Market regulator Sebi to boost cash shorts, untangle promoter tag

Regulator may blink on brokerage fee cap for MFs

India’s stock market regulator is gearing up to consider a complete overhaul of regulations governing stock brokers and mutual funds — formulated in the 1990s — at its December 17 board meeting, even as it looks to walk back on a plan to slash the cap on brokerage fees for mutual funds as it could have a chilling effect on independent equity research. 

While the new regulations for mutual funds and stock brokers are likely to focus on easing compliance and slashing redundant norms, the Securities and Exchange Board of India (Sebi) is also eyeing measures to bolster market activity in the cash segment amid a resurgence in futures and options (F&O) trading volumes, through reforms aimed at spurring short selling activity in the cash market. 

 

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Separately, it is reviewing the listing and disclosure norms for public firms in a bid to iron out emerging “ambiguities” in defining or identifying firms’ promoters, especially in new age companies, and ensuring that promoters don’t hang on to the tag even after losing control of a firm, a senior official aware of the development told Business Standard. 

On Sebi’s plan to cut the ceiling on brokerage fees paid by mutual funds for cash market transactions to two basis points from 12 basis points, the official said the regulator had initially believed that lower costs will benefit investors. One basis point equals 0.01 per cent. 

“The idea was to unbundle the brokerage and equity research fees, but this could result in unintended consequences, industry participants have pointed out, citing the example of UK which tried such unbundling. The move was not successful as it ended up killing research activity on stocks for investors to turn to,” the official noted. 

“So we are reviewing the idea now as only certain types of funds like arbitrage funds would be concerned about trading costs, while long term mutual funds could gain more from meaningful research from brokerages,” he said. “In India, we have about 5,000 listed stocks but just about 350 are researched by analysts. We need more companies to be actively researched, at least 700-1000 stocks, including many of the new firms that are listing, so that investors are not just influenced by ‘Buy’ side research reports, but have access to multiple opinions on stocks,” the official explained further. 

While downplaying concerns about moderating cash market turnover, the official said: “We want to increase the cash market trading and ensure more liquidity, so some different measures are being proposed. One proposal, for which a working group has been formed, is to relook at our short selling and securities lending and borrowing mechanism (SLBM) so that we encourage more short selling in the cash market rather than the derivatives segment.” 

There has been no change in the short selling framework since 2007-08 and the SLBM is not ‘very active’. One key reason is that many investors are using stock futures, a ‘good way of shorting a stock’. “But that's only available for 200 stocks. We want to strengthen and activate the SLBM framework and look at the problems, what’s impeding it…,” he reasoned. 

On the proposed review of Sebi’s Listing Obligations and Disclosure Regulations (LODR) of 2015, the official said there were some contextual issues that had cropped up over the years. 

“Many of the new age companies which are coming, there is an issue about the promoter, although it's not necessary in all cases, but to be a promoter, you should have a minimum stake of certain percentage, and if you are less than that, then you are supposed to get more and then be a promoter. So there are certain things that which is throwing up from the kind of companies that are today coming,” he noted. 

“Moreover, sometimes, you do not have very clearly identified promoters, and there are problems around exit of promoters. Some promoters are getting carried away… even if they were there initially in the business and started as a promoter, and they have hardly any control but they still want to stick around as a promoter. Why should they be called a promoter anymore?” the official pointed out. 

“On the other hand, some are saying that ‘I have nothing to do with it and I just want an exit’. And we don't enable exit very well. So there are certain ambiguities and since this is an important issue, this review will have to necessarily undergo a fair amount of consultation and cannot be concluded in a few months,” he concluded.