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

Image Credits:

Photo by Roman Castillo on Pexels

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.

Related Posts

POST A COMMENT

SEBI's Proposals to Plug Loopholes in AIF Regime

On January 19, 2024, the Securities and Exchange Board of India (“SEBI”) published a consultation paper[i] which sets out proposals aimed at enhancing trust and promoting ease of doing business in the Alternative Investment Fund (“AIF”) ecosystem.

SEBI, in the consultation paper, noted that there have been several instances of AIFs being structured to circumvent existing financial sector regulations. The paper records that a majority of the instances of circumvention involved either a single investor or investors of the same group. Instances in which such circumvention occurred were flagged in the consultation paper and are summarised below:

  1. Practice of evergreening of loans

    The subject of a recent notification of the Reserve Bank of India (“RBI“)[ii], finds mention in the consultation paper as well. The RBI noted that certain AIFs systematically funded a regulated lender’s borrower, and in return, the lender would subscribe to the units of an AIF. This would have the effect of lenders avoiding appropriate disclosures and regulatory requirements under RBI’s regulations. The paper acknowledges the steps taken by the RBI in this regard but points to the importance of ensuring that such practices do not recur in other forms.

  1. Setting up of AIF to circumvent FEMA rules

    SEBI noted that certain AIFs were set up for the sole purpose of circumventing the provisions relating to downstream investment as stated in the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.[iii] Attention was drawn to cases involving the appointment of Indian managers or sponsors by AIFs set up by foreign investors, wherein the AIFs were used to invest in an industry sector beyond the limit prescribed or in sectors prohibited for foreign direct investment.

  1. AIFs with single or very few investors availing benefits under QIB regulations

    SEBI noted that certain AIFs with a single or very few investors invested in multiple initial public offerings under the Qualified Institutional Buyer (“QIB”) quota, and thus were able to avail benefits available to QIBs under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018. These AIFs would otherwise have been ineligible for QIB status on their own.

Proposed Approach

SEBI seeks to approach these issues pragmatically. At the outset, SEBI notes in the consultation paper that the regulatory concerns ought to be addressed in a proportionate and risk-based manner. Secondly, this must be done simultaneously while facilitating ease of doing business and ease of compliance. It is essential to note that any proposed intervention on SEBI’s end does not seek to take away the AIFs’ flexibility to carry out genuine and legitimate investments. Some of the significant proposals are summarised below:

  • Setting up a Standards Forum for AIFs (“SFA”) for implementing the AIF regulations by formulating relevant standards.
  • Introducing a general obligation for AIFs, and their managers and key managerial personnel, to ensure that they do not operate in any way which would circumvent the regulations of any regulator.
  • SEBI has proposed moving forward in line with the “trust, but verify” principle to ensure compliance and adherence to the AIF regulations. This will be done by the standards set by the industry, in consultation with SEBI.
  • In furtherance of a previous SEBI circular[iv], the paper notes that managers of AIFs have the ability to either not make the investment or exclude the investment of an investor if the participation of such an investor leads to a violation of any regulation.

Keeping in mind the above, SEBI proposes to insert a new provision in Chapter IV of the SEBI (AIF) Regulations, 2012.[v] The said Chapter deals with the general obligations and responsibilities of an AIF. The proposed provision essentially places an obligation on the manager and key managerial personnel of an AIF to undertake necessary due diligence on their investors and investments, to prevent any circumvention of the regulations of any financial sector regulator. A proviso is also sought to be added, which states that the manager of an AIF shall either not make an investment or exclude the particular investor from the investment if it is found that the investment leads to circumvention of any existing regulations.

Conclusion

Following RBI’s clampdown on lenders and AIFs bypassing its regulations, SEBI’s proposal seeks to further prevent industry participants from circumventing the regulations of any regulator through novel modi operandi. The proposal marks a positive step in the regulatory environment governing AIFs, as it seeks to balance the interests of legitimate investments in the industry, with proper compliance with all regulations. Additionally, with the proposal putting forth the idea of “trust, but verify”, industry participants will themselves be responsible for setting up suitable standards of reporting and operating, as may be formulated by the SFA.

