Strengthening regulation

The Securities and Exchange Board of India (Sebi) has shortened the period for processing rights issues from the earlier 58 days to 31 days, and has also set a new time limit of 31 days on the disclosure of defaults by listed companies. In addition, it has enhanced the investment threshold in schemes offered by portfolio management services (PMS) and raised the net worth requirements for PMS providers. Sebi has also mandated the top 1,000 listed firms to release a Business Responsibility Report (BRR) —this requirement earlier applied only to the top 500 companies. 

These measures should have an overall positive impact. The shortening of the time period for processing rights issues comes as a relief for companies raising cash. This reduces the risk of price volatility, and the rights issue pricing is less likely to vary substantially from the market price of listed shares. This also eases the anxiety of companies raising money; an issue made at a substantial discount, or a premium, to the market price can run into problems. 

In addition, the ASBA (applications supported by blocked amount) requirements result in a simpler and more trustworthy allotment system.  The investor needs to do less paperwork and she is dealing with a trusted intermediary — her own bank — and earning interest on the money during the allotment period. The increase in net worth norms for PMS providers from Rs 2 crore to Rs 5 crore provides a cushion against possible defaults in this segment of the financial services market. It should help weed out fly-by-night operators. For existing operators, ample time (36 months) has been given to comply with the new norms. But the rationale for doubling the minimum investment threshold from Rs 25 lakh to Rs 50 lakh is not clear. 

Investors might be a bit disappointed with Wednesday’s announcements. Market watchers had expected that the regulator would tighten the default disclosure norms much more stringently. In effect, a listed company has to disclose a default only on the 31st day after the payment becomes due. Investors were hoping that the reporting period would be reduced to 24 hours (within a day of a payment becoming due) and indeed, Sebi was said to be considering a 24-hour deadline. Given the porous nature of India’s information ecosystem, defaults tend to be flagged long before 31 days anyhow. So this move may make little material difference in terms of information dissemination. 

It was also hoped that the regulator would address the issue arising from abrupt resignations of auditors. There have been many such instances in the recent past, and auditors should be asked to give a comprehensive explanation of their rationale for dropping clients. A case may also be made for insisting the same auditor completes a full fiscal’s audit due to the practical difficulties of appointing new auditors in the middle of a fiscal year. Extending the requirement for BRR to the top 1,000 companies in terms of market capitalisation is a good move in theory. A BRR can give investors a better handle on corporate governance if taken seriously. This move will encourage companies with ambitions of entering the big league to develop an internal culture of BRR.  


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