SEBI’s 204th Board Meeting: A Look at Key Decisions

The Securities and Exchange Board of India (“SEBI”) convened its 204th Board Meeting in Mumbai on March 15, 2024.[1] During this session, several significant decisions were taken to enhance the regulatory framework governing the Indian securities market. This article provides an overview of the key approvals granted by SEBI in the said Board Meeting.

  1. Expediting timelines: Launch of beta version of T+0 settlement cycle approved

SEBI has approved the launch of the beta version of optional T+0 settlement. This initiative allows for same-day settlement on an optional basis for a limited set of 25 scrips with a select group of brokers.

The existing T+1 rolling settlement cycle was introduced back in September 2021 and was fully implemented in January of last year. The significant advancements in technology, architecture, and capacity within Market Infrastructure Institutions (“MIIs”) have created opportunities to further expedite clearing and settlement timelines. Recognising the potential benefits of shortening settlement cycles, such as enhanced cost efficiency, transparent charges, and improved risk management across the securities market, it was proposed to introduce the T+0 settlement cycle on an optional basis, alongside the existing T+1 cycle. Days after the launch was approved by the Board, a circular was issued providing certain operational guidelines and directives to MIIs.[2]

  1. Certain FPIs exempted from additional disclosure requirements

The Board approved a proposal to exempt additional disclosure requirements for Foreign Portfolio Investors (“FPIs”) with over 50% of their India equity Assets Under Management (“AUM”) in a single corporate group. This exemption applies if the concentrated holdings of these FPIs are in a listed company with no identified promoter, provided certain conditions are met:

i) The FPI holds not more than 50% of its India equity AUM in the corporate group, excluding its holding in the parent company with no identified promoter.

ii) The combined holdings of all such FPIs in the company with no identified promoter, which exceed the 50% concentration criteria and are not exempted, are less than 3% of its total equity share capital.

SEBI has elaborated on the criteria for exempting FPIs in its circular dated March 20, 2024.[3]

  1. Material changes by FPIs categorised into 2 types, timelines for their disclosure relaxed

The Board approved a proposal to extend the timelines for the disclosure of material changes by FPIs, aiming to facilitate ease of doing business. Currently, FPIs are mandated to report material changes to their Designated Depository Participant (“DDP”) within seven working days. These material changes will now be categorised into two types:

Type I – FPIs are required to notify their DDP of these material changes within seven working days of occurrence, with supporting documents within 30 days.

Type II – FPIs are required to inform their DDP of these material changes along with any supporting documents within 30 days of occurrence.

  1. Flexibility provided in dealing with securities subsequent to expiry of FPI registration

To enhance the ease of conducting business for FPIs, the Board has approved the following measures:

(a) Expired FPI registrations due to non-payment can be reactivated within 30 days. During this period, FPIs can sell their securities. If the registrations are not reactivated, a 180-day window is provided for securities disposal.

(b) A minimum period of 180 days, or until the end of the registration block, is ensured for securities disposal in cases of adverse compliance changes in the FPI’s home jurisdiction or non-submission of required documents.

(c) If securities remain unsold after the initial 180-day period:

I. FPIs have an additional period of 180 days for disposal of securities, with a 5% financial disincentive on sale proceeds, which shall be credited by the custodian to SEBI’s Investor Protection and Education Fund (“IPEF”).

II. The securities remaining unsold after the expiry of the additional 180-day period will be deemed to be compulsorily written off by the FPI.

(d) For existing cases, FPIs with expired registrations have a one-time opportunity of 360 days to dispose of securities, with the first 180 days exempt from financial disincentives. Subsequently, any unsold securities will be compulsorily written off. Such unsold securities will be transferred to an escrow account managed by an exchange broker. The broker will be required to sell the securities at market price and transfer the sale proceeds to SEBI’s IPEF.

  1. Amendments to facilitate ease of doing business for companies heading for IPOs

The Board has approved the following amendments to SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018:

(a) Eliminating the one per cent security deposit requirement in public or rights issues of equity shares.

(b) Allowing promoter group entities and non-individual shareholders holding more than five per cent of post-offer equity share capital to contribute towards minimum promoters’ contribution (“MPC”) without being classified as promoters.

(c) Considering equity shares from the conversion of compulsorily convertible securities held for a year before filing the DRHP for meeting MPC requirement.

(d) Revising the requirement for fresh filing for increasing or decreasing the size of offer for sale (“OFS”) based on either the issue size in rupees or the number of shares disclosed in the draft offer document.