References:

[i] Available at: https://www.sebi.gov.in/reports-and-statistics/reports/jan-2024/consultation-paper-on-proposal-to-enhance-trust-in-the-alternative-investment-funds-aif-ecosystem-to-facilitate-ease-of-doing-business-measures_80799.html

[ii] RBI Notification dated December 19, 2023; available at: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12572&Mode=0

[iii] Available at: https://incometaxindia.gov.in/Documents/Provisions%20for%20NR/FEM-Non-debt-Instruments-Rules-2019.htm

[iv] SEBI circular dated April 10, 2023; available at: https://www.sebi.gov.in/legal/circulars/apr-2023/guidelines-with-respect-to-excusing-or-excluding-an-investor-from-an-investment-of-aif_69995.html

[v] Available at: https://www.sebi.gov.in/legal/regulations/feb-2023/securities-and-exchange-board-of-india-alternative-investment-funds-regulations-2012-last-amended-on-february-07-2023-_69231.html

Image Credits:

Photo by utah778 on Unsplash

Following RBI’s clampdown on lenders and AIFs bypassing its regulations, SEBI’s proposal seeks to further prevent industry participants from circumventing the regulations of any regulator through novel modi operandi. The proposal marks a positive step in the regulatory environment governing AIFs, as it seeks to balance the interests of legitimate investments in the industry, with proper compliance with all regulations. Additionally, with the proposal putting forth the idea of “trust, but verify”, industry participants will themselves be responsible for setting up suitable standards of reporting and operating, as may be formulated by the SFA.

Related Posts

POST A COMMENT

REIT, InvIT Subordinate Units: Examining SEBI’s Additional Proposals

On 10 January 2024, the Securities and Exchange Board of India (“SEBI”) released a consultation paper, titled “Additional Proposals Regarding Framework for Issuance of Subordinate Units–REITs and InvITs”.[i] This paper adds on to the proposals suggested by SEBI in its consultation paper on the same subject, issued last month (“2023 Proposals”).[ii] The latest consultation paper by SEBI suggests substantial changes to the regulatory framework regarding subordinate units issued by Real Estate Investment Trusts (“REITs”) or Infrastructure Investment Trusts (“InvITs”), which have been discussed in this article.

Background

The existing framework governing REITs and InvITs provides for all unit holders to have equal rights, as regards voting rights and right of distribution. However, it is permissible to issue “subordinate units” exclusively to sponsors or their associates. Sponsors under the SEBI (REIT) Regulations, 2014, are those persons who set up the REIT.[iii] The subordinate units issued to sponsors have inferior voting rights or any other rights compared to ordinary units.[iv] The consultation paper, thereby, proposes changes to three aspects linked to the issuance of subordinate rights by REITs and InvITs. These are (i) incorporating a ceiling on subordinate units which can be issued to sponsors or their associates; (ii) bringing uniformity in the nature of rights conferred by subordinate units; and (iii) dealing with changes in terms and conditions of the subordinate units after issuance.

Additional Proposals

The first proposal deals with the specification of a ceiling (in percentage) on subordinate units issued by REITs or InvITs. The paper acknowledges that subordinate units are primarily issued to bridge the difference in the valuation of an asset, as perceived by the sponsor and the REIT or InvIT. This point is explained with an illustration, wherein the sponsor’s asset valuation and the REIT’s asset valuation have a difference of INR 100 crores. In such a case, the REIT can issue subordinate units for this amount. The terms of issuance of such REITs may also provide for the conversion of the subordinate units into ordinary units after 5 years if specific pre-decided performance benchmarks are satisfied.

The problem identified by SEBI with the existing framework is two-fold. Firstly, if the performance benchmarks are met, the units will automatically be converted into ordinary units, resulting in the benefits of capital appreciation accruing only to the sponsor. Secondly, the conversion to ordinary units would necessarily dilute the holding of the existing unit holders of the REIT or InvIT. Keeping this in mind, the proposal seeks to limit the issuance of subordinate units at the time of acquisition to 10% of the price at which the asset is acquired.

The second aspect covered in the paper deals with bringing uniformity in the nature of rights that subordinate units confer on the sponsors or their affiliates. Owing to the lack of clarity on what kind of rights the subordinate units confer on the unit holders, it is proposed that the subordinate units shall only carry inferior voting rights, inferior distribution rights, or both. In addition to this, REITs will not be permitted to issue multiple classes of subordinate units. This means that an REIT would not be able to issue one class of subordinate units with 40% distribution rights and another class with 70% distribution rights.

