Capital markets reforms by SEBI

SEBI vide its press release PR No.59/2010 dated March 6, 2010 has announced the decisions of the board meeting of SEBI held on the same day. The following is an analysis of the abovesaid decisions.

Margin requirements for Qualified Institutional Buyers (QIBs) bidding in a book built public issue revised so as to ensure level playing field among all categories of investors.

SEBI has decided that all types of investors should bring in 100% of the application money as margin along with the application for securities in public issues.

Earlier SEBI had not mandated margin requirements for any of the categories of investors applying in public issues. However it was noted that in practice, retail investors and non institutional investors were required to pay 100% of the application money at the time of placing bids while QIBs were permitted to bid without paying any upfront amount. This led to huge oversubscription. Subsequently in September 2005, SEBI (DIP) Guidelines were amended requiring collection of at least 10% of application money from QIBs at the time of placing bids. The above margin requirement continues to exist in the present SEBI (ICDR) Regulations 2009. Schedule XI Part A (11)(b) of SEBI (ICDR) Regulations states “An amount of not less than ten percent of the application money in respect of bids placed by qualified institutional buyers and not less than twenty five percent of the application money from the Anchor investors shall be taken as margin money.” While SEBI regulations does not prescribe any margin requirements for other categories of investors, as per current market practice 100% of application money is collected from all other investor categories.

Numerous IPOs in recent times have shown a high appetite from various investors with such issues being over subscribed from a few times over to more than 60 times. Irrespective of the reasons for such huge demand, which could be on account of the fundamentals of the issuer or mere speculative interest, it is felt that the lower margin enjoyed by QIBs coupled with proportionate allotment leads them to put in larger bids than they intend to acquire, thus reflecting a demand which is much higher than what actually is. Retail and other investors often look at QIB bidding levels as an indicator of the interest in the scrip/ issue and hence overbidding by QIBs may falsely encourage other investors to put in their bids. As a result, the total demand in a book built public issue could be overstated significantly. Since the listing price is often driven by unsatiated demand during issue process, overbidding could also affect post listing price discovery. Following an earlier recommendation of SEBI Board, Primary Market Advisory Committee of SEBI (PMAC) examined the entire IPO process afresh to bring about more efficiency in terms of time involved, cost, transparency etc and constituted the Group on Review of Issue Process (GRIP). GRIP had inter-alia suggested that 100% margin may be collected from QIBs. These suggestions were accepted in principle and recommended by PMAC for implementation at appropriate time. SEBI Board has now decided to implement these suggestions from 1 May 2010.

Reservation for Employees in Public/Rights Issues

SEBI has decided that the reservation for employees in public/rights issues would also be available to employees of subsidiaries and material associates of the issuer whose financial statements are consolidated with the issuer’s financial statements.

SEBI regulations currently permit SEBI permit reservation for employees of the issuer. The rationale behind allowing such a dispensation is to enable the issuer to reward its employees for their contribution to the operations of the issuer. However as per the current regulations the employees of the holding company/ subsidiaries of the issuer are not entitled for such rewards, though their contribution to the business of the issuer may be at par with the employees of the issuer. In the present day business environment there are several companies who may be having a number of subsidiary companies apart from having a holding company who contribute to the profitability of the issuer company. There could be several instances where a major part of the business operations of the group may be done through holding/ subsidiary companies. The provision for employee reservation provided in the current regulations enables an issuer to reward employees who are on its payroll. SEBI has now decided that this reward should also be made available to employees of subsidiaries and material associates of the issuer. However corresponding amendment in SEBI (ICDR) Regulations, 2009 is still awaited.

Reforms in Derivatives Market

(1) Equity derivatives contracts with tenures upto 5 years: Earlier in January, 2008 SEBI had introduced long term options on Sensex and Nifty with tenures of upto 3 years. Now SEBI has in principle permitted stock exchnages to introduce equity derivatives contracts with tenures upto 5 years.

(2) Derivative contracts on volatility indexes which have suitable track record: Earlier in January 2008, SEBI has permitted stock exchanges to adopt any of the volatility index computation models available globally or develop their own model for computation of Volatility Index. SEBI has now in principle permitted the introduction of derivative contracts on volatility indexes like the Volatility Index (VIX India) of NSE.

(3) Physical settlement of equity derivatives: SEBI also has decided to allow physical settlement of equity derivatives.

A copy of the press release is available here.

For more information log on to www.sebi.gov.in

[Ed: A few typos appeared in the original article have been corrected. Thanks to my readers for pointing this out.]