SEBI board meeting to discuss major reforms for market participants

29 Mar 2023 , 09:38 AM

The Securities and Exchange Board of India (SEBI) is prepared to approve a number of significant proposals, among them the categorical elimination of permanent board memberships, the adoption of a new ESG framework centered on ratings and disclosures, as well as significantly more efficient and effective trade settlement mechanisms for retail investors.

The SEBI board meeting will begin today with a discussion of these and a few other topics.

The market regulator has implemented a number of incisive reforms under the direction of its chairperson, Madhabi Puri Buch, which are changing the landscape for institutional investors as well as injecting greater accountability for market participants like brokerages, ESG rating providers, MIIs, including stock exchanges, clearing corporations, and depositories.

The market regulator published a consultation paper earlier in February that solidified the barriers put in place to protect the interests of small-scale traders and investors, even if doing so means cutting into brokerages’ profits.

In its advisory paper, SEBI noted that: ‘On January 6th, the day of the last running account settlement, roughly INR46,000 crores of investor cash was kept with brokers and CMs, demonstrating the need to properly secure funds of retail investors.

According to anecdotal information, the number might be considerably greater on other days. It should be highlighted that none of the regulatory safeguards that apply to other financial organizations that take customer funds apply to India’s 1355 stock brokers.

The regulator’s proposal calls for daily upstreaming of all investor money from stock brokers and CMs to clearing organizations in an effort to reduce the risk associated with funds. The danger of fund misuse in the ecosystem should significantly decrease even though this plan may lessen the implicit float income that brokers and CMs currently enjoy. Additionally, investors would maintain the freedom to choose other suitably qualified and lawfully permitted financial service providers to increase returns on their excess assets.

The market regulator aimed to establish a standardized valuation approach for the investment portfolio of AIFs in another public comment document published in January.

However, current AIF regulations are only concerned with investor disclosures and do not specify any rules for the standards, principles, or methodology that should be used. As a result, managers of AIFs are free to use any valuation theory, methodology, or standard as long as they disclose it to investors in the Private Placement Memoranda (PPMs) of the AIF schemes they are managing.

While simultaneously requiring category-III AIFs to conduct an independent valuer’s valuation of their investment portfolio in unlisted stocks, SEBI has proposed objective and stringent requirements for the nomination of an AIF manager.

The question of board permanency has generated a lot of controversies recently. Vijay Mallya’s dramatic struggle with Diageo, in which he defended his right to serve as board chairman even as he evaded the law, brought the issue to light.

A permanent seat on a board can typically be obtained in one of two ways: I by adding a provision allowing the appointment of a permanent director to the articles of association (AoA) of a company; or (ii) by being appointed to the board as a director who is not subject to ‘retirement by rotation’ and who has no set term.

To solve this problem, SEBI has suggested that, as of March 31, 2024, if any director is currently serving on the board of a listed entity without having had his or her appointment or re-appointment subject to shareholder approval during the previous five years, starting on April 1, 2019, the listed entity shall seek the shareholders’ approval in the first general meeting to be held after April 1, 2024, for his or her continuation on the board of the listed entity.

Second, starting on April 1, 2024, the listed corporation shall make sure that the directorship of every director serving on the board or appointed to the board is put to shareholders for approval at least once every five years, subject to other applicable legal conditions.

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