13 August, 2018
Know Your Client Requirements for FPIs
SEBI has, by way of its circular dated April 10, 2018, prescribed the following key changes to the existing Know Your Client (‘KYC’) requirements for FPIs:
i. Identification and verification of beneficial owner (‘BO’) should be in accordance with Rule 9 of Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (‘PMLA Rules’). Accordingly, the BOs of FPIs having a company or trust structure should be identified on controlling ownership interest and control basis, and in case of partnership firms and unincorporated association of individuals, should be identified on ownership or entitlement basis.
ii. The materiality threshold for identification of BOs on controlling ownership interest will be: (i) 25% in case of a company; and (ii) 15% in case of a partnership firm, trust and unincorporated association of persons. In respect of FPIs from ‘high risk jurisdictions’, intermediaries may apply lower materiality threshold of 10% for identification of BOs and also ensure compliance with KYC documentation as applicable for category III FPIs. This threshold will first be applied at the FPI level, and next look through principle will be applied to identify the BO of the material shareholder / owner entity level. When no BO is identified, the BO will be the senior managing official of the FPI.
iii. Non Resident Indians (‘NRIs’) / Overseas Citizens of India (‘OCIs’) / resident Indian cannot be BOs of FPIs. However, if an FPI is Category II investment manager of other FPIs and is a non-investing entity, it may be promoted by NRIs / OCIs.
Clubbing of investment limits for FPIs will also be based on the abovementioned manner of identification of BOs.
Amendments to the SEBI Listing Regulations
The key amendments introduced by the Securities and Exchange Board of India (‘SEBI ’) on May 9, 2018 to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘Listing Regulations ) are as follows:
i. Any person or entity belonging to the promoter or promoter group holding 20% or more of the shareholding in the listed entity is now deemed to be a ‘related party’.
ii. Payments made by the listed entities to related parties with respect to brand usage/ royalty amounting to more than 2% of consolidated turnover of the listed entity as per the last audited financial statements, will be considered to be a material related party transaction.
iii. The definition of ‘independent director’ has been amended to exclude: (i) any director who is or was a member of the promoter group of the listed entity; and (i) any director who is not a non-independent director of another company on the board of which any non-independent director of the listed entity is an independent director.
iv. At least one independent woman director is required to be appointed on the Board of the top 500 listed entities by April 1, 2019, and of the top 1000 listed entities by April 1, 2020.
v. The threshold for determining whether a subsidiary is a ‘material subsidiary’ has been reduced from 20% to 10% of the consolidated income or net worth of the listed entity and its subsidiaries in the previous accounting year.
vi. Additional requirements have been imposed in relation to age limits for non-executive directors, eligibility criteria for the chairman of the board, quorum for board and committee meetings, remuneration of directors and other related matters.
vii. No person can be a director on the Board of more than eight listed companies (with effect from April 1, 2019) and seven listed companies (with effect from April 1, 2020).
viii. Listed companies are now required to include clear threshold limits, duly approved by the Board of Directors, in their materiality policy for related party transactions and such policy must be reviewed once every three years.
Implementation of Certain Recommendations of the Committee on Corporate Governance
SEBI has issued a circular dated May 10, 2018 (‘Circular’) that provides for implementation of certain recommendations of the committee on corporate governance under the chairmanship of Uday Kotak. The following provisions will now apply to entities whose equity shares are listed on a recognized stock exchange:
i. Disclosures on Board Evaluation: A listed entity may consider including observations about Board evaluation of the current year, the previous year’s observations and any actions taken pursuant to the same and proposed actions based on the current year’s observations as part of its disclosure on Board’s evaluation.
ii. Group Governance Units: If a listed entity has several unlisted subsidiaries, it may monitor their governance through a dedicated group governance unit or governance committee comprised of members of its Board and a strong and effective group governance policy.
iii. Medium term and long term strategy : The listed entity may consider disclosing its medium-term and long-term strategy under the management discussion and analysis section of the annual report, within limits of its competitive position and for a time frame as set by the board of directors. Additionally, the listed entity may articulate a clear set of long-term metrics specific to the company’s long term strategy to allow for appropriate measurement of progress.
