No merit in relaxing 10% cap on single stock investment: Sebi chief

The market regulator Securities and Exchange Board of India (Sebi) sees no merit in increasing the 10 per cent investment cap on a single stock for actively-managed mutual fund (MF) schemes.

“The 10 per cent cap is meant for diversification cap. Just because some scrip is outperforming doesn’t mean you raise the ceiling. That will be self re enforcing that a scrip has moved up and you are allowing higher investment in the same scrip. That doesn’t sound very logical. For the sake of diversification, the 10 per cent ceiling is something which stays,” said Ajay Tyagi, chairman, Sebi while addressing the media at a market summit organized by industry body CII.

As the weightage of India’s most valuable company Reliance Industries has neared nearly 15 per cent in the benchmark Sensex and Nifty indices, the MF industry has highlighted the challenges it faces in matching the returns generated by the benchmarks.

“Undoubtedly, there are challenges in performance measurement as indices do not have a cap on stock whereas mutual fund schemes have a cap of 10 per cent on a stock,” industry body Amfi has said in a recent communication.

When asked about the operational challenges highlighted by foreign portfolio investors (FPIs) to reduce the trade settlement cycle to T+1, Tyagi said, “To have an early settlement is in everyone’s interest. It will help increasing liquidity and reducing margins. It cannot be anyone argument that we want to settle it late. But there are some operational issues with regards to FPIs and custodians because of time differences and other factors. We will take everyone’s view and suggestions before finalizing anything.”

On rising instances of brokers defaults, Tyagi said Sebi has reviewed the matter extensively and will soon take corrective measures. He said there is a cause to boost the amount lying in the investor protection fund (IPF)

“I agree that investor protection fund is woefully insufficient. We have examined this and will soon take action in consultation with stock exchanges to increase the IPF. We will not allow that to be criteria to delay payment in case of broker default.”

Tyagi also said there is a merit in the proposal by some industry players of introducing capital adequacy for the broking industry.

“There are all types of brokers in the system. The net worth requirement was set almost a decade back. So that area needs reform. We will examine this. Capital adequacy should be the first level of consideration.”

The Sebi chief also said delivery-based trading needs to be encouraged. He said the regulator has introduced norms to increase the upfront margins for intra-day trades, which will kick in from December. “This will further reduce speculation.”

Tyagi expressed concerns over the issue of resignation of independent directors.

“I must admit, the independent director (issue) is a puzzle which we are still trying to deal with. They are the voice of minority shareholders. To what extent they have to be responsible. How they fit in into the board structure. Which are the kind of people that need to be appointed. These are the issues that are troubling us,” he said.

Tyagi said Sebi would urge “resigning directors to come forward and state the same clearly to the public at large and not give cryptic reasons.”

He also called in the industry support in finalizing the norms pertaining to reclassification of promoters as ordinary shareholders. Tyagi said it remains a contentious issue.

In this speech, the Sebi chairman highlighted the positive takeaways from the market this year.

“While one repeatedly hears that the liquidity and low interest rates are the only prime factors driving up the markets, and that there is a disconnect between the market and the real economy, I would like to place before you certain positive aspects of the market recovery.”

Tyagi said the contrary to popular perception, the gains in the market post-covid have been broad-based. He also highlighted that the investor participation and trading turnover have increased substantially over last year. He said 6.3 million demat accounts have got added in the first half of the current fiscal compared to just 2.74 million during the same period of last fiscal.

He also said India has received strong FPI flows even as our emerging market peers have seen outflows. Tyagi also said primary markets too have done well after a bit of a lag.