Regulating investors is not Sebi's job

In the tumultuous years of the early 1990s, a time when exchange liberalisation was followed by one of India's biggest financial scams, there was a bit of passing the parcel game going on. While foreign money was welcome, it had to go through a gate. TheSecurities and Exchange Board of India (Sebi) was given the parcel of registering foreign institutionalinvestors (FIIs) in the Budget of 1992-93 not out of any philosophy but merely as a regulator who was somehow concerned with investors and capital markets.

This handing over of the mandate, if analysed, does not go with Sebi's mandate of regulating the market, developing the market or of protecting the interest of investors. While few people give it second thought, it is not the mandate ofSebi to regulate investors but it's rather to protect them. Further the mandate of protecting investors is not restricted to Indian investors but all investors. This is sensible because protecting all investors will further the cause of developing a well-regulated capital market which gives importance to corporate governance and accountability to shareholders.

The muddled regulations of FIIs andventure capital (VC), though born in 1992, arise from amendments made in 1995 to Sebi Act and this muddle is clear from the unclear language of the Act. Section 11 talks of registering and regulating "Foreign institutional investorsa¦and such other intermediaries" as may be specified. FIIs are investors and not intermediaries like brokers, merchant bankers, etc.

Doing violence to the language also does violence to the philosophy of why Sebi was set up. Similarly the same section also speaks of registering and regulating "venture capital funds and collective investment schemes, including mutual funds". Of course, mutual funds are neither collective investment schemes nor venture capital funds. In the same light, venture capital funds are pools of investors rather than intermediaries and don't need to be regulated.

So are there arguments in favour of Sebi registering and regulating FIIs? There are, though they don't hold water. The first argument is that Sebi needs to regulate large foreign investors because they have the ability to disrupt Indian capital markets with their huge cash inflows and outflows.

This can be dismissed in both theory and practice. It is not Sebi's mandate to regulate the inflows and outflows in the market. In addition, once anFII is registered, it has in fact no controls on how much money it can invest and how much it can take back the next day, which could be done by theReserve Bank of India (RBI) under exchange control regulations.

The second argument is that FIIs could be a vehicle for money laundering. Again, both the theory and practice refute this argument. Foreign money comes into India through banking channels and theRBI imposes strict money laundering restraints on the banking system. Having a second regulator does not add useful service to this remit.

rguments can also be made that Sebi provides important disclosure standards for participatory notes and other second-level investments by FIIs on others' behalf. Whatever disclosure standards that Sebi imposes can well be imposed by the central bank in a single window system of exchange control rather than create a pointless registration process with a second regulator.

Similarly, regulating venture capital is also not ideal. But the issues relating to VCs are more nuanced. Venture capital funds are pools of money contributed by sophisticated investors which are managed by a professional manager and invested mainly in highly risky unlisted equity and hybrid securities.

Sebi has two sets of regulations - one for foreign VCs and another for domestic VCs. In both, there are extensive sets of investment restrictions which prohibit, for instance investing substantial amounts in listed equity. In return, Sebi and the income tax authorities grant it certain beneficial treatment and tax exemptions. The unstated rule is that registering as a VC is optional and if one is willing to register and take on the investment restrictions, then one is entitled to certain benefits.

In addition, Sebi's investor protection mandate also comes into play as investors in the domestic VC are majorly Indian investors who need the regulator's protection. Sebi imposes a minimum investment of Rs 5 lakh per investor in a domestic VC to ensure that only sophisticated investors enter this high-risk investment arena.

While having optional registration is a welcome move, it would be useful if Sebi could make that a formal position stating the same. In addition, in order to prevent unsophisticated investors from entering this gladiator's arena where few investee companies do well or even survive, a threshold limit of Rs 5 lakh is too low and should be increased many fold to prevent unsophisticated investors from burning their fingers. Such a regime would serve the needs of investor protection remit of a securities regulator rather than serving as a shadow foreign exchange controller.

Source: http://economictimes.indiatimes.com/opinion/guest-writer/regulating-investors-is-not-sebis-job/articleshow/9402863.cms?curpg=2

NBFCs, MFs can launch infra debt funds.

