Sebi approves wide-ranging reforms across mutual funds, IPOs and debt markets

Capital markets regulator Sebi on Wednesday announced a series of regulatory changes covering mutual fund expense structures, IPO disclosures, stock broking norms and debt market fundraising, adopting what it described as a “balanced” approach while addressing concerns raised by the asset management industry.

The Sebi board approved changes to the mutual fund expense framework by introducing the concept of a base expense ratio (BER), which excludes statutory levies such as security transaction tax (STT) and goods and services tax (GST). This marks a shift from the current structure that focuses on the total expense ratio (TER).

Under the revised framework, the TER will continue to apply and will comprise the BER, brokerage, regulatory levies and statutory levies.

Sebi chairman Tuhin Kanta Pandey told reporters that taxes and statutory levies vary over time and said the BER provides a clearer view of the expenses charged by the industry.

He said the regulator opted for a “balanced” set of rules instead of the “radical” proposals outlined in the discussion paper released earlier this week, which had led to investor unease around asset management company stocks. Pandey did not directly respond to a question on whether the new measures would impact industry profitability or benefit retail investors.

The board also approved a rationalisation of brokerage limits, reducing the cap to 0.06 per cent from 0.12 per cent, and cutting the brokerage limit for derivative transactions to 0.02 per cent from 0.05 per cent.

In addition, Sebi ended the additional 0.05 per cent exit load measure that was first introduced in 2018. Pandey said the revised rules will come into effect from April 1 next year.

The Sebi board also overhauled stock broking regulations that are over three decades old, with the aim of making them more concise and transparent, Pandey said.

Beyond mutual funds and stock broking, the board approved several measures to improve investor convenience, ease compliance requirements and deepen participation in the capital and debt markets.

As part of the changes, Sebi decided to replace the abridged prospectus with a concise and standardised summary of the offer document, limited to key information, to make IPO disclosures more accessible to investors.

To boost retail participation in the bond market, the board approved a proposal allowing debt issuers to offer incentives in public issues to select investor categories such as senior citizens, women and retail investors, in a move aimed at reviving interest in public debt issuances.

The regulator also approved a framework to reduce the compliance burden on large debt-laden companies by increasing the threshold for classifying High Value Debt Listed Entities (HVDLEs) to Rs 5,000 crore from Rs 1,000 crore.

To further simplify investor servicing, the board approved the removal of the requirement to issue Letters of Confirmation (LOCs) by registrars and transfer agents (RTAs) or listed companies. Under the revised process, securities will be credited directly to investors’ demat accounts after due diligence, following investor service requests.

Sebi said the changes would streamline the credit process, reduce the timeline for credit of securities to demat accounts from around 150 days to about 30 days, and lower the risk of loss or pilferage of LOCs.

On IPO disclosures, the regulator said the board approved the availability of a “focused, concise and standardised” summary of offer documents in the form of a draft abridged prospectus at the draft red herring prospectus (DRHP) stage, in addition to the existing requirement at the red herring prospectus (RHP) stage. The move is intended to increase retail investor participation in the IPO process.

In this context, the board also cleared a proposal to rationalise disclosures in the abridged prospectus, which will be hosted on websites as required under the regulations. Sebi said the requirement to prepare a separate offer document summary may be done away with, subject to consultation with the central government.

Separately, to facilitate the transfer of physical securities, the board approved a proposal allowing investors holding original physical security certificates along with transfer deeds executed before April 1, 2019, to submit such documents during a specified window. These transfers will be subject to conditions specified by the board and due diligence by RTAs or listed companies, while cases involving disputes or fraud will be excluded.

To further ease doing business, Sebi approved amendments to the Sebi (Credit Rating Agencies) Regulations, allowing credit rating agencies (CRAs) to rate financial instruments that fall under the purview of other financial sector regulators even in the absence of explicit rating guidelines from those regulators.

Currently, CRAs rate bank loans under Reserve Bank of India guidelines but are restricted from rating certain unlisted debt instruments due to the absence of specific norms. Sebi said enabling such ratings would expand the availability of ratings across a wider range of instruments and support the development of the debt market.

Additionally, issuers of non-convertible securities will now be required to transfer unclaimed amounts only once, after the completion of seven years from the date of maturity, instead of making multiple transfers when interest, dividend or redemption payments fall due.

Sebi said the change would also provide investors with a longer window to claim unclaimed amounts from issuers. At present, such amounts are transferred to the Investor Education and Protection Fund (IEPF) or Investor Protection and Education Fund (IPEF) after remaining unclaimed for seven years.

Pandey said Sebi is also working on similar reforms in areas such as settlement mechanisms, substantial acquisition of shares and takeovers, and listing obligations and disclosure requirements frameworks.