The third aspect revolves around the permissibility of changing terms and conditions after the issuance of the units. The 2023 Proposals envisaged a one-time extension of the entitlement date, which is the date on which the subordinate units get converted into ordinary units if the required benchmarks are satisfied. However, this one-time extension of the entitlement date was subject to stringent conditions. Recognising the importance of the terms and conditions of the issuance of the subordinate units, which include inter-alia the performance benchmark agreed upon for conversion into ordinary units, SEBI proposes to prohibit any amendment to the terms and conditions of the subordinate units after their issuance. 

Conclusion

SEBI’s consultation paper seeks to expand on the 2023 Proposals and make it even more comprehensive and detailed. The proposals aim to prioritise the interests of the individual unit holders of the REITs and InvITs, especially retail investors. This is evident from the consultation paper, with many of the proposed changes being put forth with the intention of putting investors or unit holders on the same pedestal as the sponsor, a case in point being the capped limit proposed for issuance of subordinate units so that the holding of the investors is not diluted by a sizeable margin. Additionally, the proposals concerning the nature of rights emanating out of subordinate units, and prohibition on changing vital terms and conditions after the issuance of the units, are an effort to bring in much-needed uniformity and clarity to the framework for issuance of subordinate units by REITs and InvITs.

References:

[i] Available at: https://www.sebi.gov.in/reports-and-statistics/reports/jan-2024/consultation-paper-on-additional-proposals-regarding-framework-for-issuance-of-subordinate-units-reits-and-invits_80548.html.

[ii] Consultation Paper on Framework for issuance of subordinate units and Unit Based Employee Benefits –REITs and InvITs; available at: https://www.sebi.gov.in/web/?file=https://www.sebi.gov.in/sebi_data/attachdocs/dec-2023/1702062121907.pdf#page=1&zoom=120,-6,792

[iii] Regulation 2(zt) of the SEBI (REIT) Regulations, 2014; available at: https://www.sebi.gov.in/legal/regulations/feb-2023/securities-and-exchange-board-of-india-real-estate-investment-trusts-regulations-2014-last-amended-on-february-14-2023-_68061.html

[iv] Regulation 4(2)(g) of the SEBI (REIT) Regulations, 2014; available at:  https://www.sebi.gov.in/legal/regulations/feb-2023/securities-and-exchange-board-of-india-real-estate-investment-trusts-regulations-2014-last-amended-on-february-14-2023-_68061.html

Image Credits:

Photo by Pasqualino Capobianco on Unsplash

SEBI’s proposals aim to prioritise the interests of the individual unit holders of the REITs and InvITs, especially retail investors. This is evident from the consultation paper, with many of the proposed changes being put forth with the intention of putting investors or unit holders on the same pedestal as the sponsor, a case in point being the capped limit proposed for issuance of subordinate units so that the holding of the investors is not diluted by a sizeable margin. Additionally, the proposals concerning the nature of rights emanating out of subordinate units, and prohibition on changing vital terms and conditions after the issuance of the units, are an effort to bring in much-needed uniformity and clarity to the framework for issuance of subordinate units by REITs and InvITs.

Related Posts

POST A COMMENT

Fast Track Public Issue of Debt Securities: Analysing SEBI’s Paper

Recently, the Securities and Exchange Board of India (“SEBI”) published a consultation paper[1] on the review of provisions under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015[2] (“LODR Regulations”) and the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021[3] (“NCS Regulations”). This consultation paper seeks to promote ease of doing business (“EODB”) and reduce compliance burdens on corporate entities by suggesting certain amendments to the LODR Regulations and NCS Regulations. In addition to the proposed amendments, the consultation paper also introduces the concept of ‘fast track’ public issuance and listing of debt securities.

In the Union Budget for Financial Year (“FY”) 2023-24, one of the announcements was regarding the need to carry out a comprehensive review of existing regulations to ease, simplify and reduce the cost of compliance. To implement the same, SEBI constituted a working group to suggest measures to promote EODB for listed debt issuers and review the LODR and NCS Regulations.

