In its recent board meeting on December 20, the Securities and Exchange Board of India (SEBI or Regulator) approved a slew of proposals in relation to existing securities laws. Some of the approved decisions are highlighted below:
I. Changes to strengthen governance in Market Infrastructure Institutions.
Pursuant to a review of the framework governing market infrastructure institutions such as stock exchanges, clearing corporations and depositories (MIIs), the SEBI board has approved certain amendments which will come into effect after 180 days from the date of notification of such amendments. Some of these amendments follow the recommendations of the committee constituted by SEBI, which had submitted its report on November 09.
Key Changes:
a. Structure
The functions of MIIs have been categorised into three verticals, namely: (i) Critical Operations; (ii) Regulatory, Compliance and Risk Management (including acting as frontline regulators along with investor grievance redressal); and (iii) Other functions, including business development. Each of these functions have to be overseen by key managerial personnel (KMP), who will be on the same hierarchical level. The SEBI board has also agreed that the first two verticals of the MIIs shall be prioritised over the third one, in terms of resource allocation.
It is further stated that the functioning of MIIs and their statutory committees shall be internally evaluated annually and external evaluation shall be done by an independent entity every three years.
b. Board Governance
MIIs will now be required to appoint Public Interest Directors (PIDs) with skillset and experience in technology, law and regulatory, finance and accounts and capital markets.
Further, to increase accountability the PIDs will now be required to additionally submit a report to SEBI, apart from the board of the MII, after their half-yearly meetings. The SEBI board has also approved the establishment of a new statutory committee by the MIIs, i.e., the investment committee which will evaluate the investments and CSR activities of the MII.
MIIs will also be required to disclose the agenda and minutes of the board meeting(s) in relation to regulatory, compliance and risk management areas, on its website.
c. Accountability of KMPs
Employees of MIIs will be classified as KMPs based on their activities and hierarchy, and their roles and responsibilities will be clearly delineated and segregated. Further, KMPs will be appointed or removed based on the recommendations of the Nomination and Remuneration Committee, and their performance would have to be evaluated every six months.
MIIs would also be required to appoint a Chief Risk Officer, to handle risks associated with the MII. Further, the Chief Regulatory Officer or the Compliance Officer will be required to submit a quarterly report to SEBI on non-compliances.
The SEBI board has also stated that board members and the KMPs of MIIs will be held accountable if they fail to report any wrongdoing(s), that they are aware of.
In another key development, employees of MII will be barred from simultaneously being employed in a subsidiary of the MII.
d. Data Sharing
MIIs will also be required to frame an internal policy for monitoring and sharing of data with other parties.
Our View
Optimal utilisation of resources and delineation of verticals across MIIs is a welcome move, and regulatory and risk management verticals have been prioritised keeping in mind the dual role of MIIs as business enterprises and front-line regulators. Enhanced reporting requirements and periodic assessments have been aimed at enhancing transparency and timely risk management, especially in light of recent governance lapses. While the above measures would enhance accountability, the board must also keep in mind concerns pertaining to confidentiality of information and practical business considerations. The barring of MII employees from working at their subsidiaries should be re-looked at, as it would erode accountability and transparency of the subsidiary.
II. Enhanced risk management framework for Qualified Stock Brokers (QSBs)
In view of the fact that failure of certain stock brokers that command a significant market share could lead to widespread impact on investors and the securities market, the SEBI board has approved amendments to the SEBI (Stock Brokers) Regulations, 1992 to designate brokers handling large number of clients, large amount of client funds and large trading volumes as QSBs. These QSBs will designated based on identified parameters, will be subject to enhanced risk management obligations and monitoring by SEBI and MIIs.