Taking a cue from government’s interest in raising funds for infrastructure financing, the Securities and Exchange Board of India (Sebi) has allowed both existing mutual funds and non-banking finance companies (NBFCs) to launch infrastructure debt funds (IDFs).

Schemes would invest 90 per cent of its assets in debt securities of infrastructure companies or special purpose vehicles (SPVs) across all infrastructure sectors. Funds could launch close-end schemes that have a maturity of more than five years or it could also introduce interval schemes with a lock-in period of five years. Even companies that have been in the infrastructure financing sector in the last five years can set up a fund.

Under the guidelines, these companies can have a minimum of five investors where no single investor shall hold more than 50 per cent of assets. Strategic investors could invest up to to Rs 25 crore in the fund.

The minimum investment into the fund would be Rs 1 crore with the minimum lot size being Rs 10 lakh for the unit. “Given that, the quantum of funds that can be invested is high, it will attract institutional buyers and high networth individuals (HNIs),” says Amar Ranu, senior manager, third-party products research, Motilal Oswal Wealth Management.

However, one can expect some liquidity since the fully paid units of the funds shall be listed on stock exchanges. Mutual funds launching these funds may issue partly paid units to its investors.

According to the government’s 12th Five Year Plan, it has planned $1-trillion investments in infrastructure projects. It was $500 billion during the 11th Plan (2007-12) and the government has been keen to raise funds through debt instruments like bonds and other routes such as units in the capital markets.Finance Minister Pranab Mukherjee had announced tax breaks for IDFs in his budget speech for this fiscal (2011-12), to attract foreign investments in the various infrastructure projects.

In the earlier guidelines for released by Reserve Bank of India in June 2011, NBFCs who set up these IDFs have been permitted to sell bonds to refinance public private projects, once the construction is complete. This would also help PPPs to attract long term funds at lower costs because of lower risk. However, in terms of attracting investments, IDFs would have to compete with the existing triple AAA rated papers which provide a liquid market.

Source: http://www.business-standard.com/india/news/nbfcs-mfs-can-launch-infra-debt-funds/444195/

Sebi rules: Mutual Fund investors to pay Rs 100-150 fee to invest

First timemutual fund investors will now have to pay an additional 150 as transaction charges according to new rules approved by securities market regulatorSebi which are aimed at widening the reach of mutual funds.

Existing investors inmutual funds will have to pay an additional 100 as transaction charge. According to a member of an advisory committee of Sebi on mutual funds, the extra 50, which will be charged for new investors, will help meet Know Your Customer, or KYC, and other incidental expenses.

"The whole idea of this step is to make good the transportation and incidental expenses incurred by the distributor while collecting the application forms from the investor," the person said.

Sebi chairman UK Sinha said that distributors will be allowed to charge 100 as transaction charges for each subscriber to help mutual funds penetrate into the retail segment in smaller towns.

The regulator has made it clear that these charges will only be applicable on fund investments exceeding 10,000. No charges will be levied on transactions other than new fund purchases. Sebi has exempted direct fund transactions from this levy. Transaction charges - of 150 for new investors and 100 for existing investors - will be charged to the fund in three to four instalments. Transaction charges are in addition to the existing eligible commissions permissible to the distributors, Sinha said.

"It'll definitely help distributors servicing retail investors. Transaction charges will cover running costs of smaller distributors," said Rajiv Bajaj, managing director, Bajaj Capital, a national distributor, adding, "it would be nice if the regulator also built-in distributor commission to the application."

Senior Sebi officials said the decision to introduce transaction charges has been taken against the backdrop of a shrinking mutual fund investor base. As a first step towards regulating distribution services, AMCs have been told to conduct due diligence while availing the services of large-sized distributors.

Fund houses will also have to disclose the aggregate amount of commissions paid to distributors besides greater disclosures in terms of performance benchmarks and break-up of assets -- equity and debt-- to provide a more realistic picture.

Source: http://economictimes.indiatimes.com/markets/regulation/sebi-rules-mf-investors-to-pay-rs-100-150-fee-to-invest/articleshow/9403175.cms