Proposed Relaxations to the LODR and NCS Regulations

Last year, a circular[4] issued by SEBI mandated the face value of each debt security[5] or non-convertible redeemable preference share (“NCRPS”) issued on a private placement basis to be Rs. 1 Lakh, which has now been proposed to be reduced to Rs. 10,000.00. The reasoning behind this proposal is to promote investments by non-institutional investors for whom such a high ticket size would act as an impediment to accessing the market for such securities. 

Clause 3.3.10 of Schedule I of the NCS Regulations mandates that the debt issuer company has to disclose its audited financial statements for the last three FYs in its offer document.[6] To reduce the file size of the offer document, the consultation paper provides that the statements should be accessible through a QR Code which opens the web link to the audited financial statements on the stock exchange’s website.  

Further, the said Schedule states that corporate entities should provide specified information for the preceding three financial years and the current financial year.[7] The consultation paper proposes that instead of providing the information for the current financial year (i.e. as on date) it shall be limited to the latest quarter of that financial year. This is to make it easier for debt issuers to close books of account to finalise certain information such as related party transactions and borrowings.

Schedule I of the NCS Regulations also specifies that the disclosures with respect to record date have to be made as part of the summary sheet in the offer document.[8] In market parlance, the shut period refers to the number of days between the record date and the interest payment or redemption date. The consultation paper proposes to standardise the record dates at 15 days before the due date of payment of interest or redemption.

According to Regulation 40 of NCS Regulations, the debt issuer is required to obtain a due diligence certificate from the debenture trustee at the time of filling of the draft offer document and at the time of listing.[9] The consultation paper provides a format for the due diligence certificate which appears to be aimed at harmonising the formats for the certificate under Chapter II of SEBI’s Master Circular for Debenture Trustees and the NCS Regulations.

Regulation 52(8) of LODR Regulations[10] requires a listed entity to publish financial results within two working days (on conclusion of the board of directors’ meeting) in newspapers. SEBI’s paper proposes to leave it to the discretion of the listed entity to decide whether or not to publish the results in newspapers. The reasoning seems to be that the financial results will already be sent to stock exchanges within 30 minutes of the closure of board meetings, and on board approval, the results get published on the websites of the entity and the stock exchange.

Fast Track Public Issuance and Listing of Debt Securities

The consultation paper notes that approximately 98% of the funds raised through the issuance of debt securities are on a private placement basis and nearly 95% of the issuers utilise the private placement route to meet their debt fund requirements. At present, Regulation 5 of the NCS Regulations provides that an issuer can raise funds through a public issuance of debt securities or by way of a private placement of non-convertible securities.[11] In India, the corporate bond market is largely a private placement market. Moreover, the non-institutional participation in the corporate debt market has been less than 2%. Thus, the present framework is introduced to promote public issuances in the corporate debt market and to boost the participation of non-institutional investors.

Eligibility Criteria for the Fast Track Issue Process

  • The issuer should be eligible as per Regulation 5 of the NCS Regulations.
  • The issuers NCSs or specified securities or units of REITs or InvITs should be listed on a stock exchange for a minimum period of three consecutive years.
  • The issuer should be in compliance with the LODR, REIT, and InvIT Regulations at the time of making the issue.
  • Debt securities being issued should have been assigned a rating of not less than “AA-” or equivalent.
  • There has been no downgrade in the rating of the issuer, by two notches or more in the last 2 financial years.
  • No regulatory action under such regulations, as specified from time to time, is pending against the issuer or its promoters or directors, sponsors, or investment managers, as applicable, before the Board. The issuer will be subject to such requirements as may be specified by its own principal or other financial regulator.
  • The issuer shall not be in default of:
    • Repayment of deposits or interest payable or any term loan or interest payable thereon.
    • Redemption of preference shares or debt securities and interest payable thereon.
    • Payment of dividend to any shareholder.

Proposed Fast Track Issue Process

Sr. No.

Key Steps

Recommendations regarding Fast Track Public Issue

1.       

Requirement of Prospectus

It is proposed to extend the applicability of the GID[12] and KID[13] concepts for the introduction of a common document for both fast track public issues and private placements.

2.       

Filing time for Draft GID

Comments need to be sought from the public on a draft offer document within 2 working days.

3.       

Disclosures in GID and KID

GID should consist of all the disclosures as mentioned under Schedule I of NCS Regulations.

