Investors to have a fringe benefit from Sebi norm | Economic Times

ET Intelligence Group: The Securities and Exchange Board of India (Sebi) on Friday issued a circular mandating multi-cap funds to allocate at least 25 per cent of their portfolios in large-, mid- and small-cap companies each by February 2021. This would result in inflows into small- and mid-cap stocks by institutional investors. But these funds would also come with increased scrutiny of the operations and governance of the investee companies by analysts and fund managers.The institutional investors will help separate the better-governed companies from the poorly-governed ones. This could significantly bolster small and retail investors who typically lose out betting on small cap and penny stocks.Besides the circular ordering the inclusion of mid- and small-cap stocks in multi-cap schemes, the regulator last Friday also proposed changes to the Sebi (Listing Obligations & Disclosure Requirements) regulations applicable to the listed companies. It has solicited public comments or views on the proposed amendments.Among the proposed changes, it is recommended that provisions that become applicable to a listed entity on the basis of market cap or paid-up capital or net worth shall continue to apply irrespective of change in the market cap or paid-up capital or net worth. Effectively, the compliance requirements applicable to a mid-cap company will remain in force even if the company becomes a penny stock.For instance, from a market cap of Rs 11,129 crore two years ago, the valuation of Reliance Capital has dropped to Rs 227 crore. However, if the proposed amendments were to be enforced, the regulations applicable to mid-cap companies will continue to apply to Reliance Capital even after the massive erosion in its valuation.It is also proposed to extend the requirement for disclosing the dividend distribution policy to the top-1,000 listed entities by market cap instead of the biggest 500 companies. This significantly widens the ambit of companies getting eligible to comply with this provision. If all listed entities are ranked based on their current market cap, the top 1,000 would have market cap ranging from Rs 14.7 lakh crore to Rs 350 crore.These changes related to increased disclosures and the regulation that opens up an opportunity to attract institutional funding are likely to compel small companies to improve their governance — much to the benefit of the retail investors.