17 January, 2019
SEBI Circular on Disclosure of Significant Beneficial Ownership
Pursuant to the Companies (Significant Beneficial Owners) Rules, 2018 (‘SBO Rules’), the Securities and Exchange Board of India (‘SEBI’) issued a circular dated December 7, 2018 (‘SBO Circular’) modifying disclosure requirements under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘Listing Regulations’) relating to the quarterly disclosures of shareholding patterns by listed entities. The SBO Circular requires disclosure of details pertaining to significant beneficial owners in a prescribed format, including details of the significant beneficial owner, registered owner, shares in which significant beneficial interest is held and the date of creation / acquisition of significant beneficial interest. The SBO Circular is to come into force with effect from the quarter ending on March 31, 2019.
However, the MCA issued a clarification on September 10, 2018 stating that it would be issuing an amended format for making disclosures under the SBO Rules and has granted an extension for making the filing. Consequently, if the amended SBO Rules are not issued before March 31, 2019, there is likely to be uncertainty regarding the scope and applicability of the SBO Circular.
SEBI (Depositories and Participants) Regulations, 2018
SEBI has, on October 3, 2018, issued the SEBI (Depositories and Participants) Regulations, 2018 (‘New DP Regulations’), replacing the SEBI (Depositories and Participants) Regulations, 1996 (‘Old DP Regulations’) introducing amendments largely related to structuring, shareholding and governance of depositories. Some of the key aspects are set out below:
i. Structuring: Under the New DP Regulations, a SEBI registered depository has been permitted to carry on any other activity (whether involving the deployment of funds or otherwise), after obtaining prior SEBI approval, as against the Old DP Regulations as per which depositories were only permitted to undertake other activity which were incidental to the activity of the depository. Moreover, the New DP Regulations now expressly provide that the prior approval of SEBI shall not be required in case of treasury investments, if such investments are as per the investment policy approved by the governing board of the depository. Similar to the position under the Old DP Regulations, the New DP Regulations permit the depository to carry out an activity not incidental to its activities as a depository through the establishment of strategic business unit(s) specific to each activity as may be assigned to the depository by the Central Government or by a regulator in the financial sector (through deployment of funds or otherwise).
ii. Shareholding: Under the New DP Regulations, the maximum prescribed shareholding in a depository, directly or indirectly, either individually or together with persons acting in concert has been retained at 5% of its paid-up equity share capital with the newly introduced exception of both Indian and foreign stock exchanges, Indian and foreign depositories, Indian and foreign banking companies, Indian and foreign insurance companies, public financial institutions, a foreign commodity derivatives exchange and a bilateral/multilateral financial institution approved by the Central Government, which may acquire or hold up to 15% of the paid-up equity share capital of such depository. An ‘applicant’ who proposes to establish a depository under the New DP Regulations is now locked in for a period of five years from the date of registration and can only hold up to 15% of the share capital of the depository, whereas under the Old DP Regulations, the sponsor was required to hold at least 51% of the equity share capital.
iii. Governance: Under the New DP Regulations, the number of public interest directors cannot be less than the number of shareholder directors on the governing board of a depository. The requirement under the Old DP Regulations for at least one public interest director to be present in the meetings of the governing board to constitute the quorum, has been replaced with the requirement of the public interest directors not being less than the number of shareholder directors to constitute the quorum. The New DP Regulations has now specifically included the managing director in the category of shareholder directors and provide for voting on a resolution of the governing board to be valid only when the number of public interest directors that have cast their vote on such resolution is equal to or more than the number of shareholder directors who have cast their vote on such resolution, with a casting vote in favour of the chairperson of the governing board. Subject to prior approval of SEBI, the chairperson will be elected by the governing board from amongst the public interest directors. Lastly, no foreign portfolio investor (‘FPI’) will have any representation on the governing board.
