The Clash of the Titans Part II - Meet Another Regulator

Once upon a time, while we were still law law school, Abhyudaya and I used to write about some developments at various regulators on our blog A First Taste of Law. It was a great way for us to keep in touch and at the same time build our blogging reach. We are republishing one such article here. 

It governs everything you do in the stock markets. It can ban you and any company floated by you at present or even in future from getting public money if it finds you guilty of market manipulation, unfair practices or insider trading. Be it a big-ticket IPO or a high-profile takeover, the SEBI governs it all.
The previous post outlined some of the innovative measures taken by RBI. This post shall introduce you to some of the innovative products brought in by the Securities and Exchange Board of India (SEBI), the stock markets regulator.

  • Interest rate futures

Interest rate futures are instruments traded on stock exchanges which fix the interest rate on an underlying security, such as a bond, upon a future date. An interest rate future can be used to hedge risk arising out of fluctuating interest rates. Recall from our previous post on Liar’s Poker that the value of a bond varies inversely in relation to interest rates. Hence, if interest rates rise, the value of the bond will fall. Entities which hold the bond would, therefore, be interested in hedging such risk of fall in the value of the bond. Interest rate futures are permitted on certain 10-year Government securities only. A more detailed idea of the product is available on this link from the Securities and Exchange Board of India (SEBI) site.

  •  SME Listing

SEBI had announced regulations for listing shares of Small and Medium Enterprises, implying that it would now be much easier for them to raise money from the public. These regulations would lower thresholds for listing by giving them certain exemptions from the applicability of listing norms and takeover provisions that apply to their larger counterparts, making listing on a stock exchange a more feasible option for them. This is important as it shifts the focus away from the Blue-Chips, the Mid, and Small Cap companies of India Inc to the thousands of other emerging companies of India.

Further, it is likely for a lot of SMEs to have shareholders from cities and states which are geographically nearer to the base of the company concerned, as those regions are also more likely to be their target markets during their growth stage. This would also encourage people who may have otherwise not participated in the stock market or transacted to a very limited extent to engage in the stock market. In the long run, it would ensure the creation of the right incentives to encourage efficiency in the management of companies, right down to the smallest of them. We must remember that this is a big step towards the inclusion of the bottom half of the pyramid and has the same potential in boosting financial transactions as the mobile revolution has had for rural telephony.

  • French Auctions

Further, in its new regulations (Issue of Capital and Disclosure Regulations, 2009), SEBI has introduced a new auctioning system when a company which is already listed tries to issue more shares to the public (known as a follow-on public offer or an FPO) – called a French Auction. The method has been tried in the FPOs of some public sector undertakings – National Thermal Power Corporation (NTPC), Rural Electrification Corporation (REC) and National Mineral Development Corporation (NMDC), though it did not turn out to be as successful as expected. But then, on cannot be successful all the time. It was still a worthwhile move forward.

  • SEBI vs. IRDA

SEBI and IRDA were engaged in a tussle with the regulation of ULIPs (Unit Linked Insurance Plans), which are essentially insurance schemes with components reserved for the purpose of investing. First, SEBI issued an order requiring registration of new ULIPs with it, but IRDA then clarified to insurance providers that they may ignore the SEBI. The matter lies with the Supreme Court at present. In the meanwhile, an ordinance was passed giving exclusive jurisdiction over ULIPs to IRDA, amending the SEBI Act, the Securities Contracts Regulation Act (SCRA) and the IRDA Act. However, an amendment to the ordinance is awaited when the Parliament is in session.

The two regulators are also cooperating with each other to bring out norms for the listing of insurance companies. Presently, the draft prepared by the IRDA has been sent to SEBI for final approval.

This was a short coverage of some innovations brought in by SEBI in the financial markets. The next post shall chart the moves of the Department of Telecom and the Competition Commission of India.

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