The International Advisory Board (IAB) of SEBI has suggested different governance standards for big and complex business groups with too many subsidiaries, besides emphasising the need to address the gap in what is reported by auditors and what investors expect.

The group, comprising experts such as Viral Acharya (New York University Stern School of Business), Jane Diplock (Independent Director of Singapore Exchange), Russell Loubser (former CEO of Johannesburg SE) , Arvind Panagariya (Professor of Indian Political Economy, Columbia University), Andrew Sheng (Chief Advisor, China Banking Regulatory Commission) and UK Sinha, Chairman, SEBI, held its fourth meeting on July 18-19.

Use market forces

The group also cautioned that the statutory regulator should not try to take on everything on its own and should use market forces. To begin with, disclosures made under different regulations may be integrated to the extent possible to reduce the number of times the same disclosure is required to be made by an individual. It said system-driven disclosures may be taken up gradually to help in monitoring compliance even while reducing the burden of compliance on individuals.

On crowd funding, the IAB urged SEBI to undertake a more detailed study and address issues such as adverse selection, lack of mechanism to express bearish sentiments through short sale, lack of liquidity, fraudulent conveyance in crowd funding and the likelihood of equity bubbles.

Institutional deepening

IAB suggested that funding of infrastructure projects could be done by institutional deepening, which in turn could be achieved by regulatory reforms such as relaxing portfolio restrictions on pension and insurance funds as well as private equity and venture capital funds. The regulation and tax should be neutral between debt versus equity, it added.

The advisory board observed that capacity building and transition issues need to be given the highest priority. It also felt principles recommended by the Financial Sector Legislative Reforms Commission, such as transparency and consultation in regulation making, cost-benefit analysis, should be adopted by the regulators.

The group discussed high frequency trading, market fragmentation, need for market making to provide liquidity, risks related to sudden outflow of FPI money, retaining investors through economic cycles, professionalisation of intermediation industry, and financial literacy.

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