SEBI clears new norms on corporate governance; mutual fund policy

Among other major decisions, SEBI board also cleared the much-awaited long term policy for mutual funds, which includes various proposals including potential tax benefits, for the future growth of the sector



Market regulator Securities and Exchange Board of India (SEBI) on Thursday cleared new norms for corporate governance and a long term policy with various proposals, including potential tax benefits, for mutual funds.

The new norms for corporate governance require listed companies to justify salaries paid to its chief executives, put in place a whistle-blower policy and have orderly succession plans.

The new norms were cleared by the SEBI board in Delhi and the relevant provisions would be incorporated in the listing agreement soon, SEBI chairman UK Sinha said.

Speaking to the reporters after the board meeting Sinha also said that any decision on the lapsed ordinance that granted greater powers to SEBI needs to be taken by the government.

Among other major decisions, SEBI board also cleared the much-awaited long term policy for mutual funds, which includes various proposals including potential tax benefits, for the future growth of the sector.

"The long term policy includes all aspects - including enhancing the reach and promoting financial inclusion, tax treatment and obligation of various stakeholders to deal with the public policy objectives of achieving sustainable growth of the mutual fund industry and mobilisation of household savings for the growth of the economy. The recommendations of long term policy has been bifurcated in two buckets, tax incentive related proposals and non-tax related proposals," SEBI said in a release.

The recommended tax incentives for mutual fund schemes are...

A long term product such as Mutual Fund Linked Retirement Plan (MFLRP) with additional tax incentive of Rs50,000 under 80C of Income Tax Act may be introduced.

Alternatively, the limit of section 80C of the Income Tax Act, 1961, may be enhanced from Rs1 lakh to Rs2 lakh to make mutual funds products (ELSS and MFLRP) as priority for investors among the different investment avenues. RGESS may also be brought under this enhanced limit.

Similar to merger/ consolidation of companies, the merger/ consolidation of equity mutual funds schemes also may not be treated as transfer and therefore, may be exempted from capital gain taxation.

SEBI board also decided to ensure that mutual funds achieve a reasonable size and play an important role in financial inclusion, while enhancing transparency. Here are the objectives decided by SEBI for this...

(i) Capital Adequacy i.e. minimum networth of the asset management companies (AMC) be increased to Rs50 crore.



(ii) The concept of seed capital to be introduced i.e. 1% of the amount raised (subject to a maximum of Rs50 lakh) to be invested by AMCs in all the open ended schemes during its life time.



(iii) EPFOs be allowed to invest upto 15% of their corpus in Equities and Mutual Funds. Further, the members of EPFOs who are earning more than Rs6500 per month be offered an option for a part of their corpus to be invested in a Mutual Fund product of their choice.



(iv) Presently, Navratna and Miniratna Central Public Sector Enterprises (CPSEs) are permitted to invest in public sector mutual funds regulated by SEBI. It has been recommended that all CPSEs be allowed to choose from any of the SEBI registered Mutual Funds for investing their surplus funds.



(v) In order to enhance transparency and improve the quality of the disclosures, it has been decided that AUM from different categories of schemes such as equity schemes, debt schemes, etc., AUM from B-15 cities, contribution of sponsor and its associates in AUM of schemes of their mutual fund, AUM garnered through sponsor group/ non-sponsor group distributors etc. are to be disclosed on monthly basis on respective website of AMCs and on consolidated basis on website of AMFI.



(vi) In order to improve transparency as well as encourage Mutual Funds to diligently participate in corporate governance of the investee companies and exercise their voting rights in the best interest of the unit holders, voting data along with rationale supporting their decision (for, against or abstain) be disclosed on quarterly basis on their website.

This is to be certified by Auditor annually and reviewed by board of AMC and Trustees.



(vii) Towards achieving the goal of financial inclusion, a gradual approach to be taken such that initially the banked population of the country may be targeted with respect to mutual funds investing. SEBI will work towards achieving the goal that the basics of capital markets and financial planning may be introduced as core curriculum in schools and colleges. Printed literature on mutual funds in regional languages be mandatorily made available by mutual funds. Investor awareness campaign in print and electronic media on mutual funds in regional languages to be introduced.



(viii) In order to develop and enhance the distribution network PSU banks may be encouraged to distribute schemes of all mutual funds. Online investment facility need to be enhanced to tap the internet savvy users to invest in mutual funds. Also, the burgeoning mobile-only internet users need to be tapped for direct distribution of mutual funds products.

The SEBI board also cleared new KYC registration agency (KRA) regulations that would make it easier for the investors to comply with know your client (KYC) requirements across various segments of the capital markets.

The approval by SEBI board to the new corporate governance norms follows months-long discussion among various stakeholders on draft regulations released last year.

The new norms seek to check excessive salaries paid to top executives of listed companies by requiring them to justify such payments, as also all related party transactions with entities linked to promoters and directors.

The companies would also need to adopt a whistle-blower policy for employees, while the number of directorship a person can hold on company boards would be capped, among various other measures to safeguard the interest of minority shareholders.

The new norms provide for greater oversight by minority shareholders and independent directors and check any unjustifiable payments to related parties.

They also seek to bring in a greater alignment of CEO salaries with the performance and goals of the company, while requiring disclosure of ratio of remuneration paid to each of their directors and their median staff salary.

Similar provisions have been made in the new Companies Act.

SEBI had earlier said that "on average, the remuneration paid to CEOs in certain Indian companies are far higher than the remuneration received by their foreign counterparts and there is no justification available to that effect".

Through these measures, SEBI is seeking to adopt better global practices without increasing the cost of compliances, so that confidence of the investors is brought back to market.