15 August, 2018
INTRODUCTION
This newsletter covers the updates about the developments in Indian securities law during the month of July 2018. We have summarized the key regulatory developments including informal guidance and regulatory proposals of the Indian capital market regulator and certain important judgements of the Securities Exchange Board of India (“SEBI”), Securities Appellate Tribunal (“SAT”) and the Delhi High Court dealing with insider trading, takeover norms and the SEBIAct, 1992. Please see below the summary of the relevant developments, proposals and judgements.
A. Informal Guidance Issued by SEBI
In 2003, SEBI introduced the Informal Guidance Scheme (“Scheme”) in the interest of better regulation and development of the Indian securities market. Under the Scheme, parties may seek guidance from SEBI in case of any queries, in relation to any proposed action / inaction or interpretation of Indian securities norms. The informal guidance is not binding on SEBI.
1. CONTRA TRADE
SEBI on 11 July 2018 has issued informal guidance in the matter of Star Cement Ltd. (“SCL”) relating to the restrictions on promoters from engaging in contra trade (i.e., opposite transactions) in the open market under the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”).
Accordingly, SEBI has clarified that inter-se transfer amongst promoters is exempted from restrictions applicable to contra trade under the PIT Regulations, in case of off-market transaction only. Since the proposed purchase was on the floor of the stock exchange, it was restricted as contra trade under PIT Regulations. Further, this restriction on contra trade will apply only to the individual promoter and not to the entire class of promoters, since only the single promoter in question will be a 'designated person' under the PIT Regulations.
2. CONVERSION OF AN OPEN-ENDED CATEGORY III AIF INTO CLOSE-ENDED
SEBI has issued informal guidance in the matter of Singular India Opportunities Trust (“SIOT”) dated 06 July 2018, relating to the matter of conversion of an open-ended Category III Alternative Investment Fund (“AIF”) into a close-ended one. Under the SEBI (Alternative Investment Funds) Regulations 2012 (“AIF Regulations”), a Category III AIF may either be an open-ended or a close-ended fund.
SEBI took a view that, there is no provision in the AIF Regulations to convert the existing open-ended fund into close-ended or vice versa. Hence, an open-ended fund cannot be converted into close ended fund or vice versa.
3. MERGER/DEMERGER OF PROMOTER GROUP ENTITIES
On 17 and 18 April 2018, SEBI issued informal guidance in relation to qualification for exemption from open offer obligation under SEBI (Substantial Acquisition of Shares and Takeover) Regulations 2015 (“Takeover Code”) as a result of proposed schemes of merger / demerger of promoter group entities in the matters of Bhoruka International Private Limited and Force Motors Limited.
SEBI held that the acquirers were exempted from making open offer obligations, since the proposed schemes of merger / demerger qualified both the conditions for such exemption i.e. (i) component of cash and cash equivalents was less than 25% of the consideration in the scheme; and (ii) the persons who held the entire voting rights before implementation of the scheme would continue to hold at least 33% of the voting rights in the target entities, after the implementation of the schemes.
4. CONSEQUENCES PURSUANT TO COMPULSORY DELISTING
On 20 April 2018, SEBI issued informal guidance in the matter of Goldcrest Corporation Limited relating to restrictions of accessing the securities market, under the SEBI (Delisting of Equity Shares) Regulations, 2009 (“Delisting Regulations”). Bhor Industries Limited (“BIL”) was compulsorily delisted, following which its whole-time directors and promoters were prohibited from accessing the securities market or seeking listing for any equity shares for a period of 10 years from the date of delisting (“10 Year Restriction"). One such director, Mr. Tushar Tanna was also a promoter of Goldcrest Corporation Limited (“GCL”). GCL proposed to merge with another entity, in consideration of which it would issue equity shares to this other entity. The merger would not affect the total promoter or public shareholdingof GCL.GCL also intended to buy back its equity shares through tender offer route.
SEBI was of the view that since Mr. Tushar Tanna was a promoter of both companies BIL and GCL, the 10 Year Restriction is applicable for accessing securities market through GCL also. However, the issuance of shares by GCL pursuant to merger and the buyback of shares of GCL falls under 'dealing in securities' and not 'accessing of capital market.' Therefore, it is not barred by the 10 Year Restriction.
