No merit in relaxing 10% cap on single stock investment: Sebi chief

Ajay Tyagi, Sebi chairman (Photo: Kamlesh Pednekar)
Markets regulator Secur­ities and Exchange Board of India (Sebi) sees no merit in relaxing the 10 per cent investment cap on a single stock for actively-managed mutual fund (MF) schemes, its chief said on Wednesday.

“The 10 per cent cap is meant for diversification. Just because some scrip is outperforming doesn’t mean you raise the ceiling. That will be self re-enforcing that a scrip has moved up and you are allowing higher investment in the same scrip. For the sake of diversification, the 10 per cent ceiling is something which stays,” said Ajay Tyagi, chairman of Sebi, while addressing the media at a market summit organised by industry body Confederation of Indian Industry (CII).

The MF industry has highlighted the challenges it faces in matching the returns generated by the benchmark Sensex and Nifty indices, as the weighting of India’s most valuable company, Reliance Industries, has neared 15 per cent on the benchmarks.

“Undoubtedly, there are challenges in performance measurement as indices do not have a cap on stock, whereas mutual fund schemes have a cap of 10 per cent on a stock,” industry body Amfi said recently.

When asked about the operational challenges highlighted by foreign portfolio investors (FPIs) to reduce the trade settlement cycle to T+1, Tyagi said, “To have an early settlement is in everyone’s interest. It will help increase liquidity and reduce margins. It cannot be anyone’s argument that we want to settle it late. But there are some operational issues with regard to FPIs and custodians because of time differences and other factors. We will take everyone’s view and suggestions before finalising anything.”

On rising instances of brokers’ defaults, Tyagi said Sebi will take corrective measures soon. He said there is reason to increase the amount lying in the investor protection fund (IPF).

“I agree that IPF is woefully insufficient. We have examined this and will soon take action in consultation with stock exchanges to increase the IPF. We will not allow that to be criteria to delay payment in case of broker default,” Tyagi said.

Tyagi also said there was merit in the proposal of some industry players of introducing capital adequacy for the broking industry. “There are all types of brokers in the system. The net worth requirement was set almost a decade back. So that area needs reform. We will examine this. Capital adequacy should be the first level of consideration.”

The Sebi chief said delivery-based trading needs to be encouraged. He said the regulator has introduced norms to increase upfront margins for intra-day trades, which will kick in from December. “This will further reduce speculation.”

Tyagi expressed concern over independent directors’ resignations. “I must admit, the independent director (issue) is a puzzle which we are still trying to deal with. 

They are the voice of minority shareholders. To what extent they have to be responsible, how they fit in into the board structure, which kinds of people need to be appointed… these are the issues that are troubling us,” he said.

Tyagi said Sebi would urge resigning directors to state their reasons clearly to the public and not give “cryptic reasons”.

He also called on the industry to help finalise norms on reclassification of promoters as ordinary shareholders. Tyagi said it remains a contentious issue.

In his speech, the Sebi chairman highlighted the positive takeaways from the market. “While one repeatedly hears that liquidity and low interest rates are the only prime factors driving up the markets, and that there is a disconnect between the market and the real economy, I would like to place before you certain positive aspects of the market recovery.”

Tyagi said contrary to popular perception, the post-Covid gains in the market have been broad-based. He said investor participation and trading turnover had increased substantially over the past year, and 6.3 million demat accounts have been added in the first half of the current fiscal, compared to just 2.74 million during the same period of last fiscal.

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