KID should contain: Part A (all relevant disclosures not in GID) and Part B (details of the offer of debt securities)

4.       

Digital Statutory Advertisement

Newspaper advertisements could be done away with and issuers may be allowed to utilise electronic modes including advertisements on relevant websites.

5.       

Period of Subscription

Fast Track Public Issue shall be kept open for a minimum of 1 working day and a maximum of 10 working days, with an extension of 1 working day.

6.       

Minimum Subscription

The requirement of minimum subscription for banks and entities in the financial sector may be done away with.

7.       

Retention of Over Subscription

Retention limit is to be fixed at a maximum of 5 times of base issue size.

8.       

Timeline for Listing

3 days from the date of closure of the issue.

9.       

Preparation of Offer Document

Timeline brought down to 2 – 3 weeks.

Conclusion

The consultation paper demonstrates a strong commitment towards increasing the ease of doing business and improving disclosure requirements. Further, SEBI has addressed specific issues to enhance the participation of retail investors and facilitate public issuances in the debt market. While provisions pertaining to QR code for accessing audited financial statements and discretion to publish financial results in newspapers will be of immense help to stakeholders, the same are likely to have positive spillover effects of promoting digitisation as well.

References:

[1]Consultation paper on review of provisions of NCS Regulations and LODR Regulations for ease of doing business and introduction of fast-track public issuance of debt securities, available at https://www.sebi.gov.in/reports-and-statistics/reports/dec-2023/consultation-paper-on-review-of-provisions-of-ncs-regulations-and-lodr-regulations-for-ease-of-doing-business-and-introduction-of-fast-track-public-issuance-of-debt-securities_79762.html

[2]https://www.sebi.gov.in/legal/regulations/oct-2023/securities-and-exchange-board-of-india-listing-obligations-and-disclosure-requirements-regulations-2015-last-amended-on-october-23-2023-_78921.html

[3]https://www.sebi.gov.in/legal/regulations/jul-2023/web-upload-of-the-securities-and-exchange-board-of-india-issue-and-listing-of-non-convertible-securities-regulations-2021-last-amended-on-july-6-2023-_73664.html

[4] SEBI vide circular dated October 28, 2022, specified provisions pertaining to denomination of issuance and trading of Non-convertible Securities (now incorporated in Chapter V of the Operational Circular no. SEBI/HO/DDHS/P/CIR/2021/613 dated August 10, 2021).

[5] ‘Debt Securities’ are defined under Section (2)(k) of the NCS Regulation as non-convertible debt securities with a fixed maturity period which create  or  acknowledge  indebtedness  and  includes debentures,  bonds  or  any  other security whether  constituting  a  charge  on  the  assets/properties  or  not, but  excludes security  receipts,  securitized  debt instruments, money  market  instruments  regulated  by the Reserve Bank of India, and bonds issued by the Government or such other bodies as may be specified by SEBI.

[6] 3.3.10 (a) The audited financial statements (i.e. profit and loss statement, balance sheet and cash flow statement) both on a standalone and consolidated basis for a period of three completed years, which shall not be more than six months old from the date of the issue document or issue opening date, as applicable. Such financial statements shall be audited and certified by the statutory auditor(s) who holds a valid certificate issued by the Peer Review Board of the Institute of Chartered Accountants of India (“ICAI”).

[7] Schedule – I of Securities and Exchange Board of India (Issue and Listing of Non-Convertible Securities) Regulations 2021.

[8] Summary of terms – Terms to be included in the issue document.

[9] 40. The debenture trustee shall, at the time of filing the draft offer document with the stock exchange(s) and prior to opening of the public issue of debt securities, furnish to the Board and stock exchange(s), a due diligence certificate: (a) in case of secured debt securities, in the format as specified in Schedule IV of these regulations; and (b) in case of unsecured debt securities, in the format as specified in Schedule IVA of these regulations.

[10] 52 (8) The listed entity shall, within two working days of the conclusion of the meeting of the board  of  directors,  publish  the  financial  results  and the  line  items referred  to  in  sub-regulation (4), in at least one English national daily newspaper circulating in the whole or substantially the whole of India; Provided that if the listed entity has submitted both standalone and consolidated financial results, to the stock exchange(s), it shall publish consolidated financial results along with the line items referred to in sub-regulation (4), in the newspaper.

