The fifth meeting of the International Advisory Board (IAB) of the Securities and Exchange Board of India (SEBI) was held on May 1 & 2, 2015. The following major issues were inter alia discussed during the meeting:

i.           Carving out a regulatory framework for market based financing of Techno Start ups

The IAB discussed the key proposals outlined in the SEBI consultation paper on carving out a regulatory framework for market based financing of new age start-ups in sectors like technology, e-commerce, etc. To give a background on the emerging potential of start ups in India, a presentation on the Indian startup scenario was made to the IAB by an external domain expert. Given the potential of the new age start ups as articulated in the presentation and the SEBI discussion paper, the IAB made, inter alia, the following observations: 

•  A relevant necessary framework is essential to enable financing of start-ups given their potential in India, as the economy of India is poised to grow at a faster pace.
•  While nurturing start-ups needs an entire eco system to be put in place by multiple agencies, financing of start-ups is certainly a major challenge that SEBI is appreciably proposing to address.
•  Given the high-risk high-return trade-offs involved in financing of start-ups and the regulatory concerns of ease of raising capital vs. investor protection, entry barriers to ensure participation of only sophisticated investors in the initial stage is a good idea. 
•  There is also a need for a balanced regulatory approach towards valuation of start-ups as conventional valuation approach may not be applicable in the early state of their operation. However, the need of adequate disclosures including suitable caution to investors about valuation cannot be overemphasized. SEBI may also evaluate if licensed sponsors may assist in strengthening the corporate governance of start ups.
•  SEBI may implement its proposed carve out regulatory framework for financing start ups and make changes going forward based on the learnings along the way. 

ii.         Participation of Institutional Investor in the Governance of Investee Companies

The IAB deliberated on a proposal on participation of Institutional Investors in the governance of investee companies.

It was observed that after SEBI mandated MF in March 2013 to disclose specific rationale supporting their voting decision on quarterly basis the participation of MFs has increased from 48.5% in FY 2013 to 83.1% in FY2015 (till Dec 2014). IAB recommended that SEBI in coordination with other authorities may introduce a Code (on the lines of Stewardship Code of UK) based on the approach of ‘comply or explain’. 

iii.       Challenges before SEBI on Proposed Merger of Commodities Market into Securities Market

The IAB was apprised of the recent policy announcement of the Govt. of India to bring the regulation of commodity futures market under the jurisdiction of SEBI. A presentation was made by our external domain expert articulating the road map for SEBI to implement this task. Following the presentation, the IAB, inter alia, advised the following:

As the commodities markets operate in a different eco-system, have legacy issues and need domain knowledge for efficient regulation, SEBI needs to conduct a thorough due diligence and gap analysis before articulating its vision for the commodity derivatives segment. SEBI should concentrate more on studying the risks and the structure of the market, including various aspects like contract design, warehouse receipts and quality control of underlying commodities in the initial period. The emphasis during this period should be on avoiding any crisis in the market. Market development may be visited only after fully understanding the strengths and weaknesses of commodities markets.

iv.        Compensating the victims (if identifiable) of Insider Trading offences

IAB was informed about SEBI’s new Insider Trading Regulations and was requested to share their global experience inter alia regarding compensation to the victims. The IAB members shared their experiences in this area, more specifically on the South African, Hong Kong and the New Zealand experience. The following major observations were made – 

•  It was agreed that the biggest challenge in this area was the careful identification of the victims and the amount of loss suffered by them in the process. It was observed that in most parts of the world this identification is done through an adjudication process where these aspects are decided by judicial authorities. 
•  Insider trading and compensating of victims cannot be looked in isolation. The entire market infrastructure and the systems need to be first strengthened to match up and complement the Insider Trading Rules. A holistic overall view is required to be taken in this area.
•  Also, keeping in mind the greed factor and the temptation to earn quick money, a deterrent in the minds of the people needs to be created and maintained through an awareness across the system that any person indulging in Insider Trading will surely be picked up at some stage and would be severely punished. This “name and shame” effect should go a long way in checking such tendencies.

SEBI had constituted the IAB in September, 2011, as part of the measures initiated by SEBI to respond to the challenges arising out of the global financial crisis. The role of IAB is to guide SEBI with its advice on future direction for the organization, taking into account relevant global experiences, emerging challenges and latest developments in the regulatory space.

Meetings of IAB are organized by SEBI in India. Its previous four meetings were held in January  2012, November 2012, November 2013 and July 2014.

The current Members of the IAB, in addition to Chairman, SEBI are Prof. Viral Acharya, Ms. Jane Diplock, Mr. Russell Loubser, Mr. Blair Pickerell and Dr. Andrew Sheng (arranged alphabetically by their surnames). Mr. Pickerell has recently joined the IAB.

Prof. Acharya is the C.V. Starr Professor of Economics in the Department of Finance at New York University Stern School of Business and a Member of Advisory Scientific Committee of European Systemic Risk Board.

Ms. Diplock is presently an Independent Director of Singapore Exchange Limited, Australian Financial Services Group Pty Limited, International Integrated Reporting Committee Board and Member of Public Interest Oversight Board (PIOB). She is also the former Chairman of both the Executive Committee of IOSCO and of the New Zealand Securities Commission.

Mr. Loubser, former CEO of Johannesburg Stock Exchange, has been one of the prime movers of modernization and development of stock exchange business in South Africa. He was a member of the team that started the Futures Industry in South Africa in 1987. He has served as Chair, Working Committee of World Federation of Exchanges and as Deputy Chair of South African Futures Exchange. Mr. Loubser was also a member of the prestigious King Commission on Corporate Governance.

Mr. Pickerell has been a leader in the Asian investment management industry for the past 30 years. He is Chairman, Asia of Nikko Asset Management Co. Prior to this, Pickerell was Chief Executive of Morgan Stanley Investment Management for three years. Before that he was Chief Executive, Asia Pacific, of HSBC Asset Management Ltd. and Chairman of Jardine Fleming Funds (now JP Morgan Funds).

Dr. Sheng, the former Chairman of the Securities and Futures Commission of Hong Kong, is well known in global financial circles as a former central banker and financial regulator in Asia and a commentator on global finance.  As President of the Fung Global Institute, Dr. Sheng is responsible for its operations and for driving its research agenda and thought leadership. He is also the Chief Adviser to the China Banking Regulatory Commission and a Board Member of the Qatar Financial Centre Regulatory Authority.  

Mr. Prashant Saran, Mr. Rajeev Kumar Agarwal & Mr. S. Raman - Whole Time Members of SEBI, and the Executive Directors of SEBI also participated in the deliberations.