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The UK Sinha Interview: 2015 Agenda

Published on Fri, Jan 16,2015 | 22:53, Updated at Mon, Jan 19 at 18:16Source : CNBC-TV18 |   Watch Video :

At the 10th India Business Leader Awards, the jury awarded SEBI Chairman UK Sinha for his outstanding contribution to Indian business. It was the opportune time to ask the market regulator about what’s in store for 2015? CNBC-TV18’s Menaka Doshi put that question to SEBI Chairman UK Sinha.

Sinha: I will desist from making any comment about what will happen in 2015.

Doshi: Not from the price point of view at all.

Sinha: But so far as the robustness of the market is concerned, in the early part of 2014 – 2015, we saw only foreign money coming in and domestic money was not coming. I am happy that in the last six months domestic money, especially through mutual funds, has come up in a very positive way and that, I regard as a very healthy development for the robustness of the market or for providing some sort of a counter balance through various things which can happen. Only regret which I have is that even today pension money is not coming into the market.

Doshi: Indian pension money... (Interrupted by guest).

Sinha: Yes; Indian pension money; foreign pension money is coming in. In fact after we changed the Foreign Institutional Investor (FII) regulation to Foreign Portfolio Investor (FPI) in April 2014, there has been a lot enthusiasm from buy side people, from people who have been long-term investors and long-term investors have started coming and getting registered in a big way. That is my regret that foreign pension money is coming into the market, taking advantage of the growth of our market and our economy, but by law, by regulation we are preventing the Indian worker to get advantage of that. If he makes a conscious choice not to come to the market, I have no issues. How can we prevent him by law to not to come to the market?

Doshi: When you spoke of foreign pension money and the FPI regime which has been a big change for India- I know it is really difficult to try and figure out whether foreign investors are coming because of the underlying fundamentals, or the move up in equities or a better regulatory regime- how would you assess SEBI’s own work on the FPI regime and whether it has helped in simplifying regulations and therefore attracting more foreign portfolio investors to India?

Sinha: The government and SEBI have been holding a number of road shows outside India. We have gone to several destinations and we are getting lot of positive feedback from people and investors. Secondly, the visitors who are coming to India and they are meeting people in the government or SEBI, they have no complaints about the regime. In fact they are all saying that things have become very easy and the number of registrations have gone up substantially. On FPI we have no problems except the demands which are being raised now is that the macro ceiling on the debt side needs to be increased but that is a call which the government and Reserve Bank of India (RBI) have to take.  

Doshi: You recently, in a sense, equalized the regulatory scrutiny that applies to FPI with Offshore Derivative Instrument (ODI) or let me put it the other way that applied to ODI with FPI. Is this your effort to create a level playing field and therefore blunt, to some extent, the P-note kind of instrument that has created concerns at various points in time? There was a fear that sometime this is anonymous hot money making its way into India, despite all the identification procedures you all have put in place?

Sinha: Things have changed substantially so far as knowing the end use or end user of the particular ODI. In the beginning of 2012, we came out with the requirement that every Foreign Institutional Investor (FII) which has issued a participatory note, has to give us at the end of the month the list of people who are the beneficiary owners. If there are any subsequent changes, those changes also they have to be disclosed. So, the n'th investor or the holder of the participatory note, SEBI has got details of them. Let me clarify that the worry which was there in 2001 when the market misconduct had happened, those worries are no longer in existence so far as the participatory note is concerned. I am not advocating participatory notes; I am only saying that the situation has vastly changed so far as the regulatory regime is concerned.

Secondly, I will like to take you back to the committee which I headed, when I was not working in SEBI and there we had recommended this new FPI regime, which has now been implemented. There the whole idea was that if somebody is coming through a participatory note route because of the procedural difficulties in getting registered with SEBI, that has to be removed. But there can be still a situation where somebody, for example, is taking a bet on multi-country securities. He has an emerging market fund which is investing in India and also ten other countries. He will perhaps still find it easy for him to come through a participatory note. So participatory notes by design one should not understand that they are some hot money or bad money. So long as SEBI is in a position to find out who is the actual investor, who is the actual holder then there is no problem.

Secondly just to give you one more nuance of it- you might have seen that about two and a half months ago, we put a restriction that participatory notes cannot be issued to what is called the protected shell companies. It cannot be issued to opaque structures. So, if through an opaque structure somebody is trying to come who is otherwise not eligible to be an FPI investor, those have also been plugged in.

Doshi: Are you attempting to blunt the p-note instrument?

Sinha: The answer is yes.

Doshi: You are attempting to blunt it?

Sinha: The answer is yes and I began by saying that this is what the intention was behind the Committee which I chaired in 2010.

Doshi: I am just trying to make it very clear in my head that SEBI is now saying there will be a level playing field and that we do not want any regulatory advantages that apply to p-notes, for p-notes to be more attractive?

Sinha: The right way to understand it is that a p-note holder- the regulatory advantage which a p-note was having by having lesser scrutiny, that has gone away. I am not encouraging p-note, in fact I want them to come through the direct registration.

Doshi: Are you disappointed that we have not seen more primary market activity even though the secondary market has given such big gains through the course of 2014; even record making gains?