(e) Providing flexibility to extend the bid or offer closing date by at least one day in case of force majeure events, instead of the current requirement of at least three days.

  1. Changes to LODR Regulations to ease compliance

Certain amendments to the SEBI (Listing Obligations and Disclosure Requirements), Regulations, 2015 (“LODR Regulations”), have been approved. The changes introduced are as follows:

(a) The compliance requirements for listed entities regarding market capitalisation will now be based on the average market capitalisation of the six months ending on December 31, rather than a single day’s market capitalisation on March 31. Additionally, to ease compliance, a sunset clause of three years is being introduced, which will cease the applicability of market capitalisation-based provisions after this period.

(b) The timeline for filling vacancies of Key Managerial Personnel has been extended from three months to six months.

(c) The prior intimation time for board meetings had been reduced to two working days.

(d) Listed entities are now permitted a longer gap of 210 days between two consecutive meetings of the Risk Management Committee, offering them flexibility in scheduling these meetings.

  1. Verification of market rumours: New measures to ensure uniform approach

To ensure a consistent approach to verifying market rumours by equity listed entities, the Industry Standards Forum (“ISF”), composed of ASSOCHAM, CII, and FICCI, collaborated on a pilot project. This project aimed to establish standards for effectively implementing rumour verification requirements in consultation with SEBI. Following discussions with ISF and stakeholders, the Board approved the below measures to facilitate a uniform approach:

(a) Specifying objective and uniformly assessing criteria for rumour verification based on material price movements of the listed entity’s equity shares.

(b) Considering unaffected prices for transactions where pricing norms are prescribed under SEBI Regulations, provided that the rumour related to such transactions is confirmed within twenty-four hours of the material price movement.

(c) Mandating timely responses from promoters, directors, key managerial personnel, and senior management of the listed entity for verifying market rumours.

(d) Clarifying that unverified events or information reported in print or electronic media will not be considered as ‘generally available information’ under SEBI (Prohibition of Insider Trading) Regulations, 2015.

  1. Category I and II AIFs allowed to pledge equity holdings in infrastructure sector investee companies

To enhance ease of business for Alternative Investment Funds (“AIFs”) and promote private capital participation in infrastructure financing, the Board has approved a measure granting flexibility to Category I and II AIFs. This measure allows these AIFs to create an encumbrance on the equity of their investee companies in the infrastructure sector. This enables the investee companies to raise debt or loans more easily, provided they adhere to specific conditions, including compliance with RBI regulations.

The infrastructure sector companies eligible for this provision are those engaged in the development, operation, or management of projects within the infrastructure sub-sectors listed in the Harmonised Master List of Infrastructure sub-sectors issued by the Government of India.

  1. AIFs mandated to conduct due diligence of investors and investments

The SEBI Board has approved the proposal of mandating AIFs, their Managers, and Key Management Personnel to conduct specific due diligence on their investors and investments. This measure aims to prevent AIFs from circumventing regulations administered by financial sector regulators. By ensuring verifiable compliance with these due diligence requirements, the proposal sets the stage for the introduction of additional ease of doing business measures for AIFs, facilitating sustained capital formation. To ensure clarity and consistency, the Industry Standards Forum for AIFs, in consultation with SEBI, will formulate specific implementation standards for conducting due diligence on AIF investors and investments.

  1. High value debt listed entities: One-year extension granted for mandatory applicability of listing norms

Approval has been accorded for extending the timeline for the mandatory applicability of listing norms, specifically Regulations 16 to 27 of the LODR Regulations, for high value debt listed entities till March 31, 2025. Hence, the said provisions will be applicable on a ‘comply or explain’ basis during the period leading up to the new deadline.

  1. Unliquidated investments can be carried forward into ‘Dissolution Period’ after expiry of AIF’s tenure

Under this approval, AIFs are permitted to retain unliquidated investments, necessitated by a lack of liquidity during the winding-up process, within the same scheme of the AIF. They may then enter a Dissolution Period, during which the value of such investments will be recognised according to SEBI norms for inclusion in the manager’s track record and reporting to Performance Benchmarking Agencies. This Dissolution Period replaces the existing option of initiating a new scheme, known as the Liquidation Scheme, which was introduced last year. Additionally, the Board has sanctioned a one-year extension of the Liquidation Period for AIF schemes dealing with unliquidated investments, whose initial Liquidation Period has expired in the past or is set to expire within three months from the date of notification of amendments to AIF Regulations, subject to specified conditions.

