The following post is contributed by Somasekhar Sundaresan
The first board meeting under the new Chairman of the Securities and Exchange Board of India (“SEBI”) has taken a very significant decision. SEBI has slashed the ad valorem fee rates attendant with filing of various draft offer documents, by nearly 80%, and has capped the total fees.
Eyebrows were raised when SEBI introduced the ad valorem fees for various securities transaction document filings. The fee rates were quite out of line with the perceived benefits from the service rendered by SEBI to the capital market. Despite the huge increase in filing fees, adherence to the self-imposed timelines for clearing offer documents was more the exception than the norm.
Mutual funds had to pay SEBI a fee of 0.03% of the funds raised subject to a maximum of Rs. 10 million. Filings of draft letters of offer under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (“Takeover Regulations”) required a payment of a fee of 0.5% for any offer having a size of more than Rs. 10 crores (virtually every open offer), without any outer limit.
Such an imposition of fees, in economic terms (leaving the legality aside), had increased transaction costs in the capital market.
The mutual fund document filing fee has now been brought down to 0.005% subject to a maximum fee of Rs. 5 million. The filing fee for draft letters of offer under the Takeover Regulations has been brought down to 0.125%, subject to a cap of Rs. 30 million. The reduction is a sensible measure, since the size of the open offer hardly made any difference to the burden shouldered by SEBI in reviewing these documents.
The securities market witnessed a watershed in Indian jurisprudence when the Supreme Court had to consider a challenge to the constitutional validity of a turnover-linked registration fee that was imposed on stock brokers in April 1992. It is noteworthy that the new SEBI Chairman, who had then led negotiations with the brokers, had offered a much smaller ad valorem fee to the broking community, provided the brokers withdrew the constitutional challenge. The brokers rejected the offer and persisted with a constitutional challenge to the fee, on the ground that it was a tax.
Nearly ten years later, in February 2001, a constitutional bench of the Supreme Court of India upheld the validity of the ad valorem fee, ruling that SEBI was indeed providing a general service to the market at large. Eventually, the ad valorem fee model was extended to all securities offering document filings.
Constitutionally-valid fees can indeed be economically taxing. SEBI has been well-advised to reduce the fee rates, bringing down transaction costs in the capital market.