[11] Regulation 5 of Securities and Exchange Board of India (Issue and Listing of Non-Convertible Securities) Regulations 2021.

[12] GID (General Information Document) will be common for all issues made by the issuer for the year (public or private).

[13] KID (Key Information Document) for the private placement will be sent only to a select group of persons for subscription, whereas the KID for a fast-track public issue will be made available to the public.

Image Credits:

Photo by freedomz on Canva

The consultation paper demonstrates a strong commitment towards increasing the ease of doing business and improving disclosure requirements. Further, SEBI has addressed specific issues to enhance the participation of retail investors and facilitate public issuances in the debt market. While provisions pertaining to QR code for accessing audited financial statements and discretion to publish financial results in newspapers will be of immense help to stakeholders, the same are likely to have positive spillover effects of promoting digitisation as well.

Related Posts

POST A COMMENT

REIT, InvIT Subordinate Units: Insights into Proposed Framework

The Securities and Exchange Board of India (“SEBI”) recently issued a consultation paper dated December 9, 2023 (“Consultation Paper”)[1], that deals with the lacunae in the SEBI (Real Estate Investment Trusts) Regulations, 2014 (“REIT Regulations”)[2] and SEBI (Infrastructure Investment Trusts) Regulations, 2014 (“InvIT Regulations”)[3] regarding the issuance of subordinate units and employee benefits. The objective of the Consultation Paper is to propose a regulatory framework for issuing subordinate units of REITs and InvITs to sponsor(s), their associates and sponsor group. Vide this Consultation Paper, SEBI also seeks opinion on the framework for unit-based benefits for the employees of the Manager of REIT and the Investment Manager of InvIT.

Framework for Issuing Subordinate Units

Regulation 4(2)(g) of the REIT Regulations and Regulation 4(2)(h) of the InvIT Regulations provide for equality among unit holders, ensuring no superior voting or additional rights for any individual. However, the proviso to these regulations allows for the issuance of subordinate units exclusively to sponsors and their associates. These subordinate units, while maintaining an overall sense of equality, have inferior voting or other rights compared to regular units, establishing a distinct category for sponsors and associates within the regulatory framework. Nevertheless, SEBI, to date, has not prescribed a mechanism for the mode and conditions of issuing subordinate units to sponsors and their associates.

SEBI’s Hybrid Securities Advisory Committee (“HySAC”)[4] has proposed several significant norms central to the fact that subordinate units are issued only to the sponsor(s), its associates and sponsor group and these units are designed to bear inferior voting or other rights compared to regular units. Three significant aspects highlighted in the consultation paper are noteworthy. Firstly, these subordinate units can be issued during the initial or subsequent offerings, but any post-initial issuance necessitates prior approval from 75% of unitholders by value, excluding votes from sponsors, associates, and related parties. Secondly, subordinate units come with a mandatory lock-in period until conversion to ordinary units or extinguishment, with a minimum one-year gap between issuance and conversion. The regulation prescribes that converted units shall be listed and tradeable on the stock exchanges only upon approval from the stock exchanges. Finally, following the issuance of subordinate units, any proposed modifications to their terms and conditions highlighted in the REIT or InvIT Trust Deed require approval from 75% of ordinary unitholders by value and unanimous approval from subordinate unitholders. The framework also covers the recommendation and conversion process, performance benchmarks the requirement of audit, and the need for unitholder approvals in case of changes to the terms and conditions of subordinate units.

Employee Incentives for REIT or InvIT Management

Any company or LLP or body corporate incorporated in India which manages assets and investments of the REIT or InvIT and undertakes operational activities of the trust constitutes a manager of the REIT[5] or Investment manager of InvIT[6] (collectively referred to as “Management”), respectively. In its Consultation Paper[7], SEBI proposes Unit Based Employee Benefits (“UBEB”) catered toward Employees of the Manager of REIT or Investment Manager of InvIT (“REIT or InvIT Employees”), in the hope that structure would foster better alignment of REIT or InvIT Employee interests with the respective trust.