  1. Framework approved for issuance of subordinate units by privately placed InvITs

The Board approved amendments to the SEBI (Infrastructure Investment Trusts) Regulations, 2014, to establish a framework for the issuance of subordinate units by privately placed InvITs. This framework is designed to address valuation gaps that may occur between the Sponsor (the asset seller) and the InvIT (the asset buyer) and includes risk mitigation measures for these units.

Though the 2014 Regulations allow InvITs to issue subordinate units to sponsors and their associates, there is no framework providing a detailed mechanism as of yet. In light of the same, SEBI came out with consultation papers dated December 9, 2023, and January 10, 2024, presenting the proposed framework (click here and here to read more about the proposals). However, to begin with, the scope of the amendments approved by the Board is limited to the issuance of subordinate units by privately placed InvITs.

  1. Stock exchange to be recognised as supervisory body for research analysts and investment advisers

A decision has been taken to recognise a stock exchange as the Research Analyst Administration and Supervisory Body (“RAASB”) and the Investment Advisers Administration and Supervisory Body (“IAASB”). Incidentally, the validity of recognition granted to BSE Administration and Supervision Limited for the administration and supervision of Investment Advisers will soon come to an end.

Similar to the treatment of Investment Advisors, the RAASB framework will not entail fees for Research Analysts. Additionally, to ensure smooth implementation and avoid disruption, existing registered Research Analysts and Investment Advisers will be automatically enlisted.

  1. SEBI Budget approved

The Board also approved the SEBI Budget for the financial year 2024-25.

Takeaways

SEBI’s decisions certainly reflect its commitment towards furthering ease of doing business. Notably, AIFs are enabled to carry forward unliquidated investments into the Dissolution Period after expiry of the Fund’s tenure. This follows that the investments may be held in the same AIF scheme without having to launch a Liquidation Scheme. SEBI has also provided for flexibility when it comes to the creation of encumbrance on the equity of AIF’s infrastructure sector investee companies. At the same time, SEBI strikes a balance by obligating AIFs to carry out due diligence of their investors and investments. Various other stakeholders including FPIs, Iisted companies, etc. stand to benefit from the decisions. Moreover, the new developments will expedite clearing and settlement timelines, prevent circumvention of regulations, and boost infrastructure development.

References:

[1] Press release on the Board Meeting, dated March 15, 2024, is available at: https://www.sebi.gov.in/media-and-notifications/press-releases/mar-2024/sebi-board-meeting_82286.html

[2] Circular dated March 21, 2024, can be accessed at: https://www.sebi.gov.in/legal/circulars/mar-2024/introduction-of-beta-version-of-t-0-rolling-settlement-cycle-on-optional-basis-in-addition-to-the-existing-t-1-settlement-cycle-in-equity-cash-markets_82455.html

[3] Available at: https://www.sebi.gov.in/legal/circulars/mar-2024/amendment-to-circular-for-mandating-additional-disclosures-by-fpis-that-fulfil-certain-objective-criteria_82418.html

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SEBI’s decisions certainly reflect its commitment towards furthering ease of doing business. Notably, AIFs are enabled to carry forward unliquidated investments into the Dissolution Period after expiry of the Fund’s tenure. This follows that the investments may be held in the same AIF scheme without having to launch a Liquidation Scheme. SEBI has also provided for flexibility when it comes to the creation of encumbrance on the equity of AIF’s infrastructure sector investee companies. At the same time, SEBI strikes a balance by obligating AIFs to carry out due diligence of their investors and investments. Various other stakeholders including FPIs, Iisted companies, etc. stand to benefit from the decisions. Moreover, the new developments will expedite clearing and settlement timelines, prevent circumvention of regulations, and boost infrastructure development.

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Differential Voting Rights – A Boost to Listed Tech Start-ups

Finding a balance between infusion of capital and retaining control are two sides of a scale that every corporate intending to survive and thrive must strive for. Being cognizant of the stress induced by this balancing act, SEBI, the market regulator, decided to relieve the corporate sector by providing a framework[i] for Issuance of Differential Voting Rights (DVR) shares.

 

Finding a balance between infusion of capital and retaining control are two sides of a scale that every corporate intending to survive and thrive must strive for. Being cognizant of the stress induced by this balancing act, SEBI, the market regulator, decided to relieve the corporate sector by providing a framework[i] for Issuance of Differential Voting Rights (DVR) shares.