Guidelines for Preferential Issue of Units by InvITs
SEBI issued a circular dated June 5, 2018 (‘Circular’) setting out guidelines for preferential issue of units by Inv ITs.As per the Circular, listed Inv ITs may make a preferential issue of units to an institutional investor subject to the fulfillment of the following conditions:
i. Conditions for preferential issue: (a) Unitholders of the Inv IT have to pass a resolution approving the preferential issue; (b) Inv IT must be in compliance with the minimum public unitholding requirements, conditions for continuous listing and disclosure obligations; (c) No preferential issue of units by the Inv IT should have been made in the six months preceding the relevant date and the issue will be completed within 12 months of the authorizing resolution; (d) The preferential issue of units can be offered to a minimum of two and maximum of 1000 investors in a financial year.
ii. Placement document: The preferential issue of units by an Inv IT will be done on the basis of a placement document, which must contain disclosures as specified in the Circular. While seeking in-principle approval from the recognised stock exchange, InvIts to furnish a copy of the placement document, a certificate issued by its merchant banker or statutory auditor confirming compliance with the provisions of this Circular along with any other documents required by the stock exchange.
iii. Pricing: The preferential issue is required to be made at a price not less than the average of the weekly high and low of the closing prices of the units quoted on the stock exchange during the two weeks preceding the relevant date. The Inv IT cannot allot partly paid-up units. Further, the prices determined for preferential issue will be subject to appropriate adjustments, if the Inv IT: (i) makes a right issue of units; and (ii) is involved in such other similar events or circumstances, which in the opinion of the concerned stock exchange, requires adjustments.
iv. Restriction on allotment: No allotment can be made to any party to the Inv IT or their related parties except to the sponsor.
v. Restriction on transferability: The units allotted under preferential issue cannot be sold by the allotee for a period of one year from the date of allotment, except on a recognized stock exchange.
Guidelines for Issuance of Debt Securities by REITs and INVITs
SEBI had recently permitted Real Estate Investment Trusts (‘REITs’) and Infrastructure Investment Trusts (‘InvITs’) to issue debt securities by amending the SEBI ( REIT) Regulations, 2014 (‘REIT Regulations’) and the SEBI ( INVIT) Regulations, 2014 (‘InvIT Regulations’). SEBI has issued guidelines for issuance of such debt securities by REITs and Inv ITs by its circular dated April 13, 2018 (‘Circular’) which provides that REITs and Inv ITs issuing debt securities must follow the provisions of SEBI (Issue and Listing of Debt Securities Regulations), 2008 (‘ILDS Regulations’) in the following manner:
i. Restriction in Regulation 4(5) of the ILDS Regulations on issue of debt securities for providing loan to or acquisition of shares of any person, who is party of the same group or under the same management and the requirement for creation of a debenture redemption reserve, will not apply to issue of debt securities by REITs and Inv ITs;
ii. Compliances to be made under Companies Act in terms of the ILDS Regulations, will not apply to REITs / Inv ITs for issuance of debt securities, unless specifically provided in the Circular.
For the issuance of debt securities, REITs / Inv ITs will appoint one or more SEBI registered debenture trustees, other than the trustee to the REIT / Inv IT issuing such debt securities. Further, the securities will be secured by the creation of a charge on the assets of the REIT / Inv IT or holding company or SPV, having a value which is sufficient for the repayment of the amount of such debt securities and interest thereon. The Circular also provided for certain additional disclosure and compliance requirements.
IBC Exemptions introduced under the Delisting Regulations and Takeover Regulations
SEBI has, as on May 31, 2018, notified the amendments to the SEBI (Delisting of Equity Shares) Regulations, 2009 (‘Delisting Regulations’) and the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (‘Takeover Regulations’) to provide that, with respect to a listed entity, the Delisting Regulations and the Takeover Regulations will not be applicable to a transaction proposed to be undertaken pursuant to a resolution plan approved under the Insolvency and Bankruptcy Code (‘IBC’). The key amendments have been set out below:
i. The Delisting Regulations will not be applicable to delisting of equity shares of a listed entity made pursuant to a resolution plan, if such a plan: (i) lays down a specific procedure to complete the delisting of such shares; or (ii) provides an exit option to the existing public shareholders at a price specified in the resolution plan.
