SEBI announces new P-note policy

M Damodaran, Chairman, Sebi, while announcing the decision on the new policy on P-notes said that this was not a board meeting to decide on a single issue.



Speaking to mediapersons after the Sebi board meet today, he said the stock exchanges would be mandated to constitute a committee chaired by a non-executive member of a concerned exchange to focus on surveillance. This, he feels, would make the market a safer place for investors.



The meet also saw new policy announcements like clearing of Sebi's proposal to have an SME exchange.



But the most awaited decision on P-notes was that the board has decided that FIIs and sub-accounts shall not issue P-Notes as underlying as derivatives.



"All current position to be wound up within 18 months. Further issue of PNs by sub-accounts will be discontinued with immediate effect," Damodaran said.




Highlights of M Damodaran's announcements at the Sebi Press Conference:



Sebi board cleared proposal to have a separate exchange for SME Segment
Date of calculation of AUC will be Sept 30
Sub accounts not to be allowed to issue PNs
PNs can't be issued with ODIs as underlying
FIIs shall not issue P-notes as underlying as derivatives has been approved
Current position to be wound up within 18 months
Board has decided further issuance of P-notes by sub accounts of FIIs to be discontinued with immediate effect
Sub accounts issuing P-notes have applied for registration of FIIs: Sebi
Until a final decision is taken on their being FIIs, sub accounts can continue as normal
Both proprietary and corporate sub-accounts will be allowed to do business till final decision is announced.
Excerpts from the meeting:



On market surveillance



“One of the issues that Sebi focuses on and is expected to focus on is surveillance. As it is customary in all our board meetings to report on surveillance activities, observations, conclusions, action taken and thereon was placed before the board and during discussions the prospect and the formal decision is been taken based thereon that the stock exchanges will be mandated to constitute a committee of board that will focus on surveillance.



This will be a committee chaired by an independent member, a non-executed member of the board of directors of the concerned exchange. We believe that broad level attention through the focused efforts of specially constituted committee of the board will enhance surveillance and ensure that it is consistent with Sebi’s interest and with the intentions and interest of the market place. The market will become a safer place for investors and that is one of the decisions that the board took today.”



"Some of you are aware that in order to liquidate the large pendency in regard to enforcement proceedings, we had introduced a system of persons applying for consent orders and cases getting disposed from the basis of consent orders.



The board took note of the progress and felt that this initiative was one that will be good for the system, not just for the clearing of the backlog, but also to ensure that our attempts at proceedings in the normal manner, throwing the book at offenders, will be confined to persons whose acts of omission or commission have largest systemic implications and the lesser matters will be not allowed to clog the pipeline.



On separate exchange for SMEs



Some of you are aware that for some time, the government, SEBI, other proponents of the SMEs have been talking in terms of enabling SMEs to access risk capital better than they have been enable to do so far. After discussions, the board cleared SEBI’s proposal to have a separate exchange for the SME segment. Consequently, the policy framework could be written off and persons interested in setting up an exchange dedicated to SMEs would be invited to come up with their proposals and thereafter.



One proposal from among those would be subject to eligibility criterion, to be picked up for enabling the setting up of the exchange."



On implementation of recommendations



We are also aware that, the corporate bond market has been a relative non-starter for a long time in India. This in turn has impeded the development process because it has not enabled persons to access long-term money for projects that need long-term money.



As some of you are aware, in April, following Sebi’s clearance, one of the exchanges had set up a reporting platform for trading on exchanges. Another exchange had done that a little later. Thereafter, we had put in place a trading platform and I am happy to report that in the last few months, we have witnessed a significant increase in the volume of trades done on the exchanges.



If you visit the Sebi website, you will find that as far as Sebi is concerned, most of the actions that arise from the report of the committee that the government accepted - the recommendations of the report - have been implemented by Sebi. We believe that the system is on course for the healthy development of the corporate bond market.



On participatory-notes:



I have seen reports in some sections of the media not too many, that decisions regarding an instrument known as participatory notes might not be taken at today’s meeting. I am sorry to disappoint those that had written those reports.



A number of decisions that needed to be taken in the context of a draft proposal that we had put out on the 16th of this month have been taken. I will take you through some of that fairly quickly. As I mentioned, in respect of this one item, we would be distributing a press note so that accuracy is ensured in what goes out to people in the marketplace.



The decision for FIIs and the sub-accounts shall not issue participatory notes with underlying hedged derivatives, has been approved by the board. The board has, also approved the related decision that the current decision would be wound up over 18 months.



This is to be read along with the clarification that we had issued a day after some people felt that the draft proposals did not have the clarity they needed to have on this particular matter. The board also decided that further issuance of participatory notes by the sub-accounts of FIIs would be discontinued with immediate effect and they would be required to wind up the current position over 18 months, during which period SEBI would review the position from time to time as had been indicated in our draft proposal.