DVR is not a new concept in India. It can be traced back by two decades when the Companies Act, 1956 was amended by Companies (Amendment) Act, 2000 to substitute Section 86, which allowed Indian companies to issue DVR Shares.

Issue of DVR can be in two ways:

  1. a) Issue of shares with superior voting rights to founders and/or
  2. b) Issue of shares with lower or fractional or inferior voting rights to raise funds from private/ public investors.

Interestingly, in the year 2009, with the apprehension of possible misuse of the issue of shares with Superior Voting Rights by listed companies, SEBI disallowed and prohibited issue of such shares for listed companies[ii]. However, it permitted issue of shares with inferior voting rights.

Recently, in an apparent reversal of its policy position, SEBI has allowed the issuance of DVR with superior voting rights by listed companies and disallowed any further issuance of shares with inferior voting rights.

The change seems to be a result of the increasing debate on the need to enable promoters/founders of companies, especially technology-based start-ups, to retain decision-making powers and rights vis-à-vis other shareholders while also raising capital.

The framework along with amendments (dated July 29,2019) to the relevant SEBI Regulations[iii] has been notified after considering the recommendations of the Primary Market Advisory Committee (PMAC) and the public comments on the Consultation Paper.  

In this context, we analyse the key aspects introduced by SEBI on DVR for listed companies.

  1. SR shares for listed start up:

Under the new framework, SEBI permitted issue of Superior Voting Rights (“SR shares”) in the ratio of a minimum of 2:1 up to a maximum of 10:1 compared to ordinary shares to the listed companies. However, the market regulator restricted SR shares only to promoters/founders of tech related listed companies.

SEBI has also made it very clear that a company having superior voting rights shares (SR shares) would be permitted to do an initial public offering (IPO) of only ordinary shares to be listed on the Main Board, subject to fulfilment of eligibility requirements of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 and the following conditions:

  1. The issuer company should be a technology-based company
  1. The SR shareholder should not be a part of the promoter group whose collective net worth exceed Rs 500 Crores. However, the investment of SR shareholders in the shares of the issuer company shall not be considered in the calculation of the collective net worth.
  1. The issue of these SR shares has been authorized by a special resolution passed at a general meeting with notice of specific matters including the size of issues, the ratio of voting rights, differential dividend, sunset clause, and coat tail provisions. Further, the issuer company should have only one class of SR equity shares.
  1. The SR shares should have the following traits:
  • Have been issued only to the promoters/ founders who hold an executive position in the company.
  • Have been held for a period of at least 6 months prior to the filing of Red Herring Prospectus (RHP)
  • Have voting rights in the ratio of a minimum of 2:1 up to a maximum of 10:1 compared to ordinary shares and such ratio shall be in whole numbers;
  • Have the same face value as ordinary shares
  • Should be equivalent to ordinary equity shares in all respects, except for having superior voting rights.
  1. Enabled Corporate Governance

Since there are increasing debates that introduction of DVRs would result in corporate governance issues such as abuse of minority shareholders, weakening of the checks and balances between shareholders and management, etc, the PMAC has recommended measures to mitigate the corporate governance issues that arise with existence of DVR structure.

As such, in view of disproportionate voting rights conferred to promoters vis-à-vis their economic holding, the new framework adopted following measures to make the companies having SR shareholders subject to enhanced corporate governance:

  1. All companies with SR Shares to have independent directors making up at least half of their total directors and two-thirds of their board committees (other than the audit committee). The audit committee is required to comprise only independent directors.
  2. The framework also provides for additional safeguards for ordinary shareholders by way of ‘Coat-tail provisions. The framework enlists the circumstances where SR shares are considered as ordinary shares. The list covers circumstances like winding up of the company, appointment/ removal of independent, related party transactions etc. In these circumstances, SR shareholders will vote on a ‘one share one vote’ basis.
  3. SR shareholder shall be entitled to SR shares in case of bonus, split or rights issues, however, rights cannot be renounced, and ratio shall remain the same as initially adopted by the company.
  4. The SR equity shares shall be treated at par with the ordinary equity shares in every respect, including dividends, except in the case of voting on resolutions.
  5. The total voting rights of SR shareholders (including ordinary shares) in the issuer upon listing, pursuant to an initial public offer, shall not at any point of time exceed 74%.
  6. The SR share shall be converted into ordinary voting rights after five years of listing or resignation, demise, merger or demerger where the control would be longer with him.

