SEBI order of impounding – self goal
Posted by Sandeep Parekh on Thursday, October 29, 2009
SEBI has passed a curious order yesterday ‘impounding’ some money from a person who is alleged to have committed manipulation. Till now SEBI either collected fees which it kept in a fund for running its operations, or it collected penalty which it remitted to the consolidated fund of India. There is a third category which started a few years back – one of collecting disgorgement amounts from the violator – to take away ill gotten gains from a violator. This third category was kept by SEBI to refund back to the investor directly or indirectly (by adding to an investor protection fund). To give away disgorgement money to the government is expropriation from the victims of the violation who have the first right over such sums.
It is settled law – in fact dozens of SAT and high court rulings have held that under the ‘direction’ making power of S. 11 and 11B, SEBI cannot impose penalty. The order under S. 11B curiously orders that the amount (which appears similar to disgorgement) be handed over to the consolidated fund of India – thereby implicitly admitting that the amount is a penalty – and thus ensuring that the order will be set aside by SAT and the violator will go home free. In addition, it takes money belonging to victims of securities crime and gives it to the government – a doubly unfair outcome. Seems SEBI just inflicted a self goal in an otherwise strong case.
Note: See SEBI Board meeting agenda which shows that disgorgement amounts are not given to the Consolidated Fund of India.
- Low FII limits
The dissonance between the huge ECB borrowing limits for companies and FII limits on corporate bonds make no sense from a policy perspective. The currency risk is borne by the investor and there is appetite. They do not substitute completely but do complement quite strongly
- Banning repos in corporate bonds/ Risk Weightage
RBI regulates the markets backdoor by its control over banks. The lack of ability to repo inventory creates a dead weight view of assets. Also the disproportionate risk weighting of corporate bonds irrespective of issues/ quality/ rating is unfair.
- Standardization/rationalization of shut period
There is no regulatory or industry accepted standard for shut periods and this crimps liquidity. Sometimes shut periods are excessively long.
- Standardization of day count convention
The market needs to move to a standard day count convention (actual, 360, 365, etc). Whatever adopted does not matter in the age of computer calculations but it needs to be a market wide standard.
- Introduction of Corporate bond derivative products
The optics of CDS is not great in this market but drunk driving is not an argument against cars. Well regulated derivative products will help in increasing trading volumes.
- Maintain a clear demarcation between retail and wholesale (QIPs) participants in corporate bond markets
Most regulation is driven by the need to protect retail investor but a QIP framework would greatly increase liquidity
- Rationalization of stamp duties
Current stamp duties on transfer and contracts are calibrated against equity and represent overly high transaction costs.
- Abolish TDS on coupon payments
This is no longer relevant in an area of demat and PAN numbers and places an unfair burden on the market.
- Introduction of DVP method of settlement to mitigate principal risk
The bilateral settlement in markets today creates execution, principal and price risk. Isolating the elements in phases and moving to risk free clearing and settlement could greatly increase volume. This could start with guaranteeing exchange (this reduces execution risk) and slowly move to guaranteeing settlement.
- Lack of a central database of bonds
Today there is no single and consistent repository of price, yield and trading information. The trade reporting was a great start but things now need to be taken to the next level.
- Treat OTC and Exchanges at par but require unified settlement and clearing
All exchange volume in debt today is done offline and reported. Regulators must become agnostic to the market microstructure decision about where a trade is completed (in fact they must ensure a level playing field to create competition) but require that both OTC and exchange trades are reported to a unified clearing and settlement system that should start with guaranteeing exchange and over time move to guaranteeing settlement.
- Review investments guidelines for pension funds and Insurance Companies
There is a logical fit between the long tail of liabilities of pension funds and insurance companies and the possibilities of long duration corporate bonds. But today the investment guidelines create artificial allocation and execution issues.
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