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360 Degree View july 2024

1. Front Running

Front running is an illegal practice where in anticipation of price movement, the Fund Managers placed their orders before the execution of larger trades and squared off their personal trade positions soon after placing the larger order. These suspected front-running activities by certain Mutual Funds have now become a concern. The SEBI has started initiating stricter actions to curb such activities by the Fund Managers of the Mutual Funds.

Mutual funds are more vulnerable to misaligned incentives and information asymmetries as they operate through a complex structure containing principles & agents, which can lead to abuse. As per the interim order passed by the SEBI in the case of Axis Mutual Fund, the Chief Dealer of the Fund, based on his insider knowledge placed orders for himself ahead of the order placed on the behalf of the mutual Fund.  

Similar challenges were faced by the global banking sector, particularly in the spot gold and LIBOR benchmarks in which it was alleged that the bank officials had manipulated the London Gold Fixing and LIBOR to benefit their trading positions. Hence, to address this, the regulators have changed the gold fixing to a system based on actual and verifiable trades and replaced the London Interbank Offered Rate (LIBOR) with the Secured overnight financing rate (SOFR).

SEBI has taken steps to curb unethical practices by focusing on integrity, transparency, and accountability. The regulatory framework has laid down a code of conduct for AMC and fund managers which prohibits them from indulging in unethical practices. Also, for instituting a robust risk mitigation mechanism, the mutual fund regulations propose the establishment of a framework to identify potential abuse, enhancement of accountability and responsibility of AMC, and increase transparency through a whistleblower policy.

A robust rating system, the use of AI (Artificial Intelligence) and ML (Machine Learning) for monitoring trade patterns and detecting anomalies, regularly updating surveillance systems and Internal Control Mechanisms, and reviewing practices and compliances are a few recommendations and suggestions for preventing market abuse practices.

2. Boards of Indian Companies make more room for young Directors

Young professionals and people are gradually entering the boardrooms of Indian Companies, which have traditionally been dominated by older and more experienced individuals. This shift is driven by companies to adapt to digital transformation and industry disruption, while also seeking to diversify their boards.  Certain statistics show that there has been a 136% jump in the number of directors in the last decade. Across all the NSE Listed Companies, as of March 31, 2024, there were 1,618 directors (including Independent) under the age of 40 as compared to 687 Directors in the last decade.

The number of Independent Directors alone has shown an increase of 456% in a decade, these numbers have increased from 134 as of March 31, 2014, to 745 as of March 31, 2024.

It is pertinent to note that Indian Boards are trying to be a source of competitive advantage and trying to identify the competencies that they may be lacking. Digitization offers a competitive edge, and young talent understands digitization better. Hence the leading Boards are trying to include Directors with digital skills. Even in family-run businesses, younger Board members are being inducted to provide a broader perspective of the business.

Due to significant shifts happening in the Industry and the fear of disruption of the Business model, the Boards are looking for people who can think out of the box. Young Directors are highly qualified can adapt to the changes, and can bring fresh perspectives that rejuvenate board dynamics.

Startups and Tech companies are actively seeking younger Directors, while some traditional Boards remain orthodox. Even in promoter-run companies, the next generation is coming in, as they want more people of their kind.

The Companies are now aiming to have at least one or two young directors on their Boards. Despite the limited availability of young directors due to their full-time roles, the demand for them is expected to grow as new technologies emerge. Hence the demand for youngsters the diversified skills and the ability to scale the business with disruption in the market is increasing. The Boards of various tech companies are seeking young Directors to be more aware about the Market trends and Customers.

3. Policy to ensure the quality of Solar Cells

The Ministry of New and Renewable Energy (MNRE) has planned to release a draft policy for ensuring the quality and reliability of solar cells that are used in modules deployed in India. This policy will include an Approved List of Models and Manufacturers (ALMM) for solar cells. The industry will have sufficient time to plan. The decision on the policy will be taken after consulting the industry and inviting comments on the same.

Currently, the ALMM covers only solar modules, but it will be expanded to include solar cells. India’s cell manufacturing capacity is expected to rise from 6 GW to over 30 GW by the end of the Financial Year. The demand for solar equipment is increasing, with most cells being imported, primarily from China. Additionally, the MNRE will likely seek bids for 500 MW of offshore wind capacity under a viability gap funding scheme.

Production-Linked Incentive Scheme

The Government may be extending the deadlines for the production-linked incentive (PLI) scheme for solar photovoltaic modules based on industry requests. The extension has mainly been sought on account of the choice of technology and availability of equipment.

PM Surya Ghar Muft Bijli Yojana

Under the PM Surya Ghar Muft Bijli Yojana, launched in mid-February, ₹430 crore has been disbursed for rooftop solar installations, with an additional ₹200 crore for 30,000 installations under the previous scheme. A further ₹1,000 crore has been sanctioned to REC (Nodal Agency for PM Surya Ghar Programme), to be disbursed in installments under terms set up by the Finance Ministry. There are sufficient funds and domestic solar module supplies to meet demand.