SEBI (Appointment of Administrator and Procedure for Refunding to the Investors) Regulations, 2018
SEBI, on October 3, 2018, issued the SEBI (Appointment of Administrator and Procedure for Refunding to the Investors) Regulations, 2018 (‘APRI Regulations’) to provide for appointment of administrators after attachment of properties of defaulters, by SEBI authorized recovery officers, who are exercising powers under the Securities Contracts (Regulation) Act, 1956 or the Depositories Act, 1956. The APRI Regulations set out eligibility norms for appointment of administrators (including that the administrator is required to be registered as an insolvency resolution professional with the Insolvency and Bankruptcy Board of India and be empaneled by SEBI), the functions, responsibilities and powers of administrators and also deal with matters such as their terms of appointment (including remuneration), procedures for sale of properties and refund of monies.
Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018
SEBI, on October 3, 2018, has issued the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018 (‘New SECC Regulations’), effectively replacing the erstwhile Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012 and the circulars issued thereunder, to regulate the recognition, ownership and governance in stock exchanges and clearing corporations. Some of key features of the New SECC Regulations are:
i. For valid quorum at a meeting of the board of stock exchanges and clearing corporations, the number of ‘public interest directors’ should not be less than the number of ‘shareholder directors’ at such meeting. The managing director is to be compulsorily categorized as a shareholder director.
ii. The voting on board resolutions shall be valid only when the number of public interest directors who have cast their vote on such resolution is more than the number of shareholder directors who have cast their vote on such resolution.
iii. The directors and key management personnel should be ‘fit and proper’ persons at all times, as per the criteria have been specified in the regulations as well as the disqualifications in this regard.
SEBI approves the Framework for Institutional Trading Platform
SEBI, on October 26, 2018, had released the ‘Consultation Paper to Review the Framework for Institutional Trading Platform’, with the objective of proposing changes to the regulatory framework for institutional trading platform, under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (‘ICDR Regulations’). Subsequently, at its meeting held on December 12, 2018, SEBI approved the proposals for amendments to the ICDR Regulations pertaining to the platform. The platform will be renamed the ‘Innovators Growth Platform’ (‘IGP’). The key proposals approved by SEBI in relation to listing on the IGP are set out below:
i. 25% of the pre-issue capital of the issuer company should have been held for at least a period of two years by qualified institutional buyers, family trusts with a net worth exceeding INR 500 crores (approx. US$ 72 million), certain regulated entities (including Category III FPIs) and/or certain ‘Accredited Investors’ (who should not hold more than 10% of the pre-issue capital).
ii. The requirement that no person (individually or with persons acting in concert) should hold 25% or more of the post-issue capital of the issuer company will be removed;
iii. The minimum application size and trading lot of ¤ 10 lakhs (approx. US$ 14,000) will be reduced to ¤ 2 lakhs (approx. US$ 2,900) and in multiples thereof;
iv. The minimum reservation of allocation to any specific category of investors will be removed;
v. The minimum number of allottees will be reduced from more than 200 to 50; and
vi. The minimum net offer to the public will be required to be in compliance with the minimum public shareholding norms of SEBI and the minimum offer size to be ¤ 10 crores (approx. US$ 14 million).
SEBI Circular on Participation of Eligible Foreign Entities in the Commodity Derivatives Market
SEBI, by way of its circular dated October 9, 2018, has permitted participation of eligible foreign entities (‘EFEs’) in the commodity derivatives market in India. Prior to the issue of this circular, foreign entities were not permitted to directly participate in the Indian commodity derivatives market, even if they imported/exported various commodities from/to India. EFEs’ participation has not been allowed in contracts having an underlying commodity which has been termed as a ‘sensitive commodity’, in terms of SEBI Circular dated July 25, 2017, on Position Limits for Agricultural Commodity Derivatives or by any other stipulation by SEBI, which are disclosed on the websites of recognized stock exchanges having commodity derivatives segment (‘CDS Exchanges’). Key eligibility conditions have been prescribed by SEBI for participation of EFEs in commodity derivatives market in India.
The Circular also specifies certain other compliance requirements to be met by EFEs including, inter alia, the know your client requirements, position limits, documentation and other applicable conditions, risk management; monitoring of limits and physical exposure, etc.
