By TIOL News Service

NEW DELHI, DEC 29, 2012: ALTHOUGH the year 2012 was witness to many fiscal fluctuations in the economy, concerted efforts on the policy fronts have provided the much-needed relief to many sub-sectors and sectors of the economy. To revive the Mutual Fund Industry, the North Block took several steps as follows:

i. Increasing penetration of mutual fund products and energizing distribution network by permitting fungibility of Total Expense Ratio (TER) which would enable AMCs to pay higher upfront commissions to distributors, simplifying the distributors' registration process, introducing varied levels for certification and registration of distributors for different types of MF products and reducing fees for registration / certification.

ii. Improving reach of MF products in smaller cities/ towns by allowing Asset Management Companies (AMCs) to charge additional TER (upto 30bps) depending upon the extent of new inflows from locations beyond top 15 cities to incentivize distributors to garner investments.

iii. Aligning the interest of investors, distributors and AMCs by setting apart a portion of the asset management fees annually for the investor education campaigns, permitting direct investments with a lower expense ratio, ensuring single expense structure under a plan to eliminate discriminating between investors, limiting expenses for brokerage or transactions costs, and permitting investments in cash where PAN/ Bank accounts are not available.

iv. Protecting Investor by curbing mis-selling and churning by creating a system of identification of agents and labeling of products and by crediting the exit loads to the scheme while compensating the AMCs by allowing an additional TER to extent of 20 bps.

v. Strengthening regulatory framework for mutual Funds by streamlining disclosures on portfolios, performance and expenses and initiation of the process of setting up of a Self Regulatory Organization (SRO) for regulation of MF distributors.

Reforms in the Primary Market

It has been made mandatory for companies to issue IPOs of Rs. 10 crore and above in electronic form through nationwide broker network of stock exchanges thereby simplifying the process of issuing Initial Public Offers (IPOs), lowering their costs and helping companies reach more retail investors in small towns. Securities and Exchanges Board of India (SEBI) has undertaken a comprehensive review of the extant regulatory framework to revitalise the primary market and approved many progressive measures including:

i. Enhancing the participation of retail investors in IPOs and affording minimum allotment to a larger number of applicants by widening the distribution network of IPOs, in addition to the existing channels, to include the nationwide broker network of stock exchanges at more than 1000 locations for distributing IPOs in electronic form, enhancing the reach of Application Supported by Blocked Amount (ASBA) by mandating all ASBA banks to provide the facility in all their branches in a phased manner, modifying the share allotment system to ensure that every retail applicant, irrespective of his application size, gets allotted a minimum bid lot and increasing the minimum application size for all investors to Rs. 10,000-Rs.15,000.

ii. Facilitating capital raising by issuers by reducing the requirement of average free float market capitalisation from Rs. 5000 Cr. to Rs. 3000 Cr. for further public offerings (FPOs) and rights issues through fast-track route, permitting companies to reach minimum public shareholding requirements through additional routes including Rights and Bonus Issue, permitting issuers to offer 5% discount to Qualified Institutional Buyers (QIBs) and streamlining annual disclosures to investors by a comprehensive statement.

(iii) Enhancing market integrity and Investor confidence by permitting only issuers with a minimum average pre-tax operating profit of Rs. 15 Crore to access the capital market through the “profitability route” and in other cases by compulsory book building route with increased QIB participation of 75%, putting in a place a framework for rejection of poor quality draft offer documents, disallowing any withdrawal or lowering the size of bids for non-retail investors at any stage in the IPO process, increasing transparency in capital raising and restraining employee benefit schemes from acquiring their shares from the secondary market.

SEBI (Alternative Investment Funds) Regulations, 2012

These regulations would extend the perimeter of regulation to unregulated funds, ensure systemic stability, increase market efficiency, encourage formation of new capital and provide investor protection .

Increasing minimum public shareholding for listed companies

The Securities Contracts (Regulation) Rules 1957 provide for the requirements, which have to be satisfied by companies for getting their securities listed on any stock exchange in India.  A dispersed shareholding structure is essential for the sustenance of a continuous market for listed securities to provide liquidity to the investors and to discover fair prices. Four additional methods, namely Institutional Placement Program (IPP), Offer for Sale of Shares through the stock exchange, Rights and Bonus Issues have been introduced to increase minimum public shareholding.

Improved market infrastructure for enabling liquidity, transparency in price discovery and for stimulating growth in trading volumes. These measures aim at providing higher level of liquidity by enabling appropriate market infrastructure such as membership of banks in stock exchanges for trading in corporate bonds, permitting specialized trading platforms for trade in corporate bonds, enabling trading in collateralized corporate bond receipts, creating an enabling framework for cash settlement of trades in corporate bonds and facilitating trading in corporate bonds etc.