4. Emerging Asset Class Offers Flexibility for Investments Between ₹10 Lakh and ₹50 Lakh.

The Securities and Exchange Board of India (SEBI) proposes a new asset class different from Mutual Funds, Portfolio Management Services (PMS) and Alternative Investment Funds (AIFs)

What is the new asset class that’s in the works?

SEBI proposes a new asset class offering greater flexibility than Mutual Funds but less than PMS and AIFs to meet increasing financial product demand.

 

Who can invest?

The new asset class will cater to investors with ₹10 lakh to ₹50 lakh, bridging the gap between Mutual Funds and higher-ticket PMS and AIFs.

 

How will their product offerings be different?

 

The regulator has proposed various investment strategies for the new asset class, including long-short equity and inverse ETFs. Potential products may encompass equity, debt, or hybrid options, such as Green Energy, Green Bonds, and high-yield fixed-income securities. Final norms are yet to be established.

 

What was the need for this Asset Class?

 

SEBI identified a need for investment products with greater flexibility and higher ticket sizes to meet evolving market demands. This new asset class aims to address this need and redirect investors from unregistered schemes back into the regulated market.

 

What will be the advantages of such Investment Products?

SEBI will regulate the new asset class, aiming to make it investor-friendly with options similar to mutual funds.

 

It may include systematic plans like Systematic Investment Plan (SIP), Systematic Withdrawal Plan (SWP), and Systematic Transfer Plan (STP) to enhance investment strategies.

 

Who can offer this new Asset Class?

Mutual funds meeting specific criteria—three years of operation, an average AUM of ₹10,000 crore, and no recent regulatory issues—can offer the new asset class.

 

Fund houses not fulfilling criteria must appoint an Investment Advisor with at least 10 years of experience and managing an AUM of ₹3,000 crore to launch this product.

 

What will be the expense ratio of such products? How easy will be redemptions?

SEBI has not yet detailed the expense ratios for the new asset class, but they are expected to be higher than those for Mutual Funds. Redemption conditions may also be more restrictive to prevent premature withdrawals.

 

What does the introduction of these products mean for PMS and AIF?

The new asset class will intensify competition for PMS and AIFs by attracting investors with lower minimum investment thresholds.

 

This shift may pressure PMS and AIFs to improve their offerings and could potentially diminish their market share.

5. Philanthropy in India Seeks to Offer the Right Solutions.

A report has revealed that in India, Philanthropy has significantly evolved due to the increased role of Ultra-High Net Worth Individuals (UHNIs) in solving problems and paving the way towards sustainable development. It has been seen that 30% of the top 100 UHNI philanthropists donate to educational causes, 21% contribute to health care, approx 11% to environmental and sustainability initiatives, and only 5% donate to sports activities.

If UHNIs channels just 5% of their annual incremental wealth, they could contribute an estimated ₹75,500 crore annually, five times the total CSR spent by India Inc. in FY-23.  Around 84% of UHNI prefer to support a wide range of causes and make donations to more than one, with over 50% contributing to three or more causes.

About 56% of philanthropists make a direct grant and 70% of large philanthropists route their Philanthropy through an operating grant-making foundation.  Philanthropy in India has shifted from the traditional approach to having more impactful and strategic engagement. This shift is due to the participation of the young generation of wealthy creators who are focusing on long-term solutions.

However, there are various challenges and complexities for philanthropists in India to make contributions in India which are structural, procedural, and Information gaps.

6. Don't Hold Your Breath, Electrify!

In 2023, India stood as the third most polluted nation globally, recording an average population-weighted fine particulate matter (PM) 2.5 concentration of 54.4 micrograms per cubic meter (μg/m3), found a new Global Report by IQAir — a Swiss air quality.

Fine PM is considered the most potent air pollutant, as the particles can travel with the bloodstream to reach other parts of the body and organs and trigger a range of diseases, including fatal ones. 

The report said that, overall, “India continues to grapple with drastically poor air quality with PM2.5 concentrations exceeding the WHO annual guideline by more than 10 times,” and 9 out of the 10 most polluted cities in the world were found to be located in India. This spike in pollution levels poses significant health risks to an estimated 1.36 billion people living in the country,” said the report.

There is an urgent need to move beyond fossil fuels and the world must invest in clean energy generation. One of the Top contributors to air pollution is transportation Emissions.  As per the Reports, there is a growing need to shift towards clean energy by reducing the dependency on oil. Hence a full electrification of Road transport is necessary.

Although EV adoption is accelerating, it remains slow compared to other major markets of China, Europe, and the USA. There’s a need to develop a new strategy that can help accelerate the EV transition by 2030.

In an article in the Economic Times, Mr Amitabh Kant, G20 Sherpa of India has suggested the following ways towards electrification.

