SEBI Board Meet takes key decisions on market transparency
The latest SEBI board meet on the 20th of November made 3 very far reaching announcements for the capital markets. While a number of issues were covered by SEBI, the key announcements were in relation to PMS services, rights issues and default disclosures. Let us look how these three reforms could have a big impact on the capital markets in the months to come.
Tweaking the PMS model
Portfolio management services have grown substantially in India. Unlike mutual funds, these PMS services give the best combination of growth and the leeway to select the stock of your choice. Despite the costs, PMS has been a solid asset class to create wealth. Firstly, SEBI has enhanced the net worth requirement for PMS services providers from Rs.2 crore to Rs.5 crore. This will ensure that only the strong and serious players will enter the PMS business with a long term perspective. Secondly, the regulator has been concerned that many retail investors get into PMS without understanding risks or the loss implications. To curb this, SEBI has stipulated that the minimum corpus for participating in a PMS will be raised from Rs.25 lakhs to Rs.50 lakhs. This will likely bring in more seasoned type of investors who understand the risks. Lastly, discretionary PMS can invest in listed securities while non-discretionary PMS cannot have more than 25% in unlisted securities at any point of time.
Setting right the rights issues
Many companies use the rights issue route to raise fresh funds from existing shareholders. Even investors find rights attractive due to the preferential pricing that investors get. SEBI has reduced the time for rights issue from 55 days to 31 days. This will ensure faster rotation for investors and companies also get access to funds faster. Secondly, SEBI is also introducing trading in rights entitlement (RE) in demat mode to make it more transparent. Thirdly, rights will be only allotted in demat form even if your current holding is in physical form. Lastly, SEBI has also stipulated that all rights issue applications must only be made through the ASBA (applications supported by blocked amounts) route for better transmission.
The cases of IL&FS, Jet and RCOM have highlighted the need to have better and quicker disclosure of defaults. Some time back, SEBI tried to make default disclosure in 24 hours mandatory. But that was later put off as not being too practical. Now SEBI has stipulated that all defaults in interest or principal must be disclosed by listed companies in 24 hours if it remains unpaid for 31 days. This gives some breather for the banks and companies. It also ensures that the resultant downgrade in the bonds is a gradual process and does not create shocks. That is surely a big plus!