Monday, March 10, 2008

Immediate agenda for reform before SEBI

When a new chairman takes charge at the Securities and Exchange Board of India (“SEBI”) the media tends to be full of what the new chairman ought to be doing. Here are some action items that SEBI ought to address as a matter of priority:-

a) The SEBI (Foreign Institutional Investors) Regulations, 1996 (“FII Regulations”), which govern foreign institutional investors (“FIIs”) await a comprehensive review and redraft. The FII Regulations do not yet reflect the policy on offshore derivative instruments announced by SEBI last year. There is also a range of unwritten rules that SEBI has in its files, which the world is not transparently made aware of. For instance, neither the erstwhile antipathy to hedge funds and stock brokers as FII applicants, nor the current acceptability of hedge funds is reflected in the FII Regulations. A transparent codification will ensure the road to investing in India represents a clear path.

b) The administration of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (“Takeover Regulations”) requires attention. Every acquirer is required to file a draft letter of offer with SEBI for “observations”, which are supposed to be provided within 21 days. However, the number of cases where such observations are held up, particularly in the wake of any suspected past violation of the Takeover Regulations even by persons other than the acquirers, is on the rise. Making an open offer is an expensive proposition – there is a need to create an escrow and to tie up a material quantum of funds. Besides, the share purchase agreement that triggered the open offer cannot be closed until the open offer is completed. There are restrictions on what the target company may do from the time a public announcement is made and until the open offer is completed. A hold-up of the open offer leads to severe implications, and therefore, the Takeover Regulations should be saved from becoming an impediment to M&A activity.

c) The SEBI (Delisting of Securities) Guidelines (“Delisting Guidelines”) were to be converted into formal regulations. This is a controversial body of law, with SEBI itself having acknowledged in a consultative paper that the “reverse book building” mechanism (which entails public shareholders quoting the price at which they would like to be bought) gave rise to abuse. However, the revised regulations that would replace the Delisting Guidelines are not yet notified. The consultative paper also entailed avoidable tinkering (imposing a non-public target delisting threshold of 90% for companies that are mandated to have minimum public shareholding of 25% and a 96% threshold for companies that are mandated to have minimum public shareholding of 10%).

d) The SEBI (Disclosure & Investor Protection) Guidelines, 2000 (“DIP Guidelines”) represent a bundle of some of the most-terribly drafted securities law provisions. Conflicting and anomalous provisions abound. Besides, form has come to prevail over substance. Underwriting activity is a mockery of sorts with no IPO being truly underwritten. More about the DIP Guidelines in a later blog.

e) Greater co-ordination with the Ministry of Finance would be required. Recently, the Ministry of Finance invited comments on proposed legislation in the form of the Securities Contracts (Regulation) Rules on the concept of ‘public shareholding’ and how it ought to be regulated. This would be a direct overlap with Clause 40A of the Listing Agreement and care ought to be taken to ensure that there is no conflict between two regulators framing law on the same subject.

f) SEBI has been conferred with wide-ranging enforcement powers, all of which are important to ensure that the regulator is well-empowered. The same offence can be dealt with using criminal prosecution, imposition of civil penalty through adjudication proceedings, issuance of directions using omnibus powers under Section 11 and 11B of the Act, and in the case of registered intermediaries, through enquiry proceedings that could result in suspension or cancellation of registration. SEBI needs to initiate a transparent policy on the circumstances in which it would use a specific nature of power. The Securities Appellate Tribunal has commented adversely on the initiation of parallel proceedings and the embarrassing outcome it can have on proceedings before SEBI. The Supreme Court of India has observed that the doctrine of separation of legislative, administrative and quasi-judicial powers has not been followed in the Act, and has advised caution.

g) A single-point electronic filing for disclosures under various provisions of securities laws is a crying need. Every filing under the Listing Agreement is required to be sent to every stock exchange where the securities are listed. With some exchanges, it is difficult to even prove delivery of the filings since they are near-defunct. Filings on the same subject are mandated in the Takeover Regulations and also the SEBI (Prohibition of Insider Trading) Regulations, 1992. Within the Takeover Regulations, filing of the same information is imposed on several persons (Regulation 7 and Regulation 8 have provisions that require disclosure first by the acquirer and then again by the target company). Failure to make a filing has a potential civil penalty liability of Rs. 100,000 per day of continued default. SEBI would do well to rationalise these filing requirements.

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