SEBI proposals need implementation

S. Vaidya Nathan

THE Securities and Exchange Board of India has in the past week come up with a series of proposals which, if implemented effectively, could improve the regulatory framework and enhance the process of capital market development.

But the key would be `implementation' -- an area where the quality of SEBI's actions leaves a lot to be desired and lag far behind its regulation-making. Be that as it may, the proposals -- made by SEBI committees focussed on the primary market and corporate governance -- are significant and merit a close look.

Ban on selective disclosure: A key proposal is to ban selective disclosure of price-sensitive and unpublished information to analysts. All information handed out to analysts would have to be disclosed immediately to the public.

The malaise of selective disclosure has tilted the scales in favour of big institutions and operators. This is widely prevalent in the American markets and was described by the US Securities and Exchange Commission (SEC) Chairman as ``stain on market integrity''.

Following this, the SEC had in the past one year introduced Regulation Fair Disclosure which requires all information, including those presented at annual meets and conference calls, to be made public. The regulation took effect on October 23.

Though widely welcomed, there is a an alternative school of thought that holds that the Regulation FD could have a `chilling effect' on corporate communication and freeze information flows.

SEBI appears to have quickly picked the cue from the SEC and one hopes it would also do homework, like its counterpart, before putting in place a regulatory framework to tackle this malaise. The effectiveness on the ground would depend on the response of the corporate sector, the deterrents that are put in place and the quality of implementation by SEBI. But, there can be no doubt that this is a move long overdue.

More insiders: In a move that throws some light on what was till now a grey area, SEBI has enlarged the definition of `insiders' to include consultants, credit-rating agencies and company accountants. The very nature of the role played by such persons means that may have to be provided with price-sensitive information ahead of the others and may also be privy to key corporate actions which need not be made public.

This would place such persons on a pedestal that the ban on selective disclosure seeks to eliminate. There is room for such persons/associates to misuse the information that comes into their possession. In this context, by creating a separate category called `temporary insiders', SEBI has done well to make it clear that such persons would come under the ambit of the insider-trading regulations if they used the information that comes their way improperly.

Insider- and informed-trading (the dividing line is thin) are rampant. One just has to look at the price trends ahead of any key corporate announcement. At least a week, if not a month, ahead, the prices tend to adjust for the would-be action. This can only be attributed to insider/informed trading. However, SEBI appears to ignore the reality when it comes to implementing its insider-trading regulations.

That is why there has been little of note apart from the highly questionable charge of insider-trading alleged by SEBI against Hindustan Lever. Admittedly, proving insider-trading to the hilt is a difficult task. But SEBI needs to only look at the number of cases in the US where the SEC has been able to impose stiff penalties and/or disgorge ill-gotten profits without admission of guilt by the persons concerned in the case. Actions of this genre have a signalling effect whose impact would be far greater than pursuing stray cases in an ad hoc manner.

Announcements and trading freeze: A proposal has also been mooted to remove the mandatory requirement that earnings announcements should not be made during trading hours. This makes a lot of sense for two reasons. One, companies and select few people may be sitting on key information, when the markets are open and there is the possibility of misuse. By allowing announcements during trading hours, the waiting period is cut to the minimum. Two, with many major Indian companies listed in India and abroad, the timing restrictions enhance the scope for such information-sitting.

The alternative mechanism of a trading freeze, suggested by the Kumar Mangalam Birla Committee, needs to be pushed strongly. This would enable wide dissemination of information absorbed by the market participants and priced in a more smooth manner than is the case now.

Widen trading freeze: The concept of trading freeze has to be extended to cover other major corporate announcements such as mergers, de-mergers, acquisitions, unexpected outcomes, swap ratio, fresh equity offering and soon. The information content of such actions is of a higher order as far as stock price implications go than earnings announcements (where expectations already play a major role).

Such trading freeze can also be contemplated when stock exchanges have sought explanations from the company on any unusual price movements. This would also have the additional effect of highlighting such cases. It may be appropriate to also build in to the regulatory framework flexibility for companies also to ask for a freeze ahead of corporate announcements for which it is not mandatory.

Insider-buying and selling: SEBI has also proposed to require key management personnel to disclose their sale and purchases of stocks with a threshold beyond which such disclosure would be mandatory. This move could also level the playing field as between insiders and outsiders and also ensure that key management personnel can own and trade stocks in more comfort than is the case now.

Lower stake dilution: With regard to the primary market, SEBI has proposed that companies will be allowed to make a public offer of 10 per cent of equity provided the minimum offer size is Rs 250 crore. This lower limit is at present available only to companies from the software, telecom, media and entertainment sectors. The move to clarify that the minimum floating stock requirement of 10-25 per cent, as the case may be, should be a continuous requirement and not a one-time one that ought to be welcomed, as it helps better price formation.