SEBI Circular on Fund Raising by Issuance of Debt Securities by Large Entities
With the purpose of deepening the access to the bond market and with a view to operationalise the Union Budget announcement for 2018-19, SEBI issued a circular on November 26, 2018 (‘Circular’), mandating ‘Large Corporates’ to meet one-fourth of their financing needs from the debt market. ‘Large Corporates’ refers to listed entities (except Scheduled Commercial Banks), which as on last day of the financial year (‘FY’) have:
i. specified securities / debt securities / non-convertible redeemable preference shares listed on recognised stock exchanges in terms of the Listing Regulations;
ii. an outstanding long term borrowing (with original maturity of more than one year, and excluding external commercial borrowings and inter-corporate borrowings between a parent and subsidiaries) of ¤ 100 crores (approximately US$ 14 million) or above; and
iii. a credit rating of “AA and above”, in accordance with specified criteria.
A Large Corporate is required to raise not less than 25% of its incremental borrowings, during the FY subsequent to the FY in which it is identified as a Large Corporate, by way of the issuance of debt securities, as defined under the SEBI (Issue and Listing of Debt Securities) Regulations, 2008. For FY 2020 and FY 2021, this requirement will be required to be met on an annual basis and from FY 2022 onwards, the requirement will be required to be met over a continuous block of two years. The Circular also requires Large Corporates to make the stock exchange disclosures (certified by both the Company Secretary and Chief Financial Officer) with respect to identification as a Large Corporate and the details of the incremental borrowings made during the FY.
The Circular will become effective from April 1, 2019 (except for those entities which follow the calendar year as their financial year, in which case the Circular shall become applicable from January 1, 2020).
SEBI Circular on ‘Guidelines for Enhanced Disclosures by Credit Rating Agencies’
SEBI, by way of a circular dated November 13, 2016, has prescribed enhanced disclosures to be made by Credit Rating Agencies (‘CRAs’) to bring about greater transparency. The disclosures, inter alia, include:
i. CRAs to include rationales in the ‘analytical approach’ and ‘liquidity’ sections of the press release, when the rating either relies on support from group companies/ parent company and to highlight parameters like liquid investments or cash balances access to unutilized credit lines, liquidity coverage ratio, adequacy of cash flows for servicing maturing debt obligation etc.;
ii. CRAs to analyze the deterioration in the liquidity conditions of the issuer and also take into account any asset-liability mismatch while monitoring repayment schedules;
iii. CRAs may treat sharp deviations in bond spreads of debt instruments vis-à-vis relevant benchmark yield as a ‘material event’;
iv. CRAs to publish information about the historical average rating transition rates across various rating categories; and
v. CRAs to bi-annually furnish data on sharp rating actions in investment grade rating category to stock exchanges and depositories for disclosure on their respective websites.
Changes Introduced for Streamlining the Process of Public Issues of Equity and Convertibles
SEBI, by way of its circular dated November 1, 2018, in its endeavor to provide an efficient fund-raising process, and in consultation with various stakeholder groups, has decided to introduce the Unified Payments Interface (‘UPI’)1, as a payment mechanism supported with the Application Supported by Block Amount (‘ASBA’), for applications in public issues through various channels. This will be done by retail investors through various kinds of intermediaries (i.e. syndicate members, registered stock brokers, registrar and transfer agents and depository participants). This new process is expected to improve efficiency and reduce the duration from issue closure to listing by up to three working days in a phased manner. Prior to the introduction of ASBA, this process usually took 12 working days.
For the purpose of public issues, UPI would allow the facility to block the funds at the time of the application. In order to ensure that there is parity across the various channels for the submitted application, it has been decided that the investor must only use his/her own bank account linked UPI ID to make an application in public issues. Further, merchant bankers are required to ensure appropriate disclosures with respect to UPI in offer documents and advertisements of a company undertaking a public issue.
This circular is applicable to all red herring prospectuses filed for public issues opening on or after January 1, 2019.
