The Damodaran era comes to an end at the Securities and Exchange Board of India (Sebi) on Monday, but India Inc and the capital markets won’t be missing the impact of some of his initiatives in the last three years. Though the market watchdog has been finetuning regulations ever since its inception in the early 1990s, the move accelerated over the last few years, making the Indian capital markets more transparent and efficient.True, the tightening of rules and loopholes helped the regulator avoid any scam in the market in the last four years. And it witnessed many path-breaking reforms.“Two crucial developments in the last three years, when M Damodaran was Sebi chairman, were the removal of entry load by mutual funds and the corporate governance norms to be followed by listed companies. This is not to say that other measures on various fronts like initial public offerings (IPOs), delisting, fast-track issues, qualified institutional placements (QIPs), bringing of more derivative products and simplification of foreign institutional investor (FII) registration are less important,” said a former member of several capital market committees.In the case of corporate governance norms, Sebi has ensured that at least 50 per cent of the members on the board of a company are independent directors if the company’s chairman is the executive director and at least one-third should be independent directors if the chairman is a non-executive director. If the non-executive chairman is a promoter or is related to the promoters, he would not be treated as an independent director. So, in such a case, the company would be required to have 50 per cent independent directors on its board — because such a chairman “cannot be considered truly ‘non-executive’ in the sense of the term”.There was severe pressure from various quarters, especially public sector companies, for relaxation of this rule. However, Sebi refused to buckle under pressure. “Besides, Damodaran ushered a semblance of order in the role of qualified institutional investors (QIBs) in initial public offerings and increased the quota for retail investors in IPOs from 25 to 35 per cent. QIBs are now required to pay 10 per cent upfront while placing IPO bids. I hope Sebi will make it 100 per cent soon,” said former Bombay Stock Exchange (BSE) executive director M R Mayya. Another measure that was cheered by investors across the country was the removal of initial issue expenses — which came up to 6 per cent — on close-ended mutual fund schemes. The Board also scrapped the entry load — 2 to 2.5 per cent — on open-ended funds. This means that investing in mutual funds has become cheaper for investors, who were increasingly getting alienated in the institutionalised market.THE ROAD AHEADThe new Sebi chairman, C B Bhave, will have to look at real estate investment trusts (REITs) as the market watchdog has already proposed draft guidelines to regulate their fund-raising activities. REITs are companies, common in developed markets, that own and usually manage income-producing real estate property such as apartments, offices and industrial space.Last month Sebi had said that REIT schemes may acquire uncompleted units in a building which is unoccupied and non-income producing or in the course of substantial development, but the aggregate contract value of such real estate should not exceed 20 per cent of the total net asset value of the scheme at the time of acquisition.Under Damodaran, Sebi had also proposed to make ‘insiders’ surrender to companies their short-swing profits last month. This move is aimed at creating a level-playing field for companies’ ordinary shareholders, who would not have access to such inside information. The proposed measure to curb insider trading is based on similar regulations prevalent in the US, which defines insiders as owners, directors or officers of a company with at least 10 per cent stake.Sebi had also suggested, in its draft norms late last year, that registration be made mandatory for all investment advisers. According to the norms, a person must acquire a certificate to act as an investment adviser. He also has to be part of a self-regulatory body to receive a certificate under these regulations. The self-regulatory body needs to forward the application form to the board with its recommendations. As a market source said, finetuning of regulations is an ongoing process. Today’s norm might become obsolete tomorrow. And now, over to Bhave.Foundations of a modern system• Finetuning of IPO norms, especially QIB and retail investor participation• Entry load, issue expenses of mutual fund schemes removed• Corp governance norms tightened; more independent directors allowed on company boards• New norms proposed for insider trading, real estate funds and financial advisers
