F.M Presentation on Sebi

7/29/2019 F.M Presentation on Sebi

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Presented by:


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Reforming corporate governance Rights and equitable treatment of shareholders:[Organizations should respect the rights of

shareholders and help shareholders to exercise those rights. They can help shareholders exercise theirrights by openly and effectively communicating information and by encouraging shareholders toparticipate in general meetings.

Interests of other stakeholders: Organizations should recognize that they have legal, contractual,

social, and market driven obligations to non-shareholder stakeholders, including employees,investors, creditors, suppliers, local communities, customers, and policy makers.

Role and responsibilities of the board. The board needs sufficient relevant skills and understandingto review and challenge management performance. It also needs adequate size and appropriate levelsof independence and commitment

Integrity and ethical behavior: Integrity should be a fundamental requirement in choosingcorporate officers and board members. Organizations should develop a code of conduct for their

directors and executives that promotes ethical and responsible decision making.

Disclosure and transparency: Organizations should clarify and make publicly known the roles andresponsibilities of board and management to provide stakeholders with a level of accountability. Theyshould also implement procedures to independently verify and safeguard the integrity of thecompany's financial reporting. Disclosure of material matters concerning the organization should betimely and balanced to ensure that all investors have access to clear, factual information.


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Internal corporate governance

controls Monitoring by the board of directors: The board of directors, with its legal authority to hire, fire and compensate top

management, safeguards invested capital. Regular board meetings allow potential problems to be identified, discussedand avoided. Whilst non-executive directors are thought to be more independent, they may not always result in moreeffective corporate governance and may not increase performance. Different board structures are optimal for differentfirms. Moreover, the ability of the board to monitor the firm's executives is a function of its access to information.Executive directors possess superior knowledge of the decision-making process and therefore evaluate top

management on the basis of the quality of its decisions that lead to financial performance outcomes, ex ante. It couldbe argued, therefore, that executive directors look beyond the financial criteria.

Internal control procedures and internal auditors: Internal control procedures are policies implemented by anentity's board of directors, audit committee, management, and other personnel to provide reasonable assurance of theentity achieving its objectives related to reliable financial reporting, operating efficiency, and compliance with laws andregulations. Internal auditors are personnel within an organization who test the design and implementation of theentity's internal control procedures and the reliability of its financial reporting

Balance of power: The simplest balance of power is very common; require that the President be a different personfrom the Treasurer. This application of separation of power is further developed in companies where separate divisionscheck and balance each other's actions. One group may propose company-wide administrative changes, another groupreview and can veto the changes, and a third group check that the interests of people (customers, shareholders,employees) outside the three groups are being met.

Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individualperformance. It may be in the form of cash or non-cash payments such as shares and share options, superannuation orother benefits. Such incentive schemes, however, are reactive in the sense that they provide no mechanism forpreventing mistakes or opportunistic behavior, and can elicit myopic behavior.

Monitoring by large shareholders and/or monitoring by banks and other large creditors: Given their large

investment in the firm, these stakeholders have the incentives, combined with the right degree of control and power, tomonitor the management.


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External corporate governance

controlsExternal corporate governance controls encompass thecontrols external stakeholders exercise over the organization.Examples include:

competition debt covenants demand for and assessment of performance information

(especially financial statements)

government regulations managerial labour market media pressure takeovers


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Current developments A new Companies Act is being drafted that will reportedly allow class-

action lawsuits and statutory derivative suits. MCA-21, a programme to streamline the Ministry of Company Affairs

(MCA) and deter corrupt practices by tis officers.

The SEBI Act is being amended to give the regulator, among otherthings, more powers of investigation and prosecution. The institute of Chartered Accounts (ICAI) has formed a committee to

create a road map for the convergence of Indian accounting standardswith international Financial Reporting standards by 2008.

SEBI formed a committee on disclosures and accounting standards in

late 2006 to advice on disclosure requirements for listed companiesand to facilitate the implementation of ICAI accounting standards asthey relate to the capital markets.

A code of corporate governance is being developed for public-sectorenterprise in both listed and unlisted companies.


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S.E.B.I


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IntroductionIn 1988 the Securities and Exchange Board of India (SEBI) wasestablished by the Government of India through an executive resolution,and was subsequently upgraded as a fully autonomous body (a statutoryBoard) in the year 1992 with the passing of the Securities and ExchangeBoard of India Act (SEBI Act) on 30th January 1992. In place ofGovernment Control, a statutory and autonomous regulatory board withdefined responsibilities, to cover both development & regulation of themarket, and independent powers have been set up. Paradoxically this is apositive outcome of the Securities Scam of 1990-91.

The basic objectives of the Board were identified as:

to protect the interests of investors in securities; to promote the development of Securities Market; to regulate the securities market and for matters connected therewith or incidental thereto.


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Sebi code The Securities and Exchange Board of India (Sebi) has come out with a code of

conduct for its members of the governing board.

The code is aimed at avoiding conflict of interest and ensuring that membersconduct their duties in a manner that does not compromise on their ability toaccomplish the regulators mandate. The code was adopted by the board in itsmeeting held on December 4 2006. Sebi has made the code applicable to allmembers, including its Chairman.

The code includes provisions such as disclosing holdings of shares by members and

their families, non-acceptance of gifts from intermediaries and avoiding conflict ofinterests that can affect decisions of the board.