SEBI has permitted banks to take limited membership in approved stock exchanges for the purpose of undertaking proprietary transactions in the corporate bond market. This will ensure transparency in the price discovery of the product.

Insurance Regulatory and Development Authority (IRDA) has issued circular/guidelines on 4 th December 2012 for the participation in the repo market by Insurance Companies, this will enhance the liquidity in the Corporate Bond Markets.

Secondary Markets

Government notified a new tax saving scheme called “Rajiv Gandhi Equity Savings Scheme“(RGESS), exclusively for the first time retail investors in securities market. This Scheme would give 50% deduction of the amount invested from the taxable income for that year to new investors who invest up to Rs. 50,000. The Scheme not only encourages the flow of savings and improves the depth of domestic capital markets, but also aims to promote an ‘equity culture' in India.

Electronic Voting Facility made mandatory for top listed companies to enhance corporate governance standards and will thereby encourage greater participation of small investors in corporate decision making.

SME Exchange / Platform Launched

Separate trading platforms for small and medium scale enterprises (SMEs) have been launched to ease capital availability to SMEs in a cost effective manner and thereby stimulate the economic growth and generate employment in the sector.

Securities Transaction Tax (STT) for cash delivery transactions reduced by 20% for reducing the cost of transactions for retail investors, who generally operate in this segment, it is also expected to increase the volume and liquidity in the cash segment.

Reformed the regulatory framework for governance and ownership of stock exchanges, clearing corporations and depositories to further strengthen the corporate governance of these institutions which results in better delivery of services to the investors.

Guidelines for Exit Policy of Stock Exchanges Revised facilitating voluntary and compulsory de-recognition of non-performing stock exchanges as per the guidelines.

External Markets and External Commercial Borrowing

On January 1, 2012, Qualified Foreign Investors (QFI) were allowed to invest in listed Equity. QFIs have been permitted to invest in corporate debt securities and Mutual Fund debt schemes subject to a total overall ceiling of USD 1 billion. In May 2012, QFIs were allowed to open individual non-interest bearing Rupee Bank Accounts with Authorized Dealers banks in India for receiving funds and making payment for transactions in securities they are eligible to invest. Definition of QFI was expanded to include residents of the member countries of Gulf Co-operation Council (GCC) and European Commission.

Achievements relating to FII Investment Scheme

FII limit for investment in G-Sec enhanced by US $ 5 billion raising the cap to US $ 20 billion. The limit for FII investment in G-Securities and Corporate bonds (non-infra category) have been further enhanced by 5 billion each taking the total limit prescribed for FII investment to USD 25 billion in G-Secs and USD 51 billion for corporate bonds for long term investors SEBI has instituted monthly auction calendar since May 2012, so that FIIs can plan ahead their bidding and investment strategies.

Achievements relating to ECB Policy:

++ The limit for refinancing rupee loans through ECB has been enhanced from 25% to 40% for Indian companies in the power sector. ECB has been allowed for capital expenditure on the maintenance and operations of toll systems for roads and highways, working capital requirements of the airline industry for a period of one year and low cost housing projects.

++ The rate of withholding tax has been reduced from 20 % to 5% for a period of three years on certain kind of interest payments on ECBs.

++ SIDBI has been permitted as an eligible borrower for accessing ECB for on-lending to MSME sector subject to certain conditions.

++ Credit enhancement facility under the Structured Obligation Scheme has been extended to all companies with reduced minimum average maturity norms from 7 years to 3 years.

++ Holding companies/Lead Promoters have been permitted to raise ECB for the project use in SPVs of such holding companies to make global funding available to infrastructure companies.

Multilateral Institutions Division

India has announced a contribution of US $ 10 billion to the IMF for enhancement of its resources for crisis prevention and resolution. The contribution will be made through a Note Purchase Agreement (NPA) that the IMF proposes to enter into with the RBI.

India has contributed US$ 10 million as first instalment towards 9 th Replenishment of International Fund for Agricultural Development (IFAD) resources.

In the current financial year eight new loans have been negotiated with ADB in the transport (including rural connectivity), energy, finance and urban development sectors. Disbursement of 8.1 million has been achieved (calendar year wise) and of 8.45 million (financial year wise) as on 31.10.2012.

At the Los Cabos Summit of G-20, India succeeded in developing a consensus on the necessity to consider investment in infrastructure to boost growth and create jobs and the same has found a place in the Summit Declaration.

India Chaired the BRICS Summit held in New Delhi on 29-30 March, 2012.