5. RIGHTS ISSUE OF SHARES KEPT IN ABEYANCE
SEBI on 20 July 2018 had issued informal guidance in the matter of Bajaj Finserv Limited ("BFL") relating to rights issue of shares kept in abeyance, under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 ("ICDR Regulations").
BFL proposed a rights issue of shares on May 16, 2012 to its shareholders, with an issue size of INR 9,400,000,000 ("Main Rights Issue"). The stock exchanges specifically advised BFL to retain 0.20% of the total issued shares with itself, in abeyance. Out of this 0.20%, 3,317 shares were allotted on 16 October 2017, since their abeyance got resolved ("Subsequently Allotted Shares"). Further, BFL filed delayed application with the stock exchanges for listing of the Subsequently Allotted Shares from the date of allotment of the Subsequently Allotted Shares, after the 20-day time limit prescribed under Regulation 108(2) of the ICDR Regulations. Hence the stock exchanges levied fines on BFL for not filing the applications within the time limit as provided in Regulation 108(2) of the ICDR Regulations. BFL contended that it will not be liable for the delay in filing the applications, since the rights issue was completed before 01 December 2015, i.e., before the effective date of Regulation 108 of ICDR Regulations and the ICDR Regulations are applicable to rights issue size of INR 5 million or more.
SEBI held that the ICDR Regulations applies to all cases where the aggregate value of specified securities offered is INR 5 million or more and the Subsequently Allotted Shares formed part of the Main Rights Issue (whose issue size was more than INR 5 million). Further, Regulation 108 of the ICDR Regulations will be applicable to the Subsequent Allotted Shares since they were allotted after 01 December 2015, even if such allotment was pursuant to a rights issue that had taken place before 01 December 2015. Therefore, BFL was required to file the application for listing the Subsequently Allotted Shares within 20 days from their allotment.
1. SAT ORDERS REVIEW ON INVESTORS PARTICIPATING IN MARKET GAUGING EXERCISE
B.SEBI, SAT and High Court Orders
SAT in the matter of L&T Financial Holdings ("LTFH") examined whether communication between employees of the merchant banker and an institutional investor (“Appellant”) who had participated in a market gauging exercise of LTFH prior to offer for sale (“OFS”) by its promoter L&T, amounted to acquisition of unpublished price sensitive information (“UPSI”) under the PIT Regulations. The Appellant had sold shares of LTFH in the futures & options segment a day before the OFS by the promoter of LTFH and later made unusual profits by buying the shares of LTFH in the OFS.
SAT held that such telephonic conversation is not enough to presume that the Appellant was privy to the UPSI that L&T would sell shares of LTFH through OFS. SAT also requested SEBI to look into whether investors participating in the market gauging exercise should be allowed to trade in all segments of the market prior to when the issue opens.
2. SEBI REFUSES TO EXEMPT FAMILY TRUST FROM MAKING AN OPEN OFFER
SEBI rejected an application made by Neeman Family Foundation Trust (“Acquirer”) seeking exemption from making a mandatory open offer to the public shareholders of Max group companies Max Financial Services Ltd. (“MFSL”) and Max Ventures and Industries Limited (“MVIL”) (collectively the “Target Companies”) under the Takeover Code.
The Acquirer, a trust of a promoter of the Max Group company, proposed certain transactions by which individual promoters of MFSL and MVI would transfer their stakes to Max Ventures Investment Holdings Pvt Ltd (“MVIHPL”). The Acquirer, in turn, will hold more than 50% of shares in MVIHPL. The Acquirer sought exemption from making an open offer, on grounds that it is a promoter entity, since the individual beneficiaries in the Acquirer trust were promoters of the Target Companies. Therefore, the proposed transactions were exempted as inter-se transfer of shareholding between promoter entities and since there was no change the promoter shareholding in the Target Companies.
SEBI held that the Acquirer is not entitled to exemption under the Takeover Code, since the Acquirer trust had not been disclosed as part of promoter group for last 3 preceding years to the date of exemption application prior to the proposed acquisition. SEBI did not deal with the question of whether transfer of shares to the Acquirer would amount to an inter-se transfer of promoter shareholding.