Sebi has also said that no member shall hear or decide on any matter where he hasa conflict of interest.

Sebi Chairman then C B Bhave has followed certain high moral standards aftertaking charge. Prior to becoming Sebi chief, Bhave was the Managing Director of

NSDL against which the market regulator had issued an order in the 2006 IPOscam. To avoid conflict of interest, Bhave stayed away from board meetings wherethe NSDL issue was to be discussed.

The code also outlines what members should do while dealing with intermediariesin their personal capacities. It requires them to disclose their professionalrelationship with market intermediaries in the past five years. Whole-time

members are barred from holding any office of profit.


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CODE OF CONDUCT FOR INTERMEDIARIES OF MUTUAL FUNDS:

1. Take necessary steps to ensure that the clients interest is protected.

2. Provide full and latest information of schemes to investors in the form ofoffer documents, performance reports, fact sheets, portfolio disclosuresand brochures, and recommend schemes appropriate for the clientssituation and needs.

3. Highlight risk factors of each scheme, avoid misrepresentation andexaggeration, and urge investors to go through offer documents/key

information memorandum before deciding to make investments.4. Avoid colluding with clients in faulty business practices such as bouncingcheques, wrong claiming of dividend/redemption cheques, etc.

5. Maintain confidentiality of all investor deals and transactions.6. When marketing various schemes, remember that a clients interest and

suitability to their financial needs is paramount, and that extra

commission or incentive earned should never form the basis forrecommending a scheme to the client.7. All employees engaged in sales and marketing should obtain AMFI

certification. Employees in other functional areas should also beencouraged to obtain the same certification.


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CODE OF CONDUCT FOR MERCHANT BANKERS:

A Merchant Banker shall make all efforts to protect the interests ofinvestors.

A Merchant Banker shall maintain high standards of integrity, dignityand fairness in the conduct of its business.

A Merchant Banker shall fulfill its obligations in a prompt, ethical, andprofessional manner.

A Merchant Banker shall at all times exercise due diligence, ensureproper care and exercise independent professional judgment.

A Merchant Banker shall endeavor to ensure that copies of theprospectus, offer document, letter of offer or any other relatedliterature is made available to the investors at the time of issue or theoffer.

A Merchant Banker shall not discriminate amongst its clients, save andexcept on ethical and commercial considerations.

A Merchant Banker shall not make any statement, either oral orwritten, which would misrepresent the services that the MerchantBanker is capable of performing for any client or has rendered to anyclient.


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Continued..

A Merchant Banker shall not make untrue statement or suppress any

material fact in any documents, reports or information furnished to theBoard.

A Merchant Banker shall ensure that the Board is promptly informedabout any action, legal proceedings etc., initiated against it in respectof material breach or non compliance by it, of any law, rules,regulations, directions of the Board or of any other regulatory body.

A Merchant Banker shall ensure that good corporate policies andcorporate governance are in place.


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SEBI's new takeover code better than the earlier one :

While the formal takeover code has been in place since1997, SEBI constituted a Takeover Regulation AdvisoryCommittee in September 2009 to review the extant normsand make them more relevant for the present day scenario.

While the committee submitted its report in July 2010, SEBIhas, subsequent to its internal deliberations, taken up most

of the recommendations and made sweeping changes tothe old norms.

To start with, the trigger point for open offer is increasedfrom 15 per cent level to 25 per cent and the open offer size,after the 25 per cent trigger is hit, is enhanced from the

current 20 per cent to 26 per cent. With the new trigger of 25 per cent, a potential acquirer

can continue making creeping acquisition of an additional10 per cent stake in the target company.


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What the committee proposed originally :

Take the case of Hotel Leela Ventures, where ITC currentlyholds 14.5 per cent stake. Under the new norms, ITC canhike its stake by another 10 per cent and still stay away frommaking an open offer for additional 26 per cent as would berequired now.

More interesting would be the case of EIH Ltd - thehospitality company which owns and operates the Oberoichain of hotels - wherein Reliance and ITC are currentlyholding 14.5 per cent stake each.

However, if an acquirer acquires at least 25 per cent stake ina company, then he has to come out with minimum 26 percent open offer. This will result in making an acquirerending up with "controlling" 51 per cent stake in the targetcompany.


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The intent behind a revised Takeover Code :

The revised norms will change the dynamics of mergers

and acquisitions in India. However, the revisions are not asdynamic as proposed by Takeover Committee, whichproposed an open offer size of 100 per cent after the trigger

was hit. Had the 100 per cent norm been implemented, it would

have freed up other shareholders off the company thoughthe acquirer company would have had to be additionally"serious" and commit more money than otherwise.

However, even under the current norms the cost ofacquisitions goes up substantially. Because earlier after the

15 per cent trigger, the acquirer had to seek another 20 percent and hold a cumulative 35 per cent in the targetcompany. The cost would now be higher as the acquirerneeds to hold 51 per cent subsequent to the open offer.


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For smaller investors, removal of non-compete fees which is inline with Takeover Committee recommendations, is good news.

Undoubtedly the new code will herald an era ofaggressive corporate wars. Promoters can nolonger sit idle with minority holding. They have to

put there money into the equities of companiesthey wish to retain. Tatas and Birlas and morecompanies and big business tycoons should watchout, because the game will get tough!

- SEBI Chairman UK Sinha


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Thank you

Documents

F.M Presentation on Sebi