Key takeaways from the last SEBI Board Meet of FY23

31 Mar 2023 , 09:34 AM

On 29^th March 2023, the last SEBI Board meeting of FY23 was conducted amid huge expectations. The outcome of the board meet may not have met all the expectations, but it has surely triggered off a thought process among investors about the direction that SEBI wants the Indian capital markets to take. Here is a gist of some of the major takeaways from the SEBI Board Meet on 29^th March 2023.

A big push to ESG compatibility

The board meeting has dwelt at adequate length on making the different facets of the capital market more ESG compatible. This includes the introduction of a Business Responsibility and Sustainability Report (BRSR) Core with Key Performance Indicators (KPIs) for listed entities. Apart from ESG disclosures at a company level, SEBI mandates that listed companies also make adequate ESG disclosures for the complete value chain that the company is involved in. To begin with, this would be only applicable to top 250 companies.

On ESG ratings, SEBI has asked the rating agencies to tweak the methodology with unique emerging market requirements. SEBI has also called for a total regulatory framework to govern ESG rating providers in India. Above all, ESG investment fund schemes must invest at least 65% of the AUM in listed entities where BRSR Core is undertaken. Greater disclosure on voting patterns on ESG matters of importance has also been added by SEBI.

ASBA in secondary markets, and upstreaming of client funds

This has been a topic of hot debate with the SEBI chairperson, Madhabi Puri Buch, being a strong votary of ASBA in secondary markets. In the latest board meeting, SEBI has approved the ASBA for secondary markets, where the debits to the bank will only be done on delivery and monies will only be blocked till then. There will be no transfer of funds to brokers. However, due to practical complexities, SEBI will make this optional for brokers and investors to begin with. This is likely to result in lower working capital needs of members.

What is upstreaming of client funds. Leaving the funds with the intermediary leads to credit risk and also potential for misuse of funds by the intermediaries. Under the approved upstreaming system, the client funds in savings bank accounts will be automatically pushed upstream to the clearing corporations. However, Bank CMs (Clearing Members) will not have to upstream funds. This will ensure safety of funds and Phase 1 will be in July 2023.

Regulating stock brokers and index providers

At the stock broker level, SEBI has approved a framework for an institutional mechanism to detect and prevent fraud or market abuse by the stock brokers. This could be in any manner that hampers with the integrity of the market mechanism. The SEBI Stock Broker Regulations will be amended to include systems for surveillance, internal controls at broker outfits, obligations of brokers and its employees, escalation matrix and a clear cut whistle blower policy that can throw light on such ongoing activities.

For the first time, SEBI also wants to bring index providers under its detailed scrutiny ambit. The passive funds are gaining traction and index ETFs and index funds together handle close to Rs8 trillion in funds. For these index funds and index ETFs, the selection and management of the benchmark index is the key. Therefore, SEBI has approved a framework to regulate index providers to foster transparency and accountability in the index selection, creation, modification and monitoring process. That was long called for.

Corporate debt market development fund

This has been in the works for some time as SEBI has been looking to set up a corporate debt market development fund (AIF model) as a backstop facility. The idea is help out in an event of debt market crises. To instil confidence during a debt market crisis, this fund will purchase high quality debt paper in the market in order to stabilize the bond markets. The dent funds and income funds will provide the corpus for this debt market development fund, which will act as a buyer of last resort. SEBI will also put in place a detailed framework whereby the mutual funds can sell such stressed debt to the debt market fund.

Clarifying the role of AMC boards, trustees, and sponsors

Since the time of the Templeton fiasco in 2020, the role of the trustees has come in for a lot of question. Now, SEBI has put a framework and structure to the entire debate. Under the amendment, there will be identified areas that will need the independent evaluation and due diligence by the trustees of the fund. Also, the responsibility to protect the interests of the unit holders will be squarely on the shoulders of the AMC board. The Board of the AMC shall also constitute a Unitholder Protection Committee (UPC) with focus on protecting the interests of the unit holders, especially in the event of a crisis.

In the last few months, there has been debate about the role of sponsors of mutual funds and how to expand the universe of sponsors. The amendments will allow a slew of entities to be sponsors like AIFs, private equity (PE) funds, which are not permitted to be sponsors today. This also gives more flexibility to the sponsors and even self-sponsored mutual funds will be permitted now.

Greater disclosure for more transparency

Transparency is never a target but more of a journey. In another initiative to improve transparency, SEBI has proposed that key material events be disclosed by the company without too much of a time lag to avoid information asymmetry. Materiality can be based on quantitative threshold. For instance, decisions in the board meeting to be communicated within 30 minutes of the conclusion of the meeting and other items in 12 hours. All market rumours pertaining to the company to be verified or confirmed by the company. It will start with top 100 companies and then be extended to top 250 companies.

Concluding remarks

In addition to the above, the SEBI Board meet has also dwelt on other aspects to make the markets more transparent and market mechanism more trustworthy. These include empowering shareholders with greater information at their disposal. It also includes streamlining the timeline for submission of first financial results by newly listed companies. In addition, the meet has also set clear time lines for filling up vacancies of directors and key officials within 3 months at the very maximum. 

In addition, the SEBI Board meeting has also mandated that any underwriting agreement in the IPO must be disclosed as part of the prospectus. Above all, bonus issues must be issued in future only in demat mode and not in physical mode at all. In short, the regulator plans to move aggressively on the reforms front. It looks like a good start, for sure.