However, the exit to shareholders should be at a price which is not less than the liquidation value as determined in accordance with the Section 35 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, after paying off dues in the order of priority as set out in the IBC. If the existing promoters or any other shareholders are proposed to be provided an opportunity to exit under the resolution plan at a price, then the delisting should be at a price which is not less than the price at which such promoters or other shareholders, directly or indirectly, are provided exit.
ii. The prohibition set out under the proviso to Regulation 3(2) of the Takeover Regulations, which restricts an acquirer from acquiring shares or voting rights in a target company, which would result in the aggregate shareholding of the acquirer, along with persons acting in concert with it, exceeding the maximum permissible non public shareholding i.e. 75%, will not be applicable to an acquirer proposing to acquire shares pursuant to a resolution plan approved under the IBC.
Enhanced Disclosure and Transparency Norms for Credit Rating Agencies
SEBI issued a circular dated May 30, 2018 (‘Circular’) setting out guidelines to enhance the governance, accountability and functioning of Credit Rating Agencies (‘CRA’).
i. Review of Ratings All cases of requests by issuers for review of the rating(s) provided to their instrument(s) by the CRA are required to be reviewed by a rating committee of the CRA that will consist of a majority of independent members3.
ii. Disclosures for non-acceptance of Ratings: All non-accepted ratings have to be disclosed on the CRA’s website for a period of 12 months from the date of such rating being disclosed as a non-accepted rating.
iii. Rationalisation of Disclosures: CRAs are required to upload a rating summary sheet presenting a snapshot of the rating actions carried out during the half-year on their websites, on a half-yearly basis, within 15 days from the end of the halfyear (March / September). These ratings must be segregated into securities and financial instruments other than securities.
Clarification on Clubbing of Investment Limits of Foreign Government / Foreign Government related entities
SEBI has, by way of its circular dated April 10, 2018 (‘Circular’), issued certain clarifications in relation to clubbing of investment limits of foreign Governments and their related entities viz. foreign central banks, sovereign wealth funds and foreign Governmental agencies registered as foreign portfolio investors (‘FPIs’) in India. The key clarifications are set out below:
i. In case of the same set of underlying beneficial owner(s), the holding of all foreign Government and its related entities from the same jurisdiction, as well as foreign Government agencies forming part of the same investor group, is required to be cumulatively below 10% of the total paid-up capital of the Indian company;
ii. If the Government of India enters into treaties with other sovereign Governments specifically recognizing certain entities to be treated distinctly, SEBI may, during the validity of such treaties, recognize them as such for the purpose of investment limits applicable to FPIs;
iii. The investment by foreign Government/ its related entities from provinces/ States of countries with federal structure will not be clubbed if such provinces/ States have different beneficial owners identified in accordance with the Prevention of Money Laundering (Maintenance of Records) Rules, 2005.
Lastly, the Circular clarifies that in case of a breach of the investment limits, the FPIs are required to divest their holdings within five trading days from the date of settlement of trades causing the breach. Alternatively, at the FPI’s option, such investment may be considered as a foreign direct investment.
Monitoring of Foreign Investment limits in listed Indian companies
SEBI has, by way of its circular dated April 5, 2018 (‘Circular’), issued guidelines for monitoring of foreign investment limits (based on the paid-up equity capital of the company on a fully diluted basis) in listed Indian companies. The Foreign Exchange Management Act, 1999 (‘FEMA ’), read with the regulations issued thereunder, prescribes the various foreign investment limits in listed Indian companies such as the aggregate FPI limit, the aggregate NRI limit and the sectoral caps. The onus of compliance with these foreign investment limits rests on the Indian company. In order to facilitate compliance by listed Indian companies, SEBI formulated a framework with effect from June 1, 2018.
The necessary infrastructure and IT systems for monitoring the limits in Indian listed companies are required to be implemented and housed at the depositories i.e. National Securities Depository Limited and Central Depository Securities Limited. Companies will have to appoint any one depository as its ‘Designated Depository’ for monitoring the foreign investment limits.
The stock exchanges will provide the data on the paid-up equity capital of an Indian company to such company’s Designated Depository.
A red flag will be activated whenever the foreign investment is within 3% or less than 3% of the aggregate FPI / NRI limits or the sectoral cap. Once a red flag has been activated for a given company, the foreign investors will take a conscious decision to trade in the shares of the company, with a clear understanding that in the event of a breach of the aggregate FPI / NRI limits or the sectoral cap, the foreign investors will be liable to disinvest the excess holding within five trading days from the date of settlement of the trades.
3 Persons not having any pecuniary relationship with the CRA or any of its employees.
For further information, please contact:
Zia Mody, Partner, AZB & Partners
zia.mody@azbpartners.com