3. OPINION OF SEBI WHOLE-TIME MEMBER PRE-CONDITION FOR ADJUDICATION
The petitioner, Amit Jain, along with 2 others, bought shares in Himalaya Granites Limited. The SEBI Committee of Division of Chiefs recommended to the Whole Time Member (“WTM”) that adjudication proceedings be initiated against all three, including the petitioner, for violation of provisions of Takeover Code and the PIT Regulations. Based on this recommendation, the WTM noted that proceedings against the petitioner should be initiated. The Delhi High Court held that while a detailed order by the WTM is not necessary for this purpose, the least that is required of the WTM is to state in unequivocal terms that in its opinion, there are grounds for adjudging under Chapter VIA of the SEBI Act, 1992 before proceeding to appoint an adjudication officer. In view of the above reasoning, the Court set aside the proceedings initiated against the petitioner as well as the impugned notice which was served on the petitioner.
1. SEBI ISSUES NORMS FOR ISSUANCE AND LISTING OF SECURITY RECEIPTS
C. RULES & REGULATIONS
SEBI has amended the SEBI (Public Offer and Listing of Securities Debt Instruments) Regulation, 2008 through the SEBI (Public Offer and Listing of Securitized Debt Instruments) (Amendment) Regulation, 2018. As per the amendment regulations, the title “SEBI (Public Offer and Listing of Debt Instruments) Regulations, 2008” shall be substituted with “SEBI (Issue and Listing of Securitized Debt Instruments and Security Receipts) Regulations, 2008.”
Some of the key amendments introduced by the amendment regulations are as follows:
a) Chapter VII A has been introduced which enumerates the provisions of 'Issuance and Listing of Security Receipts Eligibility'
b) The Security Receipts should be issued on a private placement basis
c) Chapter VIIA also prescribes the provisions for sale of security receipts by the existing holders
d) The amendment regulations also introduced certain eligibility requirements / conditions for listing of security receipts and disclosure requirements in the offer document for issue of security receipts, including valuations, credit rating and net asset value
2. INCREASE IN OVERSEAS INVESTMENT LIMIT FOR AIF AND VCF
SEBI has raised the maximum permissible limit for overseas investment by AIF and Venture Capital Funds ("VCF") from USD 500 million to USD 750 million vide its circular SEBI/HO/IMD/DF1/CIR/P/2018/103/2018 dated 03 July 2018 (“Circular”). Additionally, the Circular has introduced certain reporting requirements based on utilization of this limit by AIF/VCF.
3. SEBI BARS STOCK BROKERS FROM ACCEPTING CASH FROM CLIENTS
SEBI has barred stock brokers from accepting cash from their clients, either directly or indirectly by way of cash deposits to the bank account of the stock broker vide its circular SEBI/HO/MIRSD/DOP/CIR/P/2018/113 dated 12 July 2018. Now the payments to stock broker must be made either via account payee crossed cheques or demand drafts or by way of electronic fund transfer or any other mode approved by the Reserve Bank of India (“RBI”). This move is in furtherance of the government's initiative towards a cashless economy.
4. SEBI ISSUES A MASTER CIRCULAR TO GOVERN MUTUAL FUNDS
SEBI has compiled all circulars applicable to mutual funds into a single master circular, for ease of reference vide Circular No. SEBI/HO/IMD/DF5/CIR/P/2018/109 dated 10 July 2018 (“Master Circular”).
The Master Circular covers all the previous SEBI circulars issued up to 05 June 2018 in relation to mutual funds. However, in case of any inconsistency between the Master Circular and the relevant circulars, the contents of the relevant circular shall prevail.
1. SEBI'S CONSULTATIVE PAPER ON REGULATING FIDUCIARIES IN THE SECURITIES MARKET
D. Consultative Papers
On 13 July 2018, as per the recommendations of the Kotak Committee on Corporate Governance, SEBI issued a consultative paper aiming to regulate the conduct of fiduciaries such as chartered accountants, company secretaries, valuers, appraisal agencies and monitoring agencies. The paper proposes to amend all SEBI regulations dealing with issue of capital, pooling of funds, acquisitions and takeovers of listed entities and the conduct of SEBI- registered intermediaries and insert appropriate norms in this regard.
