Editorial. Balancing act – The Hindu BusinessLine

The first Board meeting of Securities Exchange Board of India (SEBI) under its new Chairperson Tuhin Kanta Pandey has signalled to markets that the regulator will now strive to balance effective regulation with ease of doing business for market participants. SEBI in the last few years has focused almost exclusively on its investor protection mandate. Steps have also been taken towards more transparent functioning and governance within SEBI. While these shifts are welcome, the regulatory relaxations granted to Foreign Portfolio Investors (FPIs) are rather puzzling.

It is good that the Board has green-flagged the constitution of an independent high-level committee to review extant rules relating to conflicts of interest and disclosures relating to property, investments and liabilities for Board members including the Chairperson. Allegations by Hindenburg Research on the former Chairperson’s investments in certain offshore funds had exposed grey areas in these rules and raised questions about the internal processes at SEBI. Such matters are currently governed by regulations framed more than a decade ago.

The new Chairman has reiterated that SEBI’s main remits are investor protection and development and regulation of the securities market. But fast-paced and piecemeal changes to protect investors can at times be detrimental to development objectives. This seems to be the primary reason why the new SEBI Chief has rolled back some of the proposals of the previous regime which impinged on the commercial practices of market players. The proposal to allow investment advisors and research analysts to charge fees in advance for a year is a case in point. SEBI’s earlier decree that these regulated entities should collect fees only for three months at a time had stirred a hornet’s nest with many research analysts surrendering their licences. It is also well that market infrastructure institutions have now been given the freedom to decide on the minimum cooling-off period for key managerial personnel and directors, when they quit to join a competitor.

The rationale behind increasing the threshold for FPIs to make granular disclosures about their shareholding is less clear. SEBI’s circular issued in August 2023 had stated that FPIs with assets under management of ₹25,000 crore in Indian equities or holding more than 50 per cent of their Indian equity in a single group, had to disclose granular details of their shareholders right down to natural persons. The Board has now increased this threshold to ₹50,000 crore. While the move could encourage foreign portfolio inflows, it is a setback to efforts to prevent round-tripping of funds through the FPI route. Though FPIs need to undergo KYC and make disclosures under the Prevention of Money Laundering (Maintenance of records) Rules 2005, there are loopholes which allow the beneficial owner to remain unidentified. Just as it consults stakeholders before introducing any new regulation, SEBI must offer detailed reasons for its actions when it waters down extant regulations.