Investor Protection Fund Insufficient, Says SEBI Chairman Ajay Tyagi

India’s capital market regulator has examined the insufficiency of investor protection fund set up by the stock exchanges, and it’ll not be the reason for delaying declaration of broker defaults, according to Ajay Tyagi.

The Securities and Exchange Board of India has extensively deliberated on this and will soon be taking measures to address it, Tyagi, chairman at the regulator, said at the CII’s virtual financial markets summit. IPF is set up by the stock exchanges to ensure that investors are compensated in the event of defaulters' assets not being sufficient to meet the admitted claims.

Besides assuring that steps will be taken towards investors’ safety, the market regulator emphasised on the need to reform the capital adequacy requirement for brokers. The chairman also spoke about the steps SEBI has taken to dilute the impact of Covid-19 on the markets and the role of market participants to make reforms more meaningful.

Market Performance And Investor Protection

Addressing the Covid-19-induced economic slump and its impact on the capital markets, Tyagi highlighted the gradual improvement in performance of the Indian capital markets. He said:

• In line with global movements, Indian markets, too, reacted adversely, leading to the triggering of lower circuit twice.
• But Indian capital markets have recovered from the March lows and both major indices — Sensex and Nifty — are currently nearing their all time high.
• The volatility index went up to 84 in March. To address this, SEBI took some timely surveillance measures to curb market volatility.
• The recovery in Indian markets is now broad-based and across all the constituents of the index. Not just large-cap stocks but even mid and small caps have recovered since their March lows.
• Despite a slow start, total fundraising activity has touched Rs 1.54 lakh crore till date compared with Rs 1.58 lakh crore last year. Most of the initial public offerings and rights issues have been oversubscribed multiple times.
• India has seen an increase of more than 130% in demat account registrations. Further, investor participation in the markets is higher than ever before and average daily turnover in the equity and derivative segments has hit an all time high.
• Among all emerging markets, India is one of the only countries which have witnessed net inflows from Foreign Portfolio Investors, while emerging markets like Brazil and Korea have witnessed outflows.

Deepening The Bond Markets

Reacting to a call from the industry for developing and deepening of the bond markets, Tyagi said India will not achieve its investment targets unless its bond markets are fully developed.

For this, he listed the following aspects:

• India’s aim to achieve Rs 100-lakh-crore investment target by 2024-25 will be challenging unless the country’s bond markets are fully developed. Therefore, the aim to make corporate bond markets more liquid and deep must be on every stakeholder’s agenda.
• Corporate bond markets need deeper and structural changes which can be made possible through co-operation between the government and different regulators.
• While bond markets experienced contraction earlier, the liquidity now is almost at the same level as it was prior to Covid-19. Illiquidity in corporate bonds rated below AAA existed even prior to the pandemic.
• While there is a need for further improvement, spreads in primary market in AAA and AA rated instruments has gradually come down.
• Apart from recent reforms, SEBI has made certain suggestions to the government for addressing the liquidity crunch in the bond markets. Launch of an RFQ platform and mandating mutual funds to trade on it for achieving transparent discovery of bond prices is one of the recent steps taken in that direction.
• The Pension Fund Regulatory and Development Authority, along with the Insurance regulator, have principally agreed to mandate their regulated entities to carry out a certain percentage of their trades on this platform.
• Similarly, the market regulator has approved a limited purpose clearing corporation to improve liquidity and urged the government to set up a backstop facility for further addressing illiquidity issues.

Role of Minority Investors, Independent Directors

SEBI has been following global best practices for market reforms to ensure that India does not fall behind, Tyagi said. The regulator has done so by following a consultative process in policy making. 27 consultative papers this year and almost 100 in the last five years have been put in the public domain, Tyagi said, while urging other stakeholders to contribute to the reforms process.

• Board of directors of listed entities are important stakeholders in the reform process as it is an institution which is relied upon by all other stakeholders, including investors.
• Company boards are vested with strong powers, while at the same time, Independent directors represent the interests of minority investors.
• Resignations by independent directors is one the rise. IDs must come forward and disclose the reason for resignation if it is caused due to any governance issues.
• The role of minority shareholders is equally important as listed entities have a concentrated shareholding structure. Therefore, institutional shareholders must play an important role during voting which has been made easier due to electronic means.
• All shareholders must exercise their voting rights. Similarly, other market participants like the auditors, proxy advisers and credit rating agencies can act as gatekeepers for financial markets.