Sebi rings in tougher governance, more MF capital, whistle-blower

Feb 14,2014

Stregnthening the voice of minority shareholders, the Securities and Exchange Board of India (Sebi) on Thursday said all-related party transactions will need to be approved by them with related parties abstaining from voting on the special resolution. The decision is in line with the provision incorporated in the newly-enacted Companies Act 2013.

Sebi said companies must make their remuneration policies for independent directors more transparent and disallowed them from owning stock options. Moreover, an independent director can be on the boards of no more than seven companies and only three if the person is a whole-time director with a listed company. Nominee directors, typically those appointed by banks or private equity funds on the boards of companies, can no longer be treated as independent directors. The move will impact an estimated 710 directors across 1,500 listed

companies according to Indianboards.com.

Asked about the proposals to keep CEO salaries in check, Sebi chairman UK Sinha said the regulator had not considered imposing an arbitrary ceiling. “We have decided that there has to be a remuneration committee headed by an independent director,” Sinha said.

The new norms, which will be applicable to all listed companies from October 1, 2014, also require companies to have a compulsory whistle blower mechanism and at least one woman director. Further, the total tenure has been restricted to two terms of five years.

Sebi has directed that all related party transactions will require the prior approval of the audit committee. “The scope of the definition of RPT has been widened to include elements of Companies Act and Accounting Standards,” said the Sebi release.

“However, if a person who has already served as an independent director for five years or more in a listed company as on the date on which the amendment to Listing Agreement becomes effective, he shall be eligible for appointment for one more term of five years only,” clarified the release.

Meanwhile, for asset management companies (AMCs), the regulator has decided to increase the capital adequacy (minimum networth) to Rs 50 crore from the current Rs 10 crore. Further, AMCs will also require to put in 1% of the amount raised as ‘seed capital’ in all open-ended schemes during its lifetime. The Sebi chairman pointed out that at present, there are 19 companies whose net worth is less than Rs 50 crore and whose assets are 6% of the total assets under management of all MFs. “We have given them three years to reach the Rs 50-crore limit,” Sinha said.

As part of its attempts to bring in more transparency and improve the quality of disclosures of fund houses, Sebi has directed AMCs to disclose the assets under management (AUM) from B-15 (beyond top 15) cities on a monthly basis. The disclosures will include contribution of sponsor and its associates and also the AUM garnered through sponsor group/non-sponsor group distributors.

With regards to its long-term policy for mutual funds, the regulator has proposed the introduction of a Mutual Fund Linked Retirement Plan (MFLRP) with additional tax incentive of Rs 50,000 under 80C of Income Tax Act. “Any long-term mutual fund scheme should get similar tax treatment to that of insurance or pension products,” Sinha said.

It has also proposed to enhance the limit of Section 80C of the Income Tax Act, 1961, from Rs 1 lakh to Rs 2 lakh to make mutual funds products (ELSS, MFLRP, RGESS etc) more popular among the investor community. These tax proposals, however, would require the government to make the necessary changes in the Income Tax Act. “Many of the proposals are for the government to implement,” Sinha said.

The regulator wants the government to allow EPFOs to invest up to 15% of their corpus in equities and mutual funds and members of EPFOs who earn more than Rs 6,500 per month be offered an option for investing a part of their corpus in mutual funds. Sebi also wants the government to allow all Central Public Sector Enterprises (CPSEs) to choose from any of the mutual fund houses for investing their surplus funds. Currently, only Navratna and Miniratna CPSEs are permitted to invest in public sector mutual funds.

“The proposals relating to tax incentives, allowing EPFO to invest in equities/mutual funds and allowing all CPSEs to invest their surplus fund in mutual funds will be sent to the government for its decision,” the Sebi release noted.