Following are the key amendments being proposed:
a) A fiduciary who issues any certificate / report pursuant to any engagement / assignment in respect of any issuer, pooled investment vehicle, restructuring, intermediary or investors in securities shall ensure that it is true in all material respects;
b) The fiduciary must report, in writing, any material violation of securities laws that it notices while undertaking such an assignment, to the audit committee of the listed company / compliance officer of an intermediary / trustee of pooled investment vehicle;
c) If after an inquiry or investigation, SEBI is satisfied that the fiduciary has submitted false certificate or report or has violated any of the provisions, it may take appropriate action under the concerned securities laws against the fiduciary, its engagement partner or director. The amendment regulations also define terms such as 'engagement partner' and 'fiduciary';
d) If the fiduciary does not comply with the proposed provisions, it may be banned from issuing any certificate or report and will be required to disgorge any wrongful gains, including the fees earned, with an interest of 12% per annum from the date of default;
e) Any non-compliance with the provisions may be referred to the Institute of Company Secretaries of India, the Institute of Chartered Accountants of India or any other authority for appropriate action.
2. SEBI'S CONSULTATIVE PAPER ON RECLASSIFICATION OF SHAREHOLDERS
SEBI on 24 July 2018 came up with a consultative paper (“Consultative Paper”) for revision of reclassification of promoters of listed entities as public shareholders under regulation 31A of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”), with an aim to simplify, streamline and clarify the provisions. The Consultative Paper is mainly based on recommendations of the Kotak Committee on Corporate Governance dated October 5, 2017. All stakeholders have been invited to provide their comments on the Consultative Paper by 16 August 2018.
The key proposed amendments to regulation 31 A of the LODR Regulations are:
a) Simple and uniform procedure of the process of reclassification: Under the current law, there are different conditions for reclassification of promoters as public shareholders in different scenarios, which has led to confusion. The Consultative Paper has proposed a uniform, 3-step process for re-classification of promoters as public shareholders in all situations. Further, all requests for reclassification must now be approved by shareholders through an ordinary resolution. Under the present law, shareholder approval is only required in certain cases.
b) Uniform criteria for reclassification of promoters as public shareholders: Under the current law, there are different criteria for reclassification of promoters, in different scenarios. The Consultative Paper has provided a uniform set of criteria applicable to all requests for reclassification, which will apply in all scenarios.
c) Minimum compliance requirements for reclassification: The listed entity can only apply for reclassification if, on the date of application, it is compliant with the minimum public shareholding requirement, does not have shares suspended from trading in the stock exchange and does not have any outstanding dues to SEBI or any stock exchange.
3. SEBI'S DISCUSSION PAPER ON REVERSE BOOK BUILDING FOR DELISTING OF EQUITY SHARES
SEBI on 26 July 2018 came up with a discussion paper (“Discussion Paper”) seeking comments on proposed changes in the process of reverse book building (“RBB”) for delisting of equity shares under the SEBI (Delisting of Equity Shares) Regulations, 2009 (“Delisting Regulations”). The Discussion Paper gives a brief background of the regulatory history of RBB for delisting of equity shares and lists various problems associated with the current regulatory framework, along with proposed changes. All stakeholders have been invited to provide their comments on the Discussion Paper by 16 August 2018.
The Discussion Paper proposes the following changes in the RBB process:
a) Counter offer by promoter: Under the current process, the promoter may reject the offer price put forth by the shareholders, if he finds it unreasonable. The promoter cannot make a revised counter offer. It is proposed that instead of rejection, the promoter may be allowed to make counter offer to the shareholders of that class. If the shareholders accept this counter offer, the delisting should be treated successful.
b) Counter offer should not be less than the book value: Under regulation 8(2) of the Takeover Code, the floor price computed by the promoter need not consider the book value of the shares. This leads to situations where the floor price is much below the book price, which hampers the investors' interests. It is proposed that in case the promoter gives a counter offer, this counter offer price should not be less than the book value of the equity shares.
For further information, please contact:
Souvik Ganguly, Partner, Acuity Law
al@acuitylaw.co.in