  • Electrification – Focus on electrifying India’s 50 most polluted cities by 2030. These 50 Cities account for over 40% of India’s vehicle registrations. If these 50 cities achieve 100% electrification by 2030 India will sharply reduce its oil needs.
  • Incentivise-Fiscal incentives are essential for encouraging the purchase of new electric vehicles (EVs) and retrofitting existing vehicles. To support these transition Extending FAME and state EV policies with predictability and consistency for the next five years, along with providing concessional finance is a necessity. Financial institutions and NBFC shall make EV finance schemes for customers.
  • Reduced prices-Promoting bulk procurement tenders helps reduce EV prices. Electrifying school buses, private buses, airport taxis, autorickshaws, and 2-wheelers for Government and Employees can further lower costs. Mandating the full electrification of the government fleet will boost EV demand.
  • Phasing Out the Old- Cities should retire old-engine vehicles which would increase EV demand. In Delhi alone due to the phasing out of old- engines will create demand for  2 million EVs. Penalties to be imposed on polluting vehicles. The state must mandate the use of zero-emission vehicles.

This transition would give rise to an opportunity for India to become a global leader in manufacturing EV vehicles which would ultimately create demand and will lead to the creation of a new export market for India.

If India can undergo a transition towards 100 % electrification by 2030 there will be a significant improvement in the Air quality of the Whole Country which would ultimately improve the Life Expectancy of Individuals. The Government has been providing subsidies to individuals to promote the purchase of EV vehicles.

Source-

India was the third-most polluted country globally in 2023, right behind top-ranking Bangladesh and Paki (downtoearth.org.in)

Budget 2024: Don’t hold your breath, electrify! – The Economic Times (indiatimes.com)

7. Smaller Cities Turn Job Hotspots as Companies Expand Play Beyond Metros

Job creation is booming in India’s small cities and towns as companies expand beyond metros, increasing demand for diverse talent. Small cities and towns in India, such as Jaipur, Vadodara, Indore, Ludhiana, Chandigarh, Lucknow, Bhopal, Surat, Mohali, Kochi, and Coimbatore, have seen a significant rise in job creation, driven by sectors like retail, consumer goods, banking, and manufacturing, according to Randstad India Talent Insights Report 2024.
Hiring in Tier 2/3 cities increased by 25-35% from 2023 to 2024. Factors contributing to this growth in smaller cities include a rise in e-commerce and retail sales, greater penetration of banks and financial services institutions, infrastructure investments, educational institutions, lower costs, favorable government policies, and rising disposable incomes.
In contrast, blue-collar and semi-skilled jobs in sectors like manufacturing, construction, and urban services are struggling to attract sufficient and qualified workers for facility management, delivery, and security services.  Many workers who went back to their villages during the pandemic have not returned to urban jobs due to government support programs back home like free food, the PM Kisan Yojana, the rural employment guarantee scheme, free or subsidized electricity, tap water, and cooking gas.

8. Proposed amendment to be made in the Insider Trading Regulations to Widen Definition of Relatives.

SEBI had suggested expanding the definition of “Relatives” in the Insider Trading Regulations. It was proposed by the Regulator to substitute “Relative” in place of the word “Immediate Relative” to cover the Family members of the Connected person.

SEBI explained that the “Relatives of Connected Person” would mean spouse, siblings, siblings of spouse, siblings of parents, any lineal ascendant or descendant, and all their spouses.

SEBI said in its Discussion Paper, that the current definition of “Connected Person” does not cover the persons who may have possession of the UPSI, yet those are not covered in the definition which may have a close relationship with such connected person.

Such deemed Connected Persons may indulge in insider trading by their close relationship with the Connected Person. Hence, SEBI had proposed to include more categories of Connected Persons.

SEBI also said the following shall be covered which are:

  • a firm, its partner, or its employee in which a Connected Person is also a partner.
  • Any person on whose advice a Connected Person would act.

The proposed Regulations would now also cover a Body Corporate whose Board of Directors and Managing Director, are acting on the directions of a Connected Person.

SEBI further said that it is intended to cover the “Relatives of Connected Person” for these regulations and it will be an implied assumption that such Relatives have the possession of UPSI.

9. The draft of DPDP Rules to come up for Public Consultation.

The Digital Personal Data Protection Act, 2023 ((DPDP Act) was published in the Official Gazette on 11 August 2023, however, the Government has not yet announced the date of its coming into force.

The Government may soon roll out the draft Rules under the DPDP Act.  It is expected that public consultation on these Draft Rules will be very extensive and the text of the draft Rules will be simple as the idea is not to disrupt anything.    

It is said that the final DPDP Rules will be within the Limits of the DPDP Act and will provide a robust mechanism to the citizens to safeguard their privacy, provide for effective redressal of complaints, and discourage frivolous complaints.

The Information Technology Ministry had deliberations with the representatives of Social Media Intermediaries and Internet companies to discuss the solutions for Age-gating and a method for verification of the age of children.

As per the DPDP Act, users below the Age of 18 are considered to be children and such users will need to obtain consent from Parents to use social media and for host services of Internet intermediaries. The earlier proposed resolution by the companies for Age verification of Children like Digi locker and Aadhar has been rendered unfeasible.

10. Non-compliance of Significant Beneficial Ownership Reporting.

The Registrar of Companies (RoC) across India had issued Show Cause Notices and imposed penalties against businesses and their officials over Non-compliance of reporting of the Significant Beneficial Ownership in their companies. The Regulatory authorities are now prioritizing the compliance of the disclosure of Significant Beneficial Owners in companies.

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