 

 

 

 

  1. No more inferior voting rights

 

Prior to the amendment and framework, inferior voting rights were allowed. Now with the new framework disallowing issuance of inferior voting rights, the watchdog has taken away the investors chance to get benefits like bonus, split etc. PMAC committee and SEBI Board is of opinion that such shares should not be encouraged as they attract less investor interest, trade at discount and therefore negatively impact retail shareholders attracted to such shares. Further, lower fractional rights would likely result in existing ordinary shares to trade at premium resulting in lower returns for institutional investors.

 

Amendment to the Companies Act, 2013

In line with amendments to the SEBI Regulations, the Ministry of Corporate Affairs has amended the Companies (Share Capital & Debentures) Rules, 2014 relating to issue of DVRs vide notification dated August 16, 2019[iv]. Brief changes made are:

  • The requirement of distributable profit for three years as an eligibility to issue shares with DVR has been removed.
  • The existing cap of 26% of the total post issue paid up equity share capital has been revised to a cap of 74% of total voting power in respect of shares with Differential Voting Rights of a company.
  • The time period for issuance of Employee Stock Options (ESOPs) to promoters or Directors holding more than 10% has been enhanced from 5 years to 10 years from the date of their incorporation.

Section 43(a)(ii) of the Companies Act, 2013, provides that a company incorporated under the laws of India and limited by shares is permitted to have equity shares with differential voting rights as part of its share capital. 

 

DVRs in Other Jurisdictions

 

Internationally, the listing of shares with differential voting rights, i.e, DVRs is known as Dual Class Shares or DCS which is permitted in many countries. However, in countries like Australia, Spain, Germany and China, they do not permit Issuers with DCS structure for listing.

In US, issuers with pre-existing DCS structures are permitted to list on the NYSE and NASDAQ. Once listed, issuers with one share one vote structure are not permitted to implement a DCS structure that would reduce or restrict the interest of existing shareholders. Founders of companies like Google, Facebook, Alibaba have adopted this DCS structure in one form or another to retain control over their entity.  However, there are investor activists who are widely against such concentrated voting rights with few founders/ managements. Also, there is ongoing debate in the U.S. Securities & Exchange Commission (SEC) about the continuation of DCS.

When we analyse UK, we can see that DCS structures were used in the 1960s to protect corporations from hostile takeovers or for the Queen to have ‘golden share’. However, now with the emergence of institutional investors, who strongly support one share one vote, DCS shares have become unpopular. Supporting the same, the market regulator there has prohibited DCS for companies listing on the UK’s premium Listing.

On the other end of the spectrum, Singapore and Hong Kong have recently permitted DCS structures with the intent to encourage new technology firms. However, considering the cons of such shares, these countries have adopted detailed checks and balances.  

 

Conclusion

 

DVR is widely accepted as a defense mechanism for hostile takeover and dilution of interest in a company. Nevertheless, a highly evolving entrepreneurial community in India that is desperately starving for capital will welcome this initiative that could help pitch their companies on a higher scale. Further, it is in consonance with the government’s strategy for ease of doing business and propelling the start-up environment.

However, only time would tell how effective superior DVR shares would be in achieving the desired objective since fractional shares had been brought in place with similar intent but failed to deliver. Moreover, when the voting interest is separated from economic interests, there are always chances of misuse by promoters. It may also lead to other externalities such as misalignment of interests among shareholders, excessive compensation of management, reduced dividend pay-out, management entrenchment, and expropriation. Finally, it remains to be seen whether the checks and balances put in place to curb misuse are effective or need overhauling.

References:

[i] https://www.sebi.gov.in/sebi_data/meetingfiles/aug-2019/1565346231044_1.pdf

[ii] SEBI circular no. SEBI/CFD/DIL/LA/2/2009/21/7 dated July 21, 2009

[iii] SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, SEBI (Buy-Back of Securities) Regulations, 2018, and SEBI (Delisting of Equity Shares) Regulations, 2009.

[iv] https://pib.gov.in/newsite/PrintRelease.aspx?relid=192676

 

 

 

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DVR is widely accepted as a defence mechanism for hostile takeover and dilution of interest in a company. Nevertheless, a highly evolving entrepreneurial community in India that is desperately starving for capital will welcome this initiative that could help pitch their companies on a higher scale. Further, it is in consonance with the government’s strategy for ease of doing business and propelling the start-up environment.

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