Sinha: Yes, SEBI was expecting that the primary market will revive. There will be more demand for raising capital. I think I have quoted this number in the past also- four year period ending 2013, Rs 84,000 crore worth of draft red herring prospectus was filed in SEBI and people either withdrew it midway or they allowed it to lapse. We were hoping that now companies or corporates will start raising fresh capital. I am not seeing that happening so far.
Doshi: Why do you think that is the case?

Sinha: They have no issues with SEBI procedures. I think the corporates are waiting for some of the stalled projects to start; they are waiting for some visible decisions from the government which will incentivize them to put their money into the projects. They are still a little hesitant in putting money. For example, if the coal auction which is going to happen next month and in March, if that coal auction goes through well, without any problem either with the vigilance authorities or with the courts, if some of the measures which have been announced through the ordinance in the Land Acquisition Bill, if those are taken to their logical and by that I mean they are passed by the parliament, then corporate India will start making investments.  Investments are not taking place. Since investments are not taking place, primary market is not active.

Doshi: But exits are taking place. Private equity wants to exit, certain investors that have run through the course of six, seven year holding periods want to exit. Ideally the initial public offering (IPO) market should be driven by that as well; ideally a robust and a rising secondary market always creates a pipeline in the IPO market. This time that has not happened.

Sinha: You are talking of half a reason; it is not the full reason. If you are a promoter and the private equity investor in your company is pressing you, you will perhaps be able to stall it for some more time.

Doshi: You are saying that it is a matter of time?

Sinha: It is a matter of time.

Doshi: In the last one month Sebi has barred over 200 entities from the securities market for indulging in malafide stock transactions to benefit from the long-term capital gains tax exemption. The modus operandi, companies would allot shares on a preferential basis to certain connected entities. The allotments would be at higher than current market prices and the connected entities would soon sell the shares back to the company or related entities at a profit. It is a practice that CNBC-TV18's research team has been reporting on for the last one year.

Sinha: Let me take you back to the developments in the last three years. You might recollect that we had lot of prevalence of a practice whereby there were certain operators who were asking companies to get listed and there used to be certain amount of manipulation on the opening day. We took action and now we have come out with very stringent guidelines in 2012 whereby now that is not possible. We have provided for a call option in the pre-open market and that sets the benchmark. So, one set of practice we were able to solve through this mechanism.

Then there was this practice of companies trying to issue some shares- rights issues or preference issues - and try to manipulate the price. This has been happening for sometime and when the market is going up, when the sentiments are optimistic, people with these mentalities try to become much more active. So we looked at it, we found the data was supporting our suspicion but the investigation takes time because we have to establish the link and what these people do is provide several layers, there are layers after layers, so the real person who is behind it was not very easy to come by. We had to go into their bank accounts and other details. This is a practice which was invoked. We were able to crack it and any number of companies who may be indulging in this practice, we will be able to tackle them.

Doshi: How much more prevalent is this because you have cracked down in two or three cases on a large number of entities but shall we expect this exists in many more companies?

Sinha: Many more companies- the answer is yes. We have developed some internal models about how the prices have moved and how they are co-related to the fundamentals of the company or not. Based on that we have come to a number of companies which we are probing and definitely it is much more than what has already been done.

Doshi: We will see many more actions in the future against similar such efforts to rig the market?

Sinha: Sure, we want to control this menace. We want to remove it.

Doshi: The barely one year old Companies Act, 2013 is about to be amended and some of the key amendments have to do with Related Party Transactions (RPTs). For instance the Act proposes that RPT’s be approved by shareholders via a special resolution i.e. 75% majority. The amendment proposes to dilute it, to an ordinary resolution or simple majority but Securities and exchange board of India (SEBI’s) Clause 49 mandates a special resolution as well.  

Doshi: Will you align with what the amended Companies Act will be or will SEBI’s always be a higher standard?

Amendment Bill: Key Provisions

Omitting requirement for minimum paid up share capital
Prohibiting public inspection of Board resolutions
Fraud Reporting Thresholds
Sec 185 exemption for WoS
Changes to RPTs – Sec 188

Companies Act vs Clause 49!
RPT Approval

Companies Act,2013: Special Resolution
Amendment Bill, 2014: Ordinary Resolution
Clause 49: Special Resolution

Sinha: You are talking of a hypothetical situation when the Bill gets passed by both the Houses of the parliament. I would like to answer this in the following way that we must understand and it is a settled law, for listed companies, SEBI is empowered to bring in something which is a stricter than what the general law provides. So, the type of companies we regulate, we can impose even more strict guidelines and whether on any specific thing as the law is passed in future by the parliament, what will happen I cannot say. We do believe that RPT is an area where misuse was happening, abusive RPTs were happening in this country. We have taken action in certain cases. We will look at it once the law is finally passed by the parliament and if the SEBI Board feels that still we have to do something different from the law, we will take a view at that stage.

Doshi: So you are saying that there is a chance that you might maintain a higher standard than what the Companies Act requires when it comes to listed companies because RPT’s have been a very sticky area?

