New regulations, governing ‘pooled resources’ of investors, are likely to be issued within the ‘next two weeks’, Securities and Exchange Board of India (SEBI) Chairman U. K. Sinha said here on Tuesday.
Minimum threshold amount
Delivering the keynote at a conference on competition and financial regulation, organised jointly by SEBI and the National Law School of India University, Mr. Sinha said the SEBI’s guiding principle rests on the premise that “any entity that is involved in pooling money has to be registered.” Hedge funds, for instance, were not regulated in India, he pointed out. He observed that discussions in international fora such as the Financial Stability Board were veering around to the view that there needs to “registration and regulation of all funds.” He said SEBI was considering a minimum threshold amount of “approximately $200,000.” The idea behind the threshold was that such funds should not be collecting from ‘ordinary retail investors,’ but from those who could understand the risks involved.
Mr. Sinha said SEBI’s new regulations, allowing leveraging by funds, were likely to be issued soon. While venture funds and private equity funds, which enjoyed ‘regulatory and tax benefits,’ would not be allowed any leveraging. The third category of funds, those that would be allowed to leverage, would not enjoy tax and regulatory benefits extended by the government, he said.
Transparency in IPOs
Recognising the need for ‘more transparency’ in the Initial Public Offer (IPO) and mutual fund markets, SEBI had “introduced a number of changes, which are basically guided by the disclosure requirements,” Mr. Sinha said. He said mutual funds would be subject to more stringent norms on disclosures about their past performance. “We have enough data to show that due diligence has not been exercised by merchant bankers to IPOs. In future, due diligence done by merchant bankers must be available to SEBI for inspection,” he said.
The regulator also detected “many cases of price manipulation in small-ticket sized IPOs on the opening day when the scrips were listed,” Mr. Sinha said. The regulator had introduced a ‘pre-trading call auction’ session for better price discovery on the opening day, he said. A ‘normal price band’ of 20 per cent of the price discovered at the session had been provided to reduce the amplitude of fluctuations on the day the scrip was listed, Mr. Sinha said.
Mr. Sinha said “high-frequency and algorithmic trading,” had, in “one or two instances, which pointed to vulnerabilities in the system.” “We are not against algo-trading, but we want to set very detailed rules on how it can be allowed,” he remarked.