As some of you are aware after we put out our draft proposal, sub accounts of FIIs, sub accounts that were in the business of issuing P-notes, have applied for registration as FIIs. Some have already been cleared. Some are in the process of being cleared and in the case of both -and I want to stress this, both proprietary and corporate sub accounts that were used for this purpose, the transition arrangements envisage that until a final decision is taken in regard to their registration as FIIs, they would be allowed to continue with the business that period is not a long period because I mentioned we have started clearing some of the applications; some might take a little longer. I must also mention that we have seen a number of reports from time to time even after I did a conference call providing case-wise detail.



On Assets Under Custody



Even after the conference call, providing case-wise details of how much time we took, even after that, stating that SEBI takes a few months or a few years, I hope that hereafter talk will be taken of facts and not of opinions put out by people whose incomplete applications might not have been cleared by us.



We cannot generalise the time taken on the basis of incomplete or incorrect applications. We have always maintained that correct and complete applications will be processed quickly. I believe in the recent past, we have given evidence of such processing and decision.



There is a question regarding the concept of AUC. Arising out of a proposal in the draft note, which the board approved today, that those FIIs with a notional value of PNs outstanding as a percentage of the AUC in India of more than 40%, shall issue PNs only against cancellation/redemption/closing out of the existing PNs of at least equivalent amount.



We have been receiving monthly reports from custodians in respect to the AUCs and for the purpose of these decisions, the AUCs will be defined until any changes made in the future, they will be defined on the same basis, as the custodians presently understand.



There have been questions regarding the dates, which will be taken into account for the purpose of cut off. The cut off for the purpose of calculation and giving effect for the purpose of operationalising the decision.



Questions at the presscon:



Q: On 40%?



A: Only a handful of people are above 40%. We arrived at 40% by looking at numbers that were available with us based on the reports and it will not be hugely disrupted. That is why we have said that those above 40%, if the issue is something new must all set it by closing out what they have. So that they remain in terms of nominal value wherever they are at this point of time.



Q: On existing position?



A: We have said that there will be no more P-Notes issued with derivatives. We have also said that those who are out there will have 18 months time to unwind.



Q: On proprietary and sub-accounts?



A: What we have initially told was that there were some FIIs that were issuing PNs directly out of their own accounts and some had setup proprietary sub-accounts from which PNs were being issued. After we announced that proprietary sub-accounts would be allowed, the facility of transition until they register and we wanted them to register and I am happy to report that they have all put in their applications.



Some people told us that we do this business entirely out of dedicated corporate sub-accounts and we need to be treated similarly. The board considered that today and said whatever time it takes for transition, both proprietary and corporate sub-accounts would be given similar treatments which is that they will continue to do the business that they were setup to do until a decision is taken on their application for registration as an FII.



If somebody had not applied, that sub-account could not have issued anymore, but since all these accounts have applied, there will be a period of transition, hopefully very short. For some of them there is hardly any transition left, because the applications came in a day after we had suggested this. We had taken decisions on some of them already, so there is hardly any transition for them. For the others where it might take a few days more, there is no need to stop doing business now and start afresh after the new 'avtaar' comes into being. But this is only for proprietary sub-accounts and corporate sub-accounts that have put in their applications, that’s the regime. So we are treating both these similarly.



Q: On provident funds, endowments?



A: Let me read out the categories Pensions Funds, Foundation, Endowments, University Funds, Charitable Trust of Societies. This is the category that is unexceptionable, set up for good purposes and whose quality is consistent with our expectation.



Q: On AUC - is there any significant difference when we calculate this with September end numbers?



A: I haven’t compared the numbers; I have only given you a date with reference to which it is logical to do that. I haven’t compared the numbers and looked at whether the numbers are more significant. Numbers move significantly when markets move significantly and we have seen that in recent times when markets have moved significantly even intra-day. So you might get numbers that you looked at with reference to August 31 being significantly different than September 30.



Q: AUC will be calculated on mark to market basis?



A: AUC will be calculated in the manner in which it is been calculated until now. It’s not a new phenomenon.



Q: Can you tell us about your new products?



A: There is a Sebi committee, the Rammohan Rao Committee on derivatives. When we will get committee’s recommendations, we can take a call on which one to accept and implement on. Today I cannot comment on any specific product because I do not have their recommendations.



Q: You have said that you have twenty applications with you and you have cleared a few of them, can you tell us how many have you cleared so far and how much time you will take to clear the remaining applications and is there any possibility of you clearing all the applications according to your criteria?



A: Securities market regulation is not a Twenty20 match where score changes per over. This is a process, you will have to wait for some time. I think in one week’s time we can take a decision on all the remaining applications, but I cannot tell you whether all applications will get cleared.



Q: To my knowledge the regulations relating to P-Notes are much older because at that time also there was a trend that anybody came on the disclosures?