Sinha: That is not the matter of chance. That is the settled law in the country. It has been settled by the Supreme Court that if at all there is a need, SEBI Board is within its right to prescribe something which is much more stringent than what the law provides. SEBI cannot do anything which is against the law.

Doshi: What I mean is, is there a chance that your board and you may think that it is necessary to impose a higher standard?

Sinha: That conclusion you are free to draw, I am only saying two things. One is that the law is settled we can do this and number two RPTs are an area of concern for us.

Doshi: I want to come to a set of regulations that the SEBI Board has approved changes to and that is the delisting regulation. You have been asked this question a few times in the last few months. I am going to ask it to you yet again. There was hope that when SEBI started out to rework the delisting regulations, that you might even go the full radical way by rethinking the reverse book building method. That was put to death when your discussion paper came out and you said the reverse book building method is here to stay. What you have done in the new delisting regulations based on what the board papers were, is that you have imposed a new requirement or threshold of a 25 percent public participation in the delisting. I understand why you have done it. I have called it the Fresenius Kabi cure. You may not agree with the phraseology but that is what I have called it. But this most bankers and companies say will make delisting impossible to do?

Sinha: Our aim in SEBI was not to make delisting easier or more difficult. If people wanted to get a message that SEBI is keen to make the whole process easier, that was not the intention at all. The whole intention was that there were certain anomalies in the system which were being misused by two sets of people on two different ends of the spectrum and our aim has been that we remove these anomalies, we remove these bad practices and what were those bad practices. On the one end was a set of people who were able to capture a portion of the public shareholding and then demand an unusually high price. So, your understanding of what we have done on the reverse book building, I will like to clarify that I do not agree with that because earlier the situation was that any price at which maximum numbers of shares were offered that becomes the determining price. So, a small set of people could corner certain shares and they could have an undue influence over the promoter, they could force him. That has been done away.

Doshi: Now you have to cross 90 percent.

Sinha: Now you have to cross 90 percent. So, this manipulation is not possible. So the reverse book building process has been made through this mechanism where this sort of a manipulation cannot be done. The feedback I have got from many people is that they are happy with it. Another thing which you perhaps might have taken note but you did not mention in your opening remark is, earlier we had a two stage process for delisting. You acquire, you cross 90, you come back to 75 then you go back again. We have removed that. We have made it now a single stage process.

The new area, where you are echoing the sentiments of some people who may have brought it to your notice is this requirement of 25 percent. Now, if you look at data in the past, there have been cases where people have been able to get away with delisting by having two or four or six shareholders coming in. I do not think it is a fair arrangement. That should not be permitted. The question is- is 25 percent possible and the answer is yes because this 25 percent is not of the entire public shareholding. This is 25 percent of those shareholding which have been demated and in our Primary Market Advisory Committee people came out, this was the only objection there that do not do it for the entire shareholding, do it only for demated and everybody was comfortable. In our Advisory Committee there is representation from all the sides. So that is why we have provided. However, I am on record having saying that, this is one matter on which we have received representations and in due course we are willing to look at it.

Doshi: This is the data investment bankers shared with me which is that mostly in the delistings that have taken place so far, they have noticed that the public participation has been south of 10 percent; so less than 10 percent. So therefore they said to be able to double that and more to meet a SEBI threshold might be very difficult but like you have said you are open to reconsideration, we will take that as an encouraging sign of potential change.

Sinha: I am open to reconsideration in due course; that I stand committed. The example you gave was south of 10 percent but does it only indicate that 10 percent should be the limit? Does it also not indicate that there was no pressure on the promoter to reach out to more investors? Because they were not reaching out; that is our understanding. They were not trying to reach out to people. So we are now saying that you please reach out to people, get some more percentage and also while you have got examples of less than 10, I have got examples where 44 percent people have tendered.

Doshi: Your data would be more solid than the investment banker data that I have got.

Sinha: I have got one example where 44 percent of public shareholders tendered their shares. So, my understanding is that if somebody is making an honest attempt to reach out, it is a possibility.

Doshi: What should we understand then from your response that there is a likelihood of this 25 percent threshold being revised or that there isn't any at this point in time, at least in the near term?

Sinha: What we are looking at is that the promoter must honestly reach out to all the public shareholders. Getting this 25 percent offering was one way to indicate that or to ensure that. Maybe in due course we will come out with some other formulation.

Doshi: Due course means a few months, a few weeks, a few years?

Sinha: The regulation has not yet been notified; so why are we talking?

Doshi: What is on your agenda for 2015?

Sinha: A lot.

Doshi: Give us an idea of what is to come up from SEBI this year?

Sinha: At this stage we are concentrating on E-IPOs. We have reached out to small and medium-sized enterprises (SMEs) and to the startups. Startups, after my interaction with them, I discovered that they have an entirely different set of issues and their expectations are entirely different. May be we will have to do something different for them. So we have just started the dialogue. The whole aim of SEBI, to answer your question in one simple sentence, is to ensure that corporates in India who are in need of raising capital how we can make that easy in India?

Doshi: That is going to be the focus in 2015 for SEBI?

Sinha: Yes.


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