Our View
In the past, unethical practices by brokers including misusing clients’ securities and funds have eroded the confidence of investors in the securities market. The Regulator’s proposal to designate brokers handling large number of clients and large trading volumes as QSBs and subjecting them to enhanced governance standards is thus a welcome move and for the benefit of investors. It should, however, be ensured that the QSBs are not permitted to advertise such status in order to allude that they are SEBI-preferred brokers in any sense, as the same would not only defeat SEBI’s objectives but also create an imbalance in the competitive landscape.
III. Revised regulatory framework for green debt securities
Recognising the relevance of sustainable finance and need the to prevent ‘greenwashing’, SEBI has approved certain amendments to the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (NCS Regulations). These including expanding the definition of green debt securities to include pollution prevention and control and eco-efficient products, etc., as eligible projects which could be financed. Further, SEBI will introduce the concept of blue bonds, for projects regarding water management and marine sector, and yellow bonds, for solar energy related initiatives. Furthermore, the Regulator aims to address the practice of greenwashing, by specifying certain dos and don’ts.
Our View
By diversifying the projects which could avail sustainable financing, the above decisions, apart from being in line with international principles, are also likely to create a more nuanced green bond framework that is aligned to the needs of the domestic market.
IV. Appointment of nominee directors and specification of public issue timelines under the NCS Regulations
Two measures aimed at protecting debenture holders’ interest and improving the efficiency of the bond market have been taken by the Regulator. Firstly, in the event of a default, the board of directors of the issuer would be required to appoint person nominated by the debenture trustee as a director of the company. Secondly, a public issue of debt securities or non-convertible redeemable preference shares will have to be kept open for a minimum period of 3 working days and a maximum period of 10 working days.
Our View
Appointment of a nominee director of the debenture trustee in the event of a default will help safeguard the interest of debenture holders. The prescription of timelines will also bring about uniformity with respect to public issue of debt securities, since prior to the Board’s approval there was no timeline stipulated under the law.
V. Change in corporate governance norms and streamlining of certain provisions for REITs and InvITs.
Presently, corporate governance norms applicable to listed companies were applicable only to those REITs and InvITs with > INR 500 Crores. However, SEBI has approved the proposal to mandate that the corporate governance norms (to the extent possible) will apply to all REITs and InvITs, regardless of whether any debt security is issued by them.
Additionally, the regulations governing REITs and InvITs are to be amended to provide for clarifications regarding certain provisions. The tenure of the auditor of REIT/InvIT manager will be till the fifth AGM instead of the current ‘5 consecutive years’, to account for the period during which the AGM is conducted after completion of the 5 years’ tenure of managers. Investment by REIT/InvITs in overnight funds will be considered as cash/cash equivalent to compute aggregate borrowings of the REIT, among other important iterations of the definition.
Further, the statutory auditor of REIT/ InvIT will be required to undertake limited review of audit of all the entities whose accounts are consolidated with that of the REIT/InvIT. Lastly, unclaimed or unpaid distributions for REIT/ InvIT would be required to be transferred to the ‘Investor Protection and Education Fund’.
VI. Amendments to the Buyback Framework
The SEBI (Buyback of Securities) Regulations, 2018 prescribe three methods of completing the buyback of shares via: tender offer, the stock exchanges and the reverse book building process.
SEBI has given its nod to remove buyback through stock exchange from the existing framework in a phased manner. Further, as a stop-gap measure, it has decided to increase the minimum utilisation limit under this method to 75% from the earlier 50%.
For the tender offer route, the requirement of filing a letter of offer with SEBI will be done away with and the timeline for completion of the buyback will be resultantly reduced by 18 days. SEBI has also allowed the upward revision of buyback price up to one day prior to the record-date. Further, for bringing transparency and standardisation, SEBI has provided the details of all places where the advertisements for buyback will need to be provided by the company.
Our View
The majority of buybacks happen via the tender offer route and easing the restrictions around it would expedite the process of completing buybacks for listed companies. However, the discontinuation of the stock exchange route for buybacks wasn’t recommended by the Keki Mistry committee and no rationale has been provided by SEBI for going ahead with the same. This will take away the most transparent and opportunistic (in a good way) route to effectuate buy-back of securities.
