It may be, probably, too early to call these second generation reforms for capital markets. But the start has definitely been made. The first SEBI board meet chaired by the incumbent SEBI Chairman, Mr. Ajay Tyagi, has focused largely on simplifying the market mechanism and broadening as well as deepening the capital markets. Here are some of the key takeaways from the SEBI Board meet and its larger implications for capital market reforms…
How SEBI has given a big push to second generation reforms…
• As promised by the SEBI chairman, the first step taken was to tighten the screws on IPO fund utilization. SEBI has now made it mandatory for companies coming out with IPOs to appoint a monitoring agency as long as the size of the IPO is above Rs.100 crore. This cut-off limit has been reduced from Rs.500 crore to Rs.100 crore to bring more IPOs under the ambit of monitoring.
– How is this monitoring agency announcement important? Firstly, it puts a greater degree of accountability on IPO issuers. The monitoring agency will monitor the end-use of funds and ensure that it is in sync with the objectives laid out in the prospectus. At a time when the IPO markets are likely to see issues to the tune of $5 billion during this fiscal, this will go a long way in reinforcing the faith of investors in the integrity of markets.
• SEBI has also approved the move towards a Unified License for brokers. Thus brokers will now be able to trade equities, futures, options, currencies, ETFs, exotic structures and commodities under a single license. In structural terms it means that brokers now need not float separate companies for their equity and commodity businesses.
– For brokers it will make the compliance task a lot simpler. Investors will also benefit as the separate KYC requirements for each product will eventually be done away with. More importantly, it could give rise to unique arbitrage opportunities between cash, futures, commodities, spot etc. While there is no clarity on cross margining; if that is also permitted, it will lead to better utilization of capital.
• Systemically important NBFCs with a net worth in excess of Rs.500 crore will be permitted to invest in IPOs via the QIB quota. Currently, NBFCS irrespective of their size and net worth are required to invest as part of the non-institutional category. That will change going ahead.
– This announcement will have a few key implications. Firstly, it will entice NBFCs to look at equity IPOs more seriously as an asset class. It will also widen the definition of institutional investors in India. Secondly, with NBFCs growing in size and spread, it will benefit the issuers and the NBFCS. For the issuers, there is an additional market to cater to and for the NBFCs; there is a new asset class to invest in.
• The SEBI meet has also given a major push for the commodity markets. Apart from the unified broking license, which will be a boost for the commodity markets, SEBI has also authorized the introduction of options trading in commodities. The list of commodities where options will be permitted and the contract specifications are yet to be worked out.
– This could be a game changer for the commodity markets. Firstly, introduction of options will bring about a greater integration between the commodity spot and futures market. Secondly, in the case of equity F&O options account for over 80% of the trading volumes. Therefore we could see an exponential expansion in commodity trading volumes post introduction of options.
• The SEBI meet has also taken a small step with respect to broadening the retail base for mutual funds. Investors have been allowed to invest and redeem mutual funds via digital wallets. Over the past few months since digitization, e-wallets have taken off in a big way and this will capitalize on that opportunity. There will be a transaction ceiling of Rs.50,000/- per day.
– Post demonetization, there has been an exponential increase in the number of digital wallets in India. The penetration across rural and semi-urban areas has been quite strong. This move will open up a huge entry level market for mutual funds. As mutual funds start selling units on e-wallets it will be a precursor to selling on ecommerce platforms, opening up a new sales channel for these mutual funds.
While these are the broad contours of the SEBI Board meet discussions, there are also some additional points that have been addressed. For example banks will now get preferential treatment when it comes to getting shares from companies under Strategic Debt Restructuring (SDR) or Corporate Debt Restructuring (CDR) schemes. The SEBI meet has also clarified that NRIs and Indian citizens are prohibited from investing in overseas derivative instruments (ODIs). This was already an accepted practice and this meet has given a legislative legitimacy to it. All in all, it has been an emphatic start by the new SEBI chairman. The journey to second generation capital market reforms may have just about begun!