Key Takeaways From The SEBI Board Meet

In its last board meeting for the year 2022, SEBI board deliberated and announced some important decisions pertaining to the capital markets, with medium to long term implications. Here are some of the key announcements made and its implications for the capital markets in India.

1) Governance in market infrastructure institutions (MIIs)

The MIIs like stock exchanges, clearing corporations and depositories will have to adhere to higher standards of corporate governance. Overall MII functions will be divided into critical operations, compliance/risk management and other functions. In terms of resource allocation, the first two functions will get priority over the third. The appointment of public interest directors (PID) will be rationalized based on skill sets. Every MII would have a separate Chief Risk Officer (CRO) to handle business risks. Above all, the performance of key management personnel (KMP) in these market infrastructure institutions (MIIs) will be evaluated on a half-yearly basis.

2) Amendments to the Buyback Regulations 2018

One of the important announcements made by SEBI in this board meeting is that the buyback route through stock exchanges would be phased out in a gradual manner. Till it is phased out, this system will run in a separate window on the stock exchange. In the stock exchange route, minimum utilization of amount earmarked increased from 50% to 75%.

SEBI prefers the tender route for buybacks, but has suggested reducing the timeline for completion of buyback by 18 days. Companies can revise the buyback price upwards up to one day prior to the record date, so that the price is current. SEBI has also raised the issue of buyback tax of 20% levied on the company buying back shares. This is unfair to shareholders who do not opt for buyback, since tax is paid by the company and impacts the bottom line.

3) Execution Only Platforms (EOP) for Direct Plans of Mutual funds

Despite a number of investment advisors offering purchase of direct plans of mutual funds, there is no systematic regulation covering this aspect. The regulatory framework for Execution Only Platforms (EOPs) would be aimed at investor convenience and appropriate regulatory checks and balances. EOPs can register with SEBI as Category-1 EOP as an AMC agent registered with AMFI or as a Category-2 EOP registered as a stock broker. SEBI will notify detailed modalities of implementation.

4) Handling risk of trading service disruption by brokers

Today, in the event of disruption faced by a registered broker, onus of loss is on the client. More so, in the case of intraday positions where the trader is not able to square off the position within the stipulated time. To address this risk, SEBI has asked stock exchanges to offer an alternate Risk Reduction Access Platform for investors. This will be a back-up in the event of inability to square off positions. It will be available from the third quarter of FY24.

5) Creation of Qualified Stock Brokers (QSB) category

Like you have QIBs and TBTF banks, SEBI plans to create a special category of brokers called Qualified Stock Brokers (QSB). This categorization would be done based on large number of clients handled or based on steeply higher trading volumes. It is estimated that failure of such brokers could have larger systemic implications for stock markets. The amendments to the SEBI Act to this effect are already initiated by SEBI and such QSBs will be subjected to enhanced levels of compliance and risk management practices. Even the MIIs will monitor such QSBs more closely in the larger interests of overall capital market integrity.

6) Simplifying onboarding process for Foreign Portfolio Investors (FPIs)

SEBI has suggested some key changes to simplify and quicken the process of onboarding FPIs. To begin with, FPIs are now likely to be granted registration based on scanned copies of application forms and supporting documents. FPIs can execute all registration related documents using digital signatures. Original copies of documents can be certified by the existing SWIFT mechanism, which is a global protocol. This is likely to encourage more global investors to register as FPIs than adopt the PN route or the sub-account route.

7) AIFs participation in credit default swaps (CDS)

In order to deepen the corporate bond market, SEBI will permit the alternate investment funds (AIFs) to participate in the CDS market as protection buyers and as protection sellers. In terms of specifics, Category 1 AIF can only use CDS to hedge an underlying exposure to debt securities. Category 2 AIF can hedge underlying debt investments with CDS and also sell CDS equal to the amount of CDS exposure. Category 3 AIFs will be also additionally allowed to sell CDS against unencumbered Treasury Bill / Government Securities holdings. This is likely to create a proper CDS market in India without the excess volatility.

8) Broadening the scope of sustainable financing bonds

Green bonds and other modes of sustainable finance have been picking up rapidly in India. For now, the scope of the definition is still too narrow and needs to be broadened. Based on its review, SEBI has suggested broadening the definition of green bonds to include new modes of sustainable finance like pollution prevention, pollution control and eco-efficient products. In addition, SEBI also will introduce the concept of Blue Bonds pertaining to water and marine management as well as yellow bonds pertaining to solar energy. However, SEBI has cautioned on the need to avoid greenwashing of related risks.

9) Fresh governance norms for REITs and INVITs

SEBI has announced in its latest board meeting that the extant corporate governance norms applicable to listed companies would be extended to REITs and INVITs also. This is essential considering their growing popularity and would be applicable irrespective of whether they have issued debt securities or not.

10) Adoption of Cloud services by regulated entities

Globally, the protocol is towards storing data in the cloud and undertaking large scale processing on the cloud with adequate security features installed. Now SEBI has approved the adoption of cloud related services by all its regulated entities. However, this has to be preceded by proper risk assessment, adequate compliance, security controls and defining the rights and responsibilities of regulated entities. That should be a good step towards leveraging the massive potential of the cloud.