The fourth meeting of the International Advisory Board (IAB) of the Securities and Exchange Board of India (SEBI) was held on July 18 & 19, 2014. Major issues discussed during the meeting were:
i) Corporate Governance Norms in India
In the context of revised corporate governance norms in India and other jurisdictions in recent years, the IAB deliberated on various facets of corporate governance, e.g. Related Party Transactions (RPTs), Independent Directors, Remuneration of Directors, Audit committee, integrated reporting, etc. The IAB concurred with the approach adopted by SEBI towards corporate governance framework. It further emphasized on the felt need to address the gap in what is reported by auditors and what investors, across jurisdictions, expect. Also, it was suggested that there needs to be different governance standards for big and complex business groups, with too many subsidiaries. A more focused enforcement of corporate governance norms was emphasized by the IAB so as to derive the true benefit of the prescribed norms.
ii) System-Driven Disclosures in Indian Securities Market
The IAB deliberated on the concept of system driven disclosures, which seeks to limit repeated disclosures about the same happenings across various regulations / authorities by automatically gathering and integrating information from available sources. Further, a cautionary note was made that statutory regulator should not try to take on everything on its own and should use market forces. It was proposed that to begin with, disclosures made under different regulations may be integrated to the extent possible so as to reduce the number of times the same disclosure is required to be made by an individual. System driven disclosures may be taken up gradually in the medium to long term, given that it is a novel concept that could significantly help in monitoring compliance even while reducing the burden of compliance on individuals.
iii) Crowd-funding: The Emergence of a New Channel of Fund Raising
The concept, type and extent of crowd funding as well as its regulation in different jurisdictions like USA, UK, New Zealand and Australia were discussed by the IAB. It was noted that the regulation on crowd funding is still evolving. It was further noted that taking into consideration that the retail investors may be exposed to undue exposure to speculative investment and illiquidity, various jurisdictions have mainly allowed sophisticated investors to access such platforms and /or capped the amount that can be raised. The SEBI consultation paper proposing regulatory framework for securities based crowd funding also seeks to address all these aspects. However, the regulator also needs to address aspects involving adverse selection issue, i.e. ideas which are rejected by Venture capitalists or private equity may be exposed to crowd funding without transparency in absence of central registry for such ideas. As equity crowd funding catches up, the issues like the lack of mechanism to express bearish sentiments through short sale, lack of liquidity, fraudulent conveyance in crowd funding and the likelihood of equity bubbles also need to be addressed. Accordingly, it was concluded that it would be a good idea for SEBI to undertake more detailed study on the need and manner of regulating crowd funding as this segment grows in India.
iv) New Products for channelizing institutional and HNI money for financing SMEs, Startups and Infrastructure
The IAB appreciated the increasing financing needs of SMEs, Start-ups and Infrastructure in the Indian economy and felt that securities markets can play an important role in efficient financial intermediation for this purpose. In this context, IAB acknowledged the initiatives already taken by SEBI in this area, e.g. SME platform, Infrastructure Debt Funds, ITP platform, AIF Regulations, etc. It felt that various financial products need to be considered for mobilizing institutional and HNI money into these sectors.
It was suggested that the involvement of Government in the financing of such projects, at least in the initial stage, is very crucial in building up confidence of private financiers/ investors in such projects. Supplementing the financial needs of such projects through equity based funding was emphasized to deal with the general tendency of such projects to get over leveraged. The IAB proposed institutional deepening which can be achieved by regulatory reforms, such as relaxing portfolio restrictions on pension and insurance funds as well as private equity and venture capital funds, etc. It was suggested that specifically the regulation and tax should be neutral between debt vs. equity and that institutional investors like insurance companies, pension funds, etc. holding long term funds need to play a significant role in financing such projects whose financing needs are also long term in nature.
v) Legislative Recommendations of the Financial Sector Legislative Reforms Commission (FSLRC) and International Best Practices
The IAB agreed that in the growing economy like India, the financial sector needs to be more efficient as well as adaptive. However, the IAB observed that there is no unique ideal financial regulatory structure. It further noted that it is difficult to design a regulatory architecture that is suitable for all future market developments. The IAB observed that FSLRC recommendations are very detailed in nature and that their implementation raises policy issues which can be addressed by the Government and the Parliament. Whatever be the decision there, capacity building and transition issues need to be given highest priority. IAB also felt that principles recommended by FSLRC, such as transparency and consultation in regulation making, cost-benefit analysis, etc. are subjects which should be adopted by the regulators.
vi) Open-house Session on Challenges Facing Securities Markets
In this session there was exchange of ideas among IAB members on various important challenges faced by various securities markets jurisdictions. Some of the important issues highlighted during this discussion included, High Frequency Trading (HFT), market fragmentation, need for market making to provide liquidity, risks related to sudden outflow of FPI money, retaining investors through economic cycles, professionalization of intermediation industry, optimum regulations, financial literacy, etc.
The IAB was constituted by SEBI in September, 2011. The role of the IAB is to guide SEBI and, in doing so, bring in the global experiences and emerging developments and challenges. The meetings of IAB were held in January 2012, November 2012 and November 2013.
The current Members of the IAB, in addition to Chairman, SEBI are Prof. Viral Acharya, Ms. Jane Diplock, Mr. Russell Loubser, Prof. Arvind Panagariya and Dr. Andrew Sheng (arranged alphabetically by the surnames).
Prof. Acharya is the C.V. Starr Professor of Economics in the Department of Finance at New York University Stern School of Business and a Member of Advisory Scientific Committee of European Systemic Risk Board.
Ms. Diplock is presently an Independent Director of Singapore Exchange Limited, Australian Financial Services Group Pty Limited, International Integrated Reporting Committee Board and Member of Public Interest Oversight Board (PIOB). She is also the former Chairman of both the Executive Committee of IOSCO and of the New Zealand Securities Commission.
Mr. Loubser, former CEO of Johannesburg Stock Exchange, has been one of the prime movers of modernization and development of stock exchange business in South Africa. He was a member of the team that started the Futures Industry in South Africa in 1987. He has served as Chair, Working Committee of World Federation of Exchanges and as Deputy Chair of South African Futures Exchange. Mr. Loubser was also a member of the prestigious King Commission on Corporate Governance.
Prof. Panagariya is the Jagdish Bhagwati Professor of Indian Political Economy at Columbia University and the former Chief Economist of the Asian Development Bank.
Dr. Sheng, the former Chairman of the Securities and Futures Commission of Hong Kong, is presently the Chief Advisor to the China Banking Regulatory Commission and a Board Member of the Qatar Financial Centre Regulatory Authority.
Mr. Prashant Saran, Mr. Rajeev Kumar Agarwal and Mr. S. Raman – Whole Time Members of SEBI and all the Executive Directors of SEBI also participated in the deliberations.
July 21, 2014