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Week Ended: April 16, 2010
India’s financial sector watchdogs have demonstrated their independence time and again. For example, the country’s central bank, the Reserve Bank of India, was one of the few central banks that chose to break from prevailing global loose monetary policies. India’s other regulator, the Securities and Exchange Board of India (SEBI), which is equivalent to the Securities and Exchange Commission (SEC) in United States, has also come a long way in asserting itself. Established in 1992, SEBI has been making systemic reforms aimed at better corporate governance, deeper capital markets and more satisfied investors.
SEBI’s primary goal has always been investor protection. Its recent efforts to abolish entry and exit loads—sales charges paid by mutual fund investors—has significantly brought down investing costs. SEBI’s recent listing regulations have balanced the interests of minority shareholders with those of promoters intending to delist companies. It has also offered guidelines for enhanced disclosures and mandatory grading of Initial Public Offerings (IPOs). Real estate IPOs, for example, are required to reveal complete ownership details of land banks and report market-determined asset values.
The regulator has also been gradually raising India’s corporate governance standards. A decade ago, SEBI managed to implement the disclosure of quarterly financial results amid huge resistance. Recently, it required the semiannual disclosure of balance sheets, in efforts to limit the scope of any “creative accounting.” SEBI has also asked companies to increase the weight of independent directors on their boards as part of its efforts to create checks and balances. These checks are meant to improve auditor oversight following an accounting scandal that surfaced at a leading technology company early last year.
Developing capital markets has been a high priority for SEBI. About a decade ago, SEBI streamlined security transactions by eliminating the need for investors to hold shares in paper form. This was followed by their push to have exchanges implement online trading capabilities. To improve liquidity and price discovery, it recently introduced short selling and is now enhancing securities lending mechanisms that enable this. SEBI has also proactively introduced new asset classes and exchanges to enable broader capital market participation.
Despite its accomplishments, SEBI still has a lot of unfinished work. For example, the liquidity in India’s capital markets is significantly lower than expected. In addition, SEBI—which currently spurs product innovation—could arguably be better served to leave that function in the hands of the exchanges themselves, and focus on the task of regulating its markets.
Sunil Asnani
Research Analyst
Matthews International Capital Management, LLC
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