Key elements of this framework include the creation of a distinct Employee Benefit Trust (“EBT“) at the discretion of the Management of the respective trusts. EBTs are designed to acquire units of REIT or InvIT from the shareholders of the Management or via subscription in lieu of management fees. If units are allotted to the EBT in exchange for management fees, specific conditions come into play, including the requirement for approval by 75% of unitholders and considerations for pricing based on factors like net asset value and market price. Importantly, units of such nature cannot be sold or transferred for purposes other than that of employee benefit. The framework additionally ensures regulatory compliance by imposing SEBI restrictions[8] on the Manager, Investment Manager, and associated businesses. The Nomination and Remuneration Committee is responsible for creating guidelines that guarantee conformity to securities regulations, with a focus on legal compliance and transparency.

Analysis

The proposed framework under the consultation paper appears to be comprehensive and addresses several important aspects such as eligibility, voting rights, approval processes, and disclosure requirements, providing a robust structure for market participants.  Also, the proposal regarding the creation of a separate EBT and mechanisms for it to receive REIT or InvIT units is aimed at balancing overall trust interest with employee incentives, emphasising transparency and accountability of management. While the framework aligns interests and emphasises transparency, it allows for the issuance of units to be done only once a year, within sixty days after the completion of the annual valuation exercise, which seems excessive in light of the rapid real estate market fluctuations, potentially leading to the EBT acquiring the unit at a price higher than market value. 

References:

[1] Consultation paper on Framework for issuance of subordinate units and Unit Based Employee Benefits – REITs and InvITs, available at https://www.sebi.gov.in/reports-and-statistics/reports/dec-2023/consultation-paper-on-framework-for-issuance-of-subordinate-units-and-unit-based-employee-benefits-reits-and-invits_79760.html

[2] Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations 2014 [Last amended on February 14, 2023], available at https://www.sebi.gov.in/legal/regulations/feb-2023/securities-and-exchange-board-of-india-real-estate-investment-trusts-regulations-2014-last-amended-on-february-14-2023-_68061.html

[3] Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014 [Last amended on February 14, 2023], available at https://www.sebi.gov.in/legal/regulations/feb-2023/securities-and-exchange-board-of-india-infrastructure-investment-trusts-regulations-2014-last-amended-on-february-14-2023-_68062.html

[4] SEBI’s Hybrid Securities Advisory Committee (“HySAC”) deliberated on November 15, 2022

[5] Reg. 2(1)(w) of the Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations 2014 [Last amended on February 14, 2023], available at https://www.sebi.gov.in/legal/regulations/feb-2023/securities-and-exchange-board-of-india-real-estate-investment-trusts-regulations-2014-last-amended-on-february-14-2023-_68061.html

[6] Reg. 2(1)(zf) of the Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014 [Last amended on February 14, 2023], available at https://www.sebi.gov.in/legal/regulations/feb-2023/securities-and-exchange-board-of-india-infrastructure-investment-trusts-regulations-2014-last-amended-on-february-14-2023-_68062.html

[7] Decided on the basis of deliberations of SEBI’s Hybrid Securities Advisory Committee (“HySAC”) on February 28, 2023 and June 1, 2023

[8] Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 [Last amended on November 24, 2022], available at https://www.sebi.gov.in/legal/regulations/nov-2022/securities-and-exchange-board-of-india-prohibition-of-insider-trading-regulations-2015-last-amended-on-november-24-2022_65864.html and the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 [Last amended on January 25, 2022], available at https://sebi.gov.in/legal/regulations/jan-2022/securities-and-exchange-board-of-india-prohibition-of-fraudulent-and-unfair-trade-practices-relating-to-securities-market-regulations-2003-last-amended-on-january-25-2022-_55604.html

Image Credits:

Photo by Christian Wiediger on Unsplash

The proposed framework under the consultation paper appears to be comprehensive and addresses several important aspects such as eligibility, voting rights, approval processes, and disclosure requirements, providing a robust structure for market participants.  Also, the proposal regarding the creation of a separate EBT and mechanisms for it to receive REIT or InvIT units is aimed at balancing overall trust interest with employee incentives, emphasising transparency and accountability of management. While the framework aligns interests and emphasises transparency, it allows for the issuance of units to be done only once a year, within sixty days after the completion of the annual valuation exercise, which seems excessive in light of the rapid real estate market fluctuations, potentially leading to the EBT acquiring the unit at a price higher than market value. 

