Sebi mulls new rules to protect investors, deepen markets

Sebi mulls new rules to protect investors, deepen markets Mumbai: Market regulator Sebi will consider Thursday new rules 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.

At its board meeting scheduled here Thursday, the Sebi (Securities and Exchange Board of India) 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 U K Sinha had met Finance Minister P Chidambaram yesterday.

Tomorrow'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, 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 Rs two lakh are considered retail investors. However, listed companies distinguish small and large individual shareholders as those holding shares worth up to Rs one lakh and those holding shares worth more than Rs one 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 per cent 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.

PTI