SEBI notifies the SEBI (Settlement Proceedings) Regulations, 2018
On November 30, 2018, SEBI issued the SEBI (Settlement Proceedings) Regulations, 2018 (‘New Settlement Regulations’) which are effective from January 1, 2019, on the basis of the report of the High Level Committee chaired by Justice Dave and have replaced the SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2014 (‘Old Settlement Regulations’). The key changes introduced by the New Settlement Regulations are as follows:
i. Definition of ‘securities laws’ has been widened to include all laws administered by SEBI. The Old Settlement Regulations merely covered the SEBI Act, 1992, the Securities Contract (Regulations) Act, 1956 and the Depositories Act, 1996. Similarly, the definition of ‘specified proceedings’ has been expanded to include proceedings pending before any forum, and not just SEBI.
ii. The ‘cooling-off ’ period of 24 months prescribed under the Old Settlement Regulations between the date of the last settlement order and an application for a new settlement has been done away with. Further, the restriction on applying for a settlement, if the applicant has received two settlement orders in the past 36 months, has also been removed.
iii. Under the Old Settlement Regulations, violation of laws pertaining to insider trading, communication of unpublished price sensitive information, fraudulent and unfair trade practices having market-wide impact (such as front-running, mis-selling to an investor, violation of internal code of conduct in insider trading), could not be considered for settlement, as these were considered ‘serious offences’. The New Settlement Regulations remove any such restriction, subject to the qualification that SEBI may not consider any such specified proceeding, where the alleged default tends to have a market-wide impact, cause losses to a large number of investors or affect the integrity of the market.
iv. A person cannot apply for a settlement if he is classified as a willful defaulter, a fugitive economic offender or a person who has defaulted in payment of any fees due or penalty imposed under any securities law.
v. The New Settlement Regulations additionally grant SEBI the discretionary power to settle a proceeding confidentially, in order to benefit applicants who agree to provide ‘substantial assistance in the investigation, inspection, inquiry or audit, to be initiated or ongoing, against any other person in respect of a violation of securities laws’. The applicant’s identity and any information, evidence or documents provided by the applicant will be kept confidential in such a case.
The New Settlement Regulations have introduced a new concept of ‘settlement schemes’, by way of which SEBI will specify the procedure and terms of settlement of specified proceedings under a settlement scheme for any class of persons involved in respect of any similar defaults specified. A settlement order issued under such a settlement scheme will be deemed to be a settlement order under the New Settlement Regulations.
New SEBI Order in the Satyam Matter
SEBI order dated November 2, 2018 (‘New Satyam Order’) modified its previous orders in the matter of Satyam Computer Services Limited (‘Satyam’), in respect of B. Ramalinga Raju, B. Rama Raju, B. Suryanarayan Raju, and SRSR Holdings Private Limited (collectively, the ‘Satyam Noticees’). In the previous orders, the Satyam Noticees had been restrained from trading in the stock market for a certain period and had been directed to disgorge wrongful gains made by them, inter alia, by falsifying financial statements of Satyam and committing insider trading in Satyam’s shares.
The key legal issue involved in the New Satyam Order was whether the benefit of ‘intrinsic value’ can be given to the Satyam Noticees while computing the disgorgement amount (by deducting the ‘intrinsic value’ of shares from the receipts from sale of such shares in order to arrive at the illegal gain). SEBI, relying on its previous decisions, held that the Satyam Noticees should not be given the benefit of discounting the intrinsic value, as it would amount to conferring undeserving benefits and may act as a moral hazard rather than as a deterrent. Therefore, only the acquisition cost and statutory dues were deducted from the sale proceeds to arise at the disgorgement amount.
SEBI also considered the point in time from which interest may be levied on the disgorgement amount. Relying on a previous decision of the Supreme Court (‘SC’) on this question, SEBI reiterated that interest could be levied right from the inception of the cause of action (i.e. date of commission of the fraudulent actions). However, SEBI did not interfere with its previous orders in this matter which had levied interest on the disgorgement amount from January 7, 2009, being the date on which Mr. Ramalinga Raju confessed that he had committed fraud with respect to Satyam’s books of accounts.
For further information, please contact:
Zia Mody, Partner, AZB & Partners
zia.mody@azbpartners.com
1 UPI is an instant payment system, developed by the National Payments Corporation of India (‘NPCI’), which enables merging several banking features and allows instant transfer of money between any two persons’ bank accounts using a unique payment address.
