SEBI’s NEW NORMS – INTENTIONS DIFFERENT, DRAFTED NORMS DIFFERENT

By SP Tulsian

There are major discussions and debates raging around, all contemplating about the latest move of SEBI. Though nothing conclusive came from the much expected Participatory Notes debate, there were other issues which SEBI has put forth. These new norms issued for Rights Issues and Qualified Institutional Placements (QIPs) have shown that SEBI, under the helm of the now-not-so-new chief, Mr.C.B.Bhave has indeed got its eyes focused on making the markets as transparent as possible and remove as many loopholes as possible. Its intentions are noble but somehow, this intent, while drafting the norms into writing has not come forth right. On a close scrutiny of the draft, one can clearly see that the intent is different and what has been drafted is different. One can criticise us that we are unnecessarily looking at the dots and lines of the alphabets. But it is precisely this close scrutiny which later helps us understand what SEBI meant and what it has been construed as. It is always the small details which matter the most. Let’s take a look at what we mean.

1: In the second point, SEBI has mentioned - SEBI Board decides to revise pricing norms for QIP and Preferential Allotment. And under this, it has been stated - Floor price may be based on the two weeks average for making a QIP or for making preferential allotment to QIBs.

Its here that one needs to pay special attention. We all have been celebrating, thinking that SEBI has revised pricing norms for preferential allotment and this covered allotment to all categories – individuals, promoters, HNIs, QIBs and the whole gamut. But what the above underlined sentence means is that individuals, promoters and HNIs are not included in this new revised norm. This gives a very restricted scope. So when we say, as per the new norm, preferential allotment will now be based on the last two weeks’ average price as against the earlier last six months’ average price or the last two weeks, whichever was higher; what SEBI means is that average pricing norm has been revised only for two category of investors, QIP and QIB, for the others it remains the same. Is that what SEBI intentionally wanted to convey or has there been a mismatch between what SEBI meant and what got drafted? This is a very important issue and SEBI needs to clear this confusion immediately.

2: In the third point, there is a paragraph which details about - Time limit for submission of financial results to stock exchanges. Now this states “A listed entity in addition to submitting quarterly and year to date standalone financial results within one month of end of the quarter may also submit consolidated financial results to the stock exchange within two months from the end of the quarter”.

On reading this, what comes forth is that public listed companies will now have to submit its quarterly and annual standalone results – this is mandatory. The word underlined – “in addition” means precisely that! And regarding its consolidated results, it may or may not submit. The underlined word – “may” conveys that submission of consolidated results is optional.

The next paragraph - Publication of financial results, states, “A listed entity opting to submit consolidated financial results in addition to standalone results to the stock exchanges shall be required to publish consolidated financial results only”.

This paragraph only further goes on to indicate that publishing of the standalone results is optional. Look at the use of the word “opting”. But more than that, the use of the underlined word – “shall be” is very harsh. What this means is that companies, will first consider and may not publish the standalone results by 31^st July (assuming its first quarter results) in various newspapers, as has been earlier mandated. Then it will consider and “shall have to” publish the consolidated performance by 31^st August. This publishing of consolidated results is mandatory while at the same time, publishing of standalone results, as per earlier mentioned para is not mandatory. It also says that only consolidated results need to be published and not both.

So who is going to bear the cost of publishing standalone results? But then companies, to avoid this additional expense, will publish the standalone results and may not opt to publish the consolidated results at all. Now that is a very derogatory step. Most of the big companies today have many wholly owned subsidiaries and joint ventures, what is the point of then looking at just the standalone results? For realty and big infrastructure companies, this publishing of standalone result has no meaning at all. Take the case of GMR Infra itself. Its consolidated performance includes that the company´s subsidiaries viz., Vemagiri Power Generation Ltd (VPGL), GMR Hyderabad International Airport Ltd (GHIAL), GMR Power Corporation Pvt Ltd(GPCPL), GMR Tuni Aanakapalli Expressways, GMR Tambaran Tindivanam, Delhi International Airport, Hyderabad Menzies Aircargo Pvt. Would it make any sense to then see just the standalone results?

This ambiguity, if intentional is extremely bad, as it is taking us two steps backwards in terms of transparency. One can always access the standalone results on the BSE and NSE sites, yet for those not having access? We fervently hope this has been a mismatch in drafting and is not intentional.

3: The markets have been down, disappointed that nothing conclusive was done about the Participatory notes or P-Notes. But for this, the market is only got to be blamed as expecting SEBI to announce something now was over expectation. In October 2007, SEBI had imposed restrictions on issue of P-Notes in the wake of mounting FII inflows. At that time itself, it had been made clear that modifications on P-Notes would happen after 18 months. So this means, the given deadline by SEBI expires by March 2009. So on what basis had the market expected SEBI to once again tweak the P-Notes issue? Baseless over expectations will always lead to disappointments and that is what the market is going through now - a bad bout of over expectation coming crashing down.

4: At this juncture it is important to mention that the current limit of 40% on AUMs has got no relevance at all. Right now, the market has neither got the depth nor the appetite; hence this limit is just not required in today's time. Moreover, FIIs are getting themselves registered directly with SEBI, so there is right now not much need for the FIIs, for a P-Note at all. Currently there are a total of 1,456 FIIs registered with SEBI. Yes, for the sovereign funds, who find it difficult to get the required registration would opt for P-Notes. Many have moved from P-Notes to direct FII holding, thereby releasing that 40% limit for others who have still not yet become FIIs.

5: A new western regional office of SEBI has been approved at Ahmedabad and would have territorial jurisdiction over Gujarat and Rajasthan to start with, to become operational during the current fiscal. Now has the opening of this office been prompted, looking at the way in which most of the IPOs hitting the markets have been “managed” mainly from Gujarat? SEBI probably feels that being closer to the source of the mischief makers would help it cull the problems. Fat chance!
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