Related Posts

POST A COMMENT

Insider Trading Regulations: SEBI’s Proposals at a Glance

On November 24, 2023, the Securities and Exchange Board of India (SEBI) released a consultation paper with proposals to facilitate the adoption of trading plans (TPs) by insiders (such as individuals who are part of senior management or key managerial personnel, etc.) who may be perpetually in possession of Unpublished Price Sensitive Information (UPSI).

The Board considered it necessary to bring in changes to the 2015 Regulations, in light of the submission of a meagre number of TPs (i.e., 30) by insiders to stock exchanges over the last five years. In its report, the Working Group constituted by SEBI has zeroed in on existing provisions that deter insiders from adopting TPs and suggested certain amendments to the SEBI (Prohibition of Insider Trading) Regulations, 2015.

The recommendations contained in the consultation paper are as follows: –

  • Cool-off period to be brought down

Presently, a TP can be executed only after 6 months from the date of its public disclosure. However, market conditions while implementing the TP may be highly distinct from the time it was formulated, therefore, the consultation paper proposes to reduce the cool-off period, i.e., the period between the public disclosure of the TP and its execution, from 6 months to 4 months.

  • Reduction of the minimum coverage period

The consultation paper envisages reducing the minimum period of trading from 12 months to 2 months, as market uncertainty makes it difficult for insiders to plan 12 months in advance.

  • Removal of the black-out period requirement

Another major amendment proposed is the removal of the black-out period requirement. As per Regulation 5(2)(ii) of the 2015 Regulations, a TP should “not entail trading for the period between the twentieth trading day prior to the last day of any financial period for which results are required to be announced by the issuer of the securities and the second trading day after the disclosure of such financial results”. SEBI noted in its consultation paper that such a restriction considerably reduces the number of trading days available in the year for trading using a TP. Accordingly, the consultation paper has proposed that this provision be deleted in order to enable flexibility to execute trades.

  • Insiders can set price limits for trades

As per the draft amendments, an insider would be eligible to set price limits during the formulation of a TP. This is to protect insiders from the adverse effects of fluctuations in the price of securities, which would need to be within +/-20% of the closing price on the date of submission of the TP. In case of price fluctuations beyond the limit, the trade cannot be executed, i.e., an insider with a TP cannot go beyond the limit.

The limits so specified have to be within the stipulated range to ensure that insiders don’t misuse the provision and set unrealistic price limits to influence market participants.

  • Contra-trade restrictions to apply to trades executed under TP

Noting that the necessity to carry out contra-trade within a short period of time arises only on account of personal exigencies which cannot be planned in advance through TPs, it has been proposed to withdraw the exemption granted in this regard.

  • Disclosure of TP

  1. After approval of TP, the compliance officer has to notify the plan to stock exchanges (on which the securities are listed) within 2 days. Currently, there is no time limit in place for the same.
  2. The Working Group has further proposed certain suggestions to protect the privacy of insiders by masking their personal details while disclosing the TP to stock exchanges, as it may potentially lead to misuse or abuse of TPs by other insiders. Three such alternatives have been put forward with respect to the furnishing of personal details of insiders such as name, designation and PAN – a) masking of personal details b) continuing the existing procedure c) making two separate disclosures; one containing the full disclosure to be kept confidential by stock exchanges and the other without personal details to be publicly made available. A common reference number with a time stamp is proposed to be added on filings which will act as a unique identifier to prevent any possible misuse arising from masking of names from the public.
  3. Additionally, it is recommended that a format for reporting details of TP be prepared in consultation with market participants.

Remarks

Overall, the proposals suggested in the consultation paper are broadly positive, since it appears that SEBI has received and appreciated the challenges faced by insiders using trading plans. We will need to wait to see what public comments are received, and whether SEBI implements these proposed changes by notifying amendments to the SEBI (Prohibition of Insider Trading) Regulations soon.

Image Credits:

Photo by uschools on Canva 

As per the draft amendments, an insider would be eligible to set price limits during the formulation of a TP. This is to protect insiders from the adverse effects of fluctuations in the price of securities, which would need to be within +/-20% of the closing price on the date of submission of the TP. In case of price fluctuations beyond the limit, the trade cannot be executed, i.e., an insider with a TP cannot go beyond the limit.

Related Posts

POST A COMMENT