VII. New framework for Execution-Only Platforms (‘EOPs’)
In a bid to simplify SEBI registration-related compliances for EOPs, SEBI has approved the proposal to establish a new framework for these platforms providing direct plans of mutual fund schemes to investors. This will provide EOPs the option to seek registration either as an agent of AMCs with registration with AMFI (Category I) or as an agent of investors with stock broker registration (Category II). The SEBI board also enunciated that the framework would include investor protection mechanism, cyber security requirements, pricing of services and grievance redressal.
Our View
A separate framework for EOPs will be of significance for those entities which aim to offer only execution services but were constrained to obtain registration as an investment adviser or stock broker, thus requiring them to comply with the entire regulations even though most provisions were either irrelevant or not applicable to the concerned entity’s functions. Such framework will further make access to mutual funds easier while simultaneously ensuring that there is no compromise on investor protection and safety.
VIII. Streamlining the on-boarding process of Foreign Portfolio Investors (FPIs)
SEBI has streamlined the procedural requirements for FPIs to facilitate ease of doing business and to reduce the time taken for registration, which would accelerate the digital push spearheaded by SEBI as well as the government. The approved measures are as follows: accepting scanned copies of forms for registration and final trading approval post verification of documents, accepting digital signatures for registration, the use of SWIFT mechanism for certification of the FPI’s documents by overseas bankers, verification of PAN by DDPs through the Common Application Form available on website of the depositories and submission of unique investor group ID by FPI applicants. Clarifications on various timelines have also been approved by amending the SEBI (FPI) Regulations, 2019.
IX. Risk Reduction Access Platform to address disruption of trading services
When services offered by brokers are disrupted, traders are not able to square off their positions or cancel their orders. For reducing this risk, it has been decided that stock exchanges shall introduce a first-of-its-kind Investor Risk Reduction Access Platform.
The purpose for introducing the measure is to provide a mechanism for investors to directly come to the exchange to execute their orders. No increase in positions would be allowed while their broker is down, only cancellations or squaring off of positions will be allowed. This mechanism will especially be useful for the new-age brokers who offer their services online.
X. Facilitation of participation by AIFs in Credit Default Swaps
SEBI has now permitted AIFs to participate in Credit Default Swaps as not only protection buyers to hedge their positions but as protection sellers. The system would facilitate the creation of a synthetic bond, which means that the buyer of the credit default swap will get protection against the particular issuer, and the AIF will treat the asset as a synthetic bond, as it would have the money to honour the credit default swap, if ever called upon.
The Board has approved different kinds of transactions to be permissible for the three categories of AIFs. For Category I AIFs, only purchase of CDSs is allowed for hedging. For Category II AIFs, both selling and purchasing of CDSs is allowed but they shall have to deposit the amount equal to the CDS exposure in G-secs. Lastly, for Category III AIFs, they can also purchase and sell CDSs and further utilize the leverage allowed to them, within legally permissible limits.
XI. Framework for Adoption of Cloud Services by SEBI Regulated Entities (REs)
SEBI has alleviated fears and provided certainties to REs which were hesitant to use cloud services without any framework on the services. In a comprehensive principle-based framework, the Board has approved the mechanism to include aspects of risk assessment, regulatory and legal compliances, rights and responsibilities of the RE, security measures and controls and rights of SEBI and other government agencies.
Our View
This framework, along with the broad issues which SEBI has tried to govern, align closely with the provisions of the new Digital Personal Data Protection Bill of 2022. It will put in place an obligation on the REs to maintain confidentiality of ‘sensitive data’ of the investors, not allow data to be transferred and processed in certain jurisdictions, assume ‘deemed consent’ on part the REs for government agencies to access relevant data, among other relevant provisions. Therefore, the obligations present under the Bill, when enacted in future, would need to be monitored in lieu of the above framework as well.
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