SEBI’s Upcoming Board Meeting: Key Proposals on the Agenda
The Securities and Exchange Board of India (SEBI), the market regulator, is set to convene on December 18, 2023, to deliberate and finalize a series of significant policy proposals. As mandated by its governing statute, SEBI’s board meets quarterly, with the last meeting held on September 30. This upcoming session promises to address a variety of crucial topics, including regulations for small and medium-sized enterprises (SMEs) looking to enter the capital market, updates to merchant banker regulations, and frameworks for performance validation agencies, among others.
Major Overhaul of SME IPO Rules
One of the most anticipated discussions at the board meeting revolves around the proposed overhaul of regulations governing SME initial public offerings (IPOs). Sources indicate that SEBI is considering substantial changes aimed at facilitating SME access to capital markets. Key proposals include increasing the minimum application size from the current ₹1 lakh to a range of ₹2-4 lakh. This adjustment reflects the significant growth in market indices, with the Nifty and Sensex experiencing approximately 4.5 times growth over the past 14 years.
Additionally, SEBI is contemplating the establishment of a monitoring agency to ensure that the proceeds from SME IPOs are utilized appropriately. Another proposal seeks to limit the size of an offer for sale (OFS) by promoters to 20% of the total issue size, a restriction that currently does not exist. Other proposed conditions for IPO eligibility include a requirement for companies to demonstrate an operating profit of ₹3 crore in two out of the last three years, aligning SME IPO allocations with those of mainboard offers, and increasing the promoter lock-in period from three to five years.
Tightening the Scope of Insider Trading
In a bid to enhance market integrity, SEBI plans to broaden the definition of unpublished price-sensitive information (UPSI). The regulator aims to include a wider array of activities, such as fundraising, corporate insolvency, loan restructuring, and significant business events like mergers and acquisitions, as UPSI. A recent study indicated that many listed companies have been narrowly interpreting UPSI, leading to inconsistent disclosures and potential misuse of sensitive information. By expanding the definition, SEBI hopes to foster greater compliance and transparency within the market.
Review of Merchant Banker Regulations
The board is also expected to review the regulations governing merchant bankers, with a focus on updating the minimum net worth requirements. Currently set at ₹5 crore, this threshold has remained unchanged since 1995. SEBI proposes to categorize merchant bankers into two groups: Category 1, requiring a net worth of at least ₹50 crore, and Category 2, with a minimum net worth of ₹10 crore. This restructuring aims to ensure that merchant bankers are adequately capitalized to undertake various market activities.
Furthermore, the board will discuss the implications of multiple registration licenses within the same group, which SEBI believes could lead to regulatory evasion. Existing merchant bankers will be granted a two-year period to comply with the revised net worth criteria, while new underwriting obligations are also under consideration to align with market risks.
Framework for Performance Validation Agency
Another significant item on the agenda is the long-awaited proposal for a performance validation agency. SEBI had previously circulated a consultation paper on this initiative, which aims to authenticate the claims of investment advisors, research analysts, and algorithmic traders. The agency, likely to be established under the National Stock Exchange (NSE), will initially operate on a voluntary basis, allowing market participants to validate their performance claims.
Review of Public Interest Director Appointments
The board may also consider revising regulations related to public interest directors (PIDs) in market infrastructure institutions (MIIs). The proposed changes aim to incentivize PIDs by offering a fixed remuneration of up to ₹30 lakh per annum, in addition to sitting fees. To address the shortage of qualified PIDs, SEBI may relax the cooling-off period for directors transitioning between MIIs, particularly when moving to a rival institution.
Review of Custodian Regulations
Lastly, SEBI is likely to approve an increase in the net worth requirement for custodians from ₹50 crore to ₹100 crore. This adjustment is intended to mitigate the risks associated with fraud and operational failures, ensuring that custodians are better equipped to handle potential losses. Additional regulatory changes may include mandatory business continuity plans and a prescribed code of conduct to prevent unfair competition practices.
Conclusion
As SEBI prepares for its December 18 board meeting, the proposed regulatory changes reflect a proactive approach to enhancing market integrity, facilitating SME growth, and ensuring that market participants operate within a robust framework. While the agenda is extensive, the outcomes of these discussions will play a crucial role in shaping the future landscape of India’s capital markets. Queries sent to SEBI for further clarification remained unanswered at the time of publication, but the anticipation surrounding these proposals underscores the importance of the upcoming meeting for stakeholders across the financial ecosystem.