On November 20, the SEBI Board approved certain amendments to the existing securities laws, which are effective from January 01, 2020. Some of these changes are highlighted below:
Revised framework for Portfolio Management Services
Based on the recommendations of the working group constituted to review the SEBI (Portfolio Managers) Regulations, 1993, which had submitted its report in July earlier, the SEBI Board has decided to revise the existing framework for PMS Schemes. Some of the salient features of the proposed new framework are discussed here:
Increase in net worth requirements and minimum investment limit:
The minimum investment in a PMS scheme is proposed to be increased from INR 25 lakh to INR 50 lakh and the existing investments will be grandfathered till the end date of the respective PMS agreement or such date as will be specified by SEBI. This move will exclude clients with smaller portfolios from being covered within the ambit of the Regulations.
Further, with a view to deter non-serious players from operating PMS schemes, the net worth requirement is proposed to be enhanced to INR 5 crore from the existing INR 2 crore, and the existing portfolio managers will be required to meet the enhanced requirements within a period of 36 months from such date as may be specified in the new regulations. The role of portfolio managers is limited to assisting clients in making investment decisions, which requires necessary skills, adequate experience, certifications and appropriate infrastructure, as compared to intermediaries such as clearing members and depository participants which directly deal with clients’ monies or securities. In such cases, stringent capital adequacy requirements are unwarranted and may serve as an unnecessary entry barrier to those entities which possess the requisite qualifications but do not meet the minimum net worth requirements.
Investment restrictions for discretionary and non-discretionary portfolio managers:
While discretionary portfolio managers will be allowed to invest only in listed securities, money market instruments, mutual fund units and such other securities as may be specified by SEBI, investment in unlisted securities by non-discretionary portfolio managers will be capped at 25% of the total assets under management. Under the existing regulations, there are no restrictions on the type of instruments in which investment can be made on behalf of clients, which gave rise to mis-selling of illiquid products by certain portfolio managers.
Additionally, SEBI has prescribed an enhanced eligibility criterion for principal officers and employees with decision making authority of portfolio managers, which will be notified in the new regulations, and a mandatory obligation will be imposed on all portfolio managers to appoint a custodian, except for those providing advisory services. SEBI has also decided to restrict off-market transfers from/to clients’ accounts, except for operational convenience. Through the above changes, SEBI has decided to make the norms more stringent with a view to control the mushrooming of the PMS industry.
Disclosure of defaults on repayment of loans by listed entities
On August 04, 2017, SEBI had issued a circular on “Disclosures by listed entities of defaults on payment of interest/repayment of principal amount on loans from banks / financial institutions, debt securities, etc.”, which required listed entities to disclose defaults in repayment of principal amount or interest on loans from banks or financial institutions to the stock exchanges within one working day from the date of such defaults. However, post opposition from various stakeholders, the circular was subsequently withdrawn by SEBI on September 29, 2017.
In light of the recent defaults in loan repayment obligations by several listed entities, SEBI has decided to reintroduce mandatory disclosures for listed entities in case of defaults in repayment obligations in respect of loans, including cash credit facilities and unlisted debt securities. As per the circular issued by SEBI on November 21, 2019, listed entities must disclose defaults related to loans which continue beyond 30 days, to the stock exchanges within 24 hours from the expiry of 30 days from the date of such default.
In case of cash credit facilities, listed entities will be in default if the outstanding balance remains continuously in excess of the sanctioned limits or drawing power, whichever is lower, for more than 30 days. Such defaults must be disclosed within 24 hours from the expiry of 30 days from the date of such default. With respect to unlisted debt securities, disclosures must be made within a period of 24 hours from the occurrence of the default.
The above amendment will help draw a balance between ensuring transparency and preventing any information asymmetry resulting from immediate disclosures of technical defaults by a day or two owing to a short-term liquidity crunch.
Extension of applicability of Business Responsibility Reporting
Presently, as per Regulation 34 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, (“Listing Regulations”) top five hundred listed entities based on market capitalization are required to include a Business Responsibility Report (BRR) in their annual reports, which describes the initiatives taken by such entities from an environmental, social and governance perspective. The aforesaid requirement of including a BRR in annual reports will now be extended to the top thousand listed entities based on market capitalization.
Review of the Rights Issue Process
With a view to make the rights issue process more efficient and reduce price risks, the SEBI board has decided to reduce the time taken for completion of a rights issue from T+55 days to T+31 days. Further, SEBI has also decided to introduce dematerialised right entitlements and permit trading of the same on stock exchanges, in order to boost liquidity in such instruments.
SEBI had previously issued a discussion paper on May 21, 2019, for a reduction in the overall time taken for completion of a rights issue, wherein SEBI had inter alia proposed to reduce the notice period for setting a record date and replace the requirement of newspaper advertisement for confirming dispatch of letter of offer with an intimation to stock exchanges.
