The Securities and Exchange Board of India (SEBI), in its recent board meeting held on March 15, 2024, approved several proposed changes. A summary of the salient decisions has been provided below.
I. Additional disclosure requirements exempted for certain FPIs
SEBI has approved a proposal aimed at streamlining business operations by exempting additional disclosure requirements for Foreign Portfolio Investors (FPIs) whose India equity assets under management (AUM) are predominantly concentrated within a single corporate group, provided certain conditions are met. These conditions include the FPI holding not more than 50% of its India equity AUM within the corporate group, excluding holdings in the parent company with no identified promoter. Additionally, the collective holdings of all such FPIs exceeding the 50% concentration threshold must amount to less than 3% of the total equity share capital of the listed company without an identified promoter.
The rationale behind this exemption is that since the listed companies of such corporate groups have no identifiable promoters, the concerns of Minimum Public Shareholding being breached do not arise since there are no promoters indirectly holding any shares in such companies. This exemption aims to simplify regulatory obligations for FPIs operating within specific investment parameters, resulting in a more conducive environment for business activities.
II. Facilitating ease of doing business for companies coming for IPOs / fund raising
To enhance the ease of conducting business for companies entering the IPO or fundraising process, SEBI has approved amendments to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, introducing the following changes:
- The requirement for a one percent security deposit in public or rights issues of equity shares has been abolished.
- Entities within the promoter group and non-individual shareholders owning over five percent of the post-offer equity share capital will now be allowed to contribute towards the minimum promoters’ contribution (MPC) without being designated as promoters themselves.
- Equity shares resulting from the conversion of compulsorily convertible securities held for a year before filing the DRHP will be considered eligible for meeting the MPC requirement.
- Adjustments to the size of offer for sale (OFS) necessitating a fresh filing will now be determined based on a single criterion, either the issue size in rupees or the number of shares, as disclosed in the draft offer document.
- In the event of force majeure events, the flexibility to extend the bid/offer closing date has been increased to a minimum of one day, as opposed to the previous requirement of a minimum of three days.
These amendments aim to streamline procedures and provide greater flexibility for companies engaging in capital markets activities, potentially encouraging more efficient and accessible fundraising processes.
III. Facilitating a uniform approach to verification of market rumours by equity listed companies
SEBI had floated a consultation paper in December 2023 seeking comments on certain proposed amendments to the market rumour verification requirement on listed companies after the same could not be effectively implemented due to friction from the industry. The Industry Standards Forum (ISF), in collaboration with ASSOCHAM, CII, and FICCI, initiated a pilot project to develop effective standards for effective implementation of the rumour verification requirement. Following discussions and consultations, a proposal was presented to the Board, which approved several measures. These include defining objective and uniformly assessed criteria for rumour verification, considering unaffected prices for transactions where pricing norms are specified under SEBI Regulations provided the rumour is confirmed within twenty-four hours of material price movement, mandating prompt responses from promoters, directors, key managerial personnel, and senior management for verifying market rumours, and stipulating that unverified events or information reported in print or electronic media should not be considered as 'generally available information' under SEBI (Prohibition of Insider Trading) Regulations, 2015.
While the intention behind the proposal is to ensure the integrity of market information and prevent potential insider trading, the last measure regarding the ‘generally available information’ imposes a high threshold for defence against allegations of insider trading. By not recognizing unverified information reported in mainstream media as 'generally available', individuals may face challenges in defending against insider trading allegations as they will have to track the clarifications provided by listed entities even when such information is available publicly. This also goes against the SEBI Chairperson’s Order in the matter of insider trading in the scrip of 63 Moons Technologies Ltd. (Erstwhile FTIL) dated January 31, 2018, wherein a newspaper article detailing a show cause notice was held to be “not speculative in nature” but rather published and available in public domain.
IV. Flexibility provided to Category I and II to create encumbrance on their holding of equity in infrastructure sector investee companies
SEBI has approved a measure aimed at enhancing the ease of doing business for Alternative Investment Funds (AIF) and fostering an environment where private capital effectively supplements various modes of infrastructure financing. Under this measure, Category I and II AIFs are permitted to create encumbrances on the equity of their investee companies in the infrastructure sector, facilitating the raising of debt or loans by these companies subject to certain conditions, including compliance with RBI regulations. In this regard, the designated infrastructure sector companies encompass those involved in the development, operation, or management of projects listed in the Harmonised Master List of Infrastructure sub-sectors issued by the Government of India. This is a positive move since large infrastructure projects require leveraging and SEBI’s initiative promotes greater flexibility in investment strategies and encourages participation in infrastructure projects.
V. Additional flexibility to AIFs and their investors to deal with unliquidated investments of their schemes beyond expiry of tenure
SEBI has approved a proposal allowing AIFs to handle unliquidated investments that remain unsold due to lack of liquidity during the winding-up process. This will be achieved by permitting AIFs to continue holding such investments within the same scheme and entering into a Dissolution Period. The value of these investments carried forward into the Dissolution Period will be recognized according to norms specified by SEBI for inclusion in the manager's track record and reporting to Performance Benchmarking Agencies. This Dissolution Period option replaces the previous choice of launching a new scheme (Liquidation Scheme).
Additionally, the Board has endorsed a proposal to grant an additional one-year Liquidation Period to AIF schemes dealing with unliquidated investments whose original Liquidation Period had expired previously or would expire within three months of the amendment to AIF Regulations, subject to specified conditions. This is a welcome move as it provides such AIFs who are unable to deal with unliquidated investments before expiry of tenure with more time and flexibility to sell and wind up their schemes.
VI. ‘Stock Exchange’ to be recognised as a body for administration and supervision of Research Analysts and Investment Advisers
SEBI has approved a proposal to designate a stock exchange as both a "Research Analyst Administration and Supervisory Body" (RAASB) and an "Investment Advisers Administration and Supervisory Body" (IAASB). Similar to the framework for Investment Advisers, the RAASB framework will maintain fee neutrality for Research Analysts. Additionally, in a bid to promote ease of doing business and ensure the smooth implementation of the RAASB/IAASB framework without causing disruption, the Board has authorized the deemed enlistment of existing registered Research Analysts (RA) and Investment Advisers (IA).
While the proposal is aimed at streamlining regulatory oversight, it raises concerns about potential overregulation for IAs. It's worth noting that IAs are already regulated by the BSE Administration and Supervisions Limited (BASL) and hence creating another body for regulating them leads to additional compliance on their part. Further, SEBI could have considered bringing RAs within the ambit of BASL thereby doing away with the creation of additional bodies for regulation of IAs and RAs.
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