The Securities and Exchange Board of India (Sebi) has announced a slew of reforms after its board meeting on Thursday. Sebi chairman Ajay Tyagi said that there is a need to improve enforcement on all fronts.
The market regulator’s board decided on key reforms over credit rating firms, promoters’ pledge of shares, liquid funds and royalty payments. At its board meeting, it discussed issues around shares encumbered by promoters and the mutual fund industry’s exposure to these structures.
Other decisions include promoters pledging their shares to take debt in unlisted companies to fund other businesses, which increases the leverage of the entire group.
In January, the Essel Group companies, to which mutual funds had lent a combined ₹7,000 crore against debt securities, neared a payment default. The fund managers agreed not to sell the pledged promoter shares until end-September on a promoter’s guarantee. This standstill agreement affected the pay-out of fixed maturity plans (FMPs) of Kotak Mahindra AMC and HDFC AMC.
In a further tightening, promoters, promoter groups and persons acting in concert will need to disclose the reason for creating an encumbrance as soon as 20% of their share capital is leveraged.
Here are key decisions taken:
Sebi will act on credit rating firms on merits
It has started action on 'standstill' pacts between companies and mutual funds
Standstill pacts between mutual funds and companies will not be recognized
Company founders should disclose the reason after 20% stake pledged
Liquid funds to hold minimum 20% assets in cash, gilts
Risk management framework needed for liquid funds
Shareholder nod needed for royalty above 2% of yearly revenue
Proposals on valuation of debt by mutual funds approved
