25 January, 2016
Informal Guidance under the SEBI (Informal Guidance) Scheme, 2003 in connection with the Applicability of the SEBI (Research Analysts) Regulations, 2014 (‘Research Analysts Regulations’)
On November 5, 2015, SEBI issued an informal guidance on receipt of clarification sought by Geojit BNP Paribas Financial Services Limited, regarding the applicability of Regulation 16(2) and Regulation 18(9) of the Research Analysts Regulations to ‘Technical Analysts’. SEBI clarified that Regulation 16(2), which imposes restrictions on personal trades by research analysts 30 days prior and five days post the publication of a research report, will be applicable to both fundamental research analysts as well as technical research analysts, whether acting indepen- dently or employed as research analysts by a research entity. With reference to Regulation 18(9), which deals with consistency of views amongst the analysts, SEBI stipulated that if contrary views are held by different teams of a research analyst / entity, then such contradictory views are to be identified and published in the research report without alteration. Further, if individual employees employed in different teams of the research analyst/ entity publish a report holding contrary views, then they are required to also publish in the report the views of the different teams without altering the same.
Report of the Committee to Recommend Measures for Curbing Mis-selling and Rationalising Distribution Incentives in Financial Products
The Ministry of Finance, GoI has released the Report of the Committee to Recommend Measures for Curbing Mis-selling and Rationalising Distribution Incentives in Financial Products dated August 7, 2015 (‘Committee Report’).
The mandate of this committee was to study the prevailing incentive structure among vari- ous financial investment products, taking into account the historical evolution of such a struc- ture in India and globally and also the differential nature of the product itself with a view to: (i) providing level playing field in respect of the commission / incentive structure of financial products; (ii) suggesting policy measures such that differential regulatory norms do not favour any particular financial product and prevent mis-selling; (iii) addressing issues with respect to hidden costs and identical financial products under different regulatory jurisdictions; and (iv) rationalising the incentive structure across financial products.
The recommendations made in the Committee Report are divided into broad recommenda- tions and product specific recommendations, including (i) regulation of financial products in terms of the product function (namely, insurance, investment and annuity); (ii) the lead regulator, according to function, should fix the rules of the game (for bundled products, the lead regu- lator for the function of the sub-part must fix rules); (iii) investment products and investment components of bundled products should have no upfront commissions; (iv) all investment products, and investment portions of bundled products, should move to an assets under management based trail model; (v) financial products should have flexible exit options and the cost of exit must be limited; (vi) costs of surrender for each product should be reasonable and after deduc- tion of costs, and the remaining money should go to the exiting investor(s); (vii) at the point of sale, returns should be clearly disclosed and should be a function of the amount invested (Re- turns in bundled products should be shown on the invested amount); (viii) on-going disclosures should show historical returns as an average annual number based on the internal rate of return of the product; (ix) similar products should have a similar structure with regard to service tax, stamp duty and rural and social sector norms; (x) regulators should create a common distributor regulation (including employees of corporate agents) with each regulator adding rules specific to products regulated by them; and (xi) regulators should create a single registry of all distribu- tors and such a registry should identify each individual distributor with a unique number.
Overseas Investment by Alternative Investment Funds & Venture Capital Funds
Pursuant to its circular dated October 1, 2015 (‘Circular’), SEBI has permitted venture capi- tal funds (‘VCFs’) registered under the erstwhile Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996, and Alternative Investment Funds (‘AIFs’) registered under the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (‘AIF Regulations’), to invest in offshore venture capital undertakings (‘OVCUs’) having an Indian connection up to 10% of such entities’ investible funds. Under the Circular, VCFs and AIFs have been permitted to invest in OVCUs that have a front office overseas, but with back of- fice operations in India. AIFs and/or VCFs may only invest up to 25% of their investible funds in such OVCUs. Further, AIFs and/or VCFs are not permitted to invest in joint ventures or wholly owned subsidiaries while making such overseas investments. SEBI has also clarified that AIFs may only invest in equity and equity linked instruments of such OVCUs.
Investments by AIFs and/or VCFs in OVCUs are subject to an overall limit of US$ 500 million (approximately ¤33.33 billion) (such limit being the combined limit for AIFs and VCFs). AIFs desirous of making such investments are required to obtain the prior approval of SEBI, and no separate permission from the RBI is required for this purpose. The allocation of investment limits will be done on a first come first serve basis and AIFs may apply for the allocation of further investment limits by making a fresh application to SEBI. AIFs are required to make the allocated investments within six months from the date of obtaining approval from SEBI, after which SEBI may reallocate any unutilised limits to other applicants.
With reference to the AIF Regulations, SEBI has also clarified that, from the date of the Circular, the tenure of any scheme of an AIF will be calculated from the date of final closing of the scheme.
For further information, please contact:
Zia Mody, Partner, AZB & Partners
zia.mody@azbpartners.com