A: Whatever is stated in the regulation has been sought to be implemented without any dilution. In between there was a dilution, which is that registered entities that were unregulated were also allowed to come in through P-Notes into the Indian market. That has been discontinued, it will be only regulated entities going forward.



Today there are some categories of people that can invest in the Indian markets directly and there are some categories of people that cannot. Our medium-term and long-term view of the market is that, it should be a market in which anyone wanting to invest should be enable to invest directly. And that is what I meant, when I said increasing access. Allowing access to such people today do not have access to our markets directly. That’s our goal we will get that through series or measures overtime. And the entire regulatory framework regarding FII’s and others is being re-examined in that light.



Given that the board meeting took place so soon after our draft proposals had been put out, we did not have time to address all the long-term issues, so going forward some of the them will get addressed.



There are two ways in the long-term. Going forward, there should not be different categories with different modes of access, with different conditions of entry or access or all that. We will work towards simplifications, which will lead to increasing access. Access to an increasing number of investors those who today cannot access our markets.



Q: Can you define regulated institution?



A: The regulated institution is an institution that is regulated in its home country by the concerned sectoral regulator depending on which sector that entity belongs to. If it is an entity that the security market regulator regulates that would regulate. If it is a bank we would look at banking regulator regulates that and if it is a insurance company we would look at whether the insurance regulated that company, but it would be something that is accountable in its home jurisdiction to somebody like us, so that we can draw comfort from that fact.



Q: Would it be the home country or the place where they are registered which would be the jurisdiction for them?



A: The place where they are regulated.



Q: Regards to the proposal to start a platform for SME, can we know whether there will be only one exchange or there can be more than one?



A: In the long run, depending on the experience of one exchange, there could be more exchanges. Ultimately it’s a question of how many the market needs? How much business is there with these exchanges etc? We believe there's considerable learning for those who are setting up this exchange as well as products and service and therefore it has been sighted whether it is one person or one applicant from among those who've applied will be permitted to set it up.



We will study it after two years or 2.5 years of the functioning of the exchange, because there are issues that we need to address. The basic issue is, how do you allow SMEs to access risk capital? Both the main platforms of the NSE and BSE have certain cutoff limits. Therefore some of these maybe knocked off at the threshold itself. They will be not able to get it there. We’ve seen another jurisdiction that there are separate exchanges for SMEs and we do not want Indians in the SMEs to indefinitely go outside India and look for capital raising there.



We need to look at what are the entry levels stipulations are in terms of compliance taking into accounts the cost. There might be cost that cannot be afforded by small entity therefore if you allow on day one the multiplicity of exchanges to come up, we will have the same situation that we had with the regional stock exchanges, because then one market will get fragmented among more than one exchange, none of which will remain healthy.



Once the SME segment becomes stronger, if there is a market case for more than one, I am sure the market itself will find a response backstage. We do not want in the long run a monopoly, it is not that we are stipulating a monopoly, but we are saying that let us see, there is learning in it, going forward we will see. The market will see whether it needs one.



Q: We had OTC Exchange of India in the past, it failed. So, what are the lessons learnt?



A: Well I think the press conference today really might not have the time to discuss all the lessons that we have learnt. Clearly lessons have been learnt and those that are now seeking to setup exchanges, would have also looked at why certain exchanges did not take off, and see that those mistakes are not repeated. But I think that will merit a whole new discussion entirely.



Q: On money invested in Indian stock markets?



A: We have always maintained that money that comes into the securities market comes through bank accounts. Banks have very detailed KYC (know your customer) norms and they are expected to know their customers, know which money is coming from where, into which customers account. Money that comes into our markets comes through banking channels. Number two, every intermediary that an investor deals with, is expected to follow KYC norms whether it is the depository participant or the broker or whoever else.



So there are several levels of checks to see that we get some idea of whose money is coming to the market. That is the detail. The broader point that I want to mention to you is, we do not have any evidence that money of the kind of origin that you mentioned has come to our markets.



The second that I want you to remember is that all the problems of the world can’t be tackled through securities markets regulation. There are other regulators, other agencies for enforcement who had to adjust some of those issues. The security market regulation is not solution to every problems.



Q: Now we are back to 2004 with reference to entering norms for FIIs through PNs. What happens to those entities that are already there?



A: The 2004 regulations say that these instruments shall be issued only to regulated entities and it also says that such instruments as have been issued to unregulated entities, should be found up within a period of five years. The five years is not yet over, there is about 16 months and a few days left from my calculation.



I think people who need those regulations and are in the market place, should use that period to comply strictly with the regulations.



Q: How many letters of intent have been received so far and the time for that? Also in the case of the regulation of Mauritius-based equities what regulations should be compliable?



A: As far as we are concerned, Mauritius is one among many countries from where people invest in the Indian markets. People go to Mauritius, because Mauritius presently has some advantages. But as I have mentioned, we can’t make solutions for all problems including tax reform measures in securities market regulation. So we are not treating Mauritius as a separate category in writing securities market regulation.



More to come...