebi hinted that the bank intends to submit a consent plea to settle the matter.

Tyagi said the extension of trading hours may not take place from October 1 as exchanges are yet to submit their detailed operation plan. Further, Sebi said it is examining the proposals submitted by NSE and BSE to start trading in commodities derivatives.

Sebi said it will soon review the processes for credit rating agencies and soon issue a circular on the issue. The move comes after default rating issued to IL&FS within months after assigning an AAA-rating. “Despite all the checks and balances and inspections, these issues keep emerging,” Tyagi said when asked it was looking into the practices adopted rating agencies.

Key announcements

1) MF commissions capped

2) Principle-based approach for consent mechanism

3) Overhaul of insider trading norms

4) Seeks powers to intercept calls

5) IPO listing timeline reduced to three days

6) Fugitive offenders barred from raising public funds

7) Rules to reclassify promoters as ordinary shareholders

8) Framework for large corporates to tap bond markets

9) Listed firms to make disclosures pertaining to sexual harassment

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