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Home > Business > Special

Sebi, scams and reforms

Ashok Kumar | January 23, 2006

One of the biggest fears that perpetually linger in the minds of Indian investors remains the possibility of a scam being unearthed, which could end the ongoing party at its bourses, which has lasted for more than two years now.

The mental wounds inflicted due to the 'Harshad Mehta' and 'Ketan Parikh' scam do not seem to have healed completely.

Hence, when the recent imbroglio surrounding an individual with over 6,000 (!) demat accounts surfaced, several retail investors kept their fingers crossed hoping that this would not trigger a mass sell-off.

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Fortunately for them, it did not, and the party remains well and truly on. The Securities Exchange Board of India, which is the designated 'watchdog' of the Indian capital market initiated an enquiry into this matter and came up with a set of fresh recommendations.

Securities and Exchange Board of Indiahas often been accused, unfairly and otherwise, of not being proactive enough. In recent times though, under the stewardship of Damodaran, it seemed to be getting its act together. Its promulgations on book-building IPO norms were progressive and has substantially minimized the practice of frivolous bidding with the objective of leading investors.

It has now proposed some further changes in the primary market system, as it exists. Let us now proceed to scrutinise the proposals:

Public issue refunds through Electronic Clearing Scheme: Presently refunds in public issues are sent only through post/ registered post, which has time and cost implications for investors.

Progressive use of technology in banking has enhanced the efficiency in clearing and transfer of funds, which is evidenced in use of ECS mechanism for corporate dividend payments and routine corporate transactions. It has now been decided to extend the facility of electronic transfer of funds, viz, ECS to public issue refunds also.

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This will ensure faster and hassle free refunds to investors. ECS as a mode of refunds will initially be available at 15 centers across India where clearing is done by RBI and may be extended to other centers over a period.

Opinion: Given that the ECS facility has been in place for quite some time, this pronouncement should have come a lot earlier. Nevertheless, it is a clear case of 'better late than never'.

Introduction of optional grading of IPOs: SEBI Board has granted in principle approval for introduction of optional "grading" of public issues by unlisted companies (viz. IPOs) by credit rating agencies registered with SEBI. IPO grading would not be mandatory. It would be solely at the option of the issuer company. SEBI will not certify the assessment made by the grading agency.

The grading is intended to be an independent and unbiased opinion of the concerned agency. The grading would be a one-time exercise and would only focus on assisting the investor particularly Retail Individual investors, in taking an informed investment decision.

The cost of IPO grading can be met by stock exchanges or out of the corpus of Investor Education and Protection Fund. Necessary procedurals aspects would be finalized by SEBI in consultation with Stock Exchanges.

Opinion: While the intent cannot be faulted, there has to be serious doubt about its practicality. Equity, by its inherent nature, signifies risk.

To try and capture that into a grading system should, for all practical purposes, be extremely difficult. Unless of course, what is planned is merely an academic grading based on some pre-fixed parameters.

Given that SEBI has washed its hands off being accountable for this grading system, one wonders whether the grading agency can be held accountable and will need to indemnify investors relying thereon.

If not, is this then a rap on the knuckles for merchant bankers who do everything short of grading an issue, even going so far as to justify the price on offer? Or, is this an attempt to erase the demarcating line between equity and debt. If nothing else, some comic relief should be on the cards, albeit not for investors who might end being even more confused than ever.

Rationalising disclosure requirements for further public offers and rights issues: Presently all companies irrespective of whether they are listed in any stock exchange or are approaching the markets for the first time with IPOs have to make identical disclosures in the prospectus/offer document.

In the context of further public offers and Rights Issues, some disclosures in the document are repetitive, as the same have been periodically disclosed to the exchanges by the listed companies.

It is now proposed to do away with the repetitive disclosures in case of rights issues and FPOs by companies, which have a satisfactory track record of filing disclosures with the stock exchanges, of redressing investors' grievances.

Opinion: Given the amount of irrelevant information that finds its way into every prospectus, leave alone those of companies making FPO's and rights issues, this is a welcome pronouncement.

One question though - how many investors read prospectuses? Clearly, the primary losers here are the printers while the gainers are corporates. As for the retail investor - who cares?

Unique Identification Number: The Board decided to resume fresh registrations for obtaining Unique Identification Number under SEBI (Central Database of Market Participants) Regulations, 2003 (MAPIN), after considering the recommendations of the Committee set up by SEBI to examine the issues related to MAPIN.

The registration process will be resumed in a phased manner. To begin with, the cut off limit for obtaining UIN with biometric impressions for natural persons has been raised from the existing limit of trade order value of Rs 100,000 to Rs 500,000 or more. The limit will be reduced progressively.

Agencies capable of providing such facilities in a cost effective manner will be assigned the responsibility of maintaining the databases. For trade order value of less than Rs 500,000, option will be available to investors to obtain either the Permanent Account Number of Income Tax Department or UIN obtained under MAPIN. Investors in mutual funds would be exempted from the requirement of obtaining UIN.

Opinion: One of the better decisions made by Damodaran after taking over as SEBI chief was to halt the treatment of retail investors like history-sheeters, through an ill-conceived UIN regime.

Alas, that now stands reversed. Indian investors must rank among those with the maximum forms of identification with the likes of a Income Tax PAN Card, ration card, passport and now the UIN all over again.

One cant' help feeling that whereas those who were prima facie held responsible for the demat imbroglio have been let off with a light rap on the knuckles, while retail investors have been left to bear the cross yet again.

To conclude, even as FII money pours in like never before, the old Indian bureaucratic shuffle of two steps-forward and one-backward, sadly continues.

Ashok Kumar heads Lotus Knowlwealth in Mumbai, India

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