20 April, 2019
Format for Disclosure of Details of Significant Beneficial Owners
SEBI had issued a circular on December 7, 2018 (‘SBO Circular’), specifying that all listed entities would be required to disclose details pertaining to significant beneficial owners (‘SBOs’), in the prescribed format. The SBO Circular was based on the Companies (Significant Beneficial Owners) Rules, 2018 (‘SBO Rules’), which were amended by the MCA by way of the Companies (Significant Beneficial Owners) Amendment Rules, 2019. Pursuant to the MCA amendment, SEBI issued a circular on March 12, 2019, and amended the SBO Circular.
The key amendments pursuant thereto pertain to the previous requirement of the number and percentage of shares held being required to be disclosed. The format has been amended to require disclosure of the details of shares, voting rights, rights on distributable dividend or any other distribution, exercise of control and exercise of significant influence held by the SBO. A footnote has been added to clarify that if the nature of the holding/ exercise of the right of an SBO falls under multiple categories (as set out above), multiple rows for the same SBO will need to be inserted for each of the categories.
The amendments to the SBO Circular will come into force with effect from the quarter ended June 30, 2019, and will apply to all listed entities that are reporting companies as per the SBO Rules, as amended.
Establishment of Committees of Market Infrastructure Institutions
SEBI has, by way of a circular dated January 10, 2019, on Committees at Market Infrastructure Institutions (as modified by SEBI circular dated February 15, 2019) (‘MII Circular’), prescribed detailed requirements in relation to the functions and composition of the committees required to be set up by stock exchanges, clearing corporations and depositories (collectively, ‘Market Infrastructure Institutions ’ or ‘MIIs ’) under the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018 and the SEBI (Depositories and Participants) Regulations, 2018, with a view to protect the interests of investors in the securities market and to regulate the securities market.
The MII Circular stipulates the establishment of: (i) functional committees (comprising of member selection committee, investor grievance redressal committee and nomination and remuneration committee); and (ii) oversight committees (comprising of standing committee on technology, advisory committee, regulatory oversight committee and risk management committee).
The MII Circular also prescribes requirements in relation to composition, quorum and functions of each of the committees.
Guidelines for the Public Issue of Units of InvITs and REITs
SEBI has introduced amendments to the guidelines for public issue of units of Infrastructure Investment Trusts and Real Estate Investment Trusts (together, ‘Investment Vehicles’) in order to further rationalise and ease the process of public issue of units of Investment Vehicles.
Key highlights amongst them are:
i. the definition of ‘institutional investors’ has been updated to refer to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018;
ii. Mutual funds, alternative investment funds (‘AIFs’), FPIs other than category III FPIs sponsored by associate entities of the merchant bankers, insurance companies
promoted by, and pension funds of, associate entities of the merchant bankers have been permitted to invest under the category of anchor investors;
iii. Bidding period may be extended on account of force majeure, banking strike or similar circumstances, subject to total bidding period not exceeding 30 days;
iv. Time period for announcement of the floor price or the price band by the investment manager has been reduced from five days to two days prior to the opening of the bid (in case of initial public offer); and
v. Investment Vehicles are required to accept bids using only the application supported by blocked amount (‘ASBA’) and consequent changes in bidding process have been made.
SEBI Informal Guidance in the Matter of JM Financial Limited
SEBI has, in its informal guidance to JM Financial Limited, stated that the objective of Regulation 15(1)(f) of SEBI (Alternative Investment Funds) Regulations, 2012 (‘AIF Regulations’) is to further the interests of investors with respect to the un-invested portion of investable funds, till deployment of these funds in accordance with the investment objective of the AIF. Accordingly, applying the same rationale, SEBI has clarified that investment proceeds from sale/transfer of investments or returns earned from the investments can be invested in temporary investment instruments specified in Regulation 15(1)(f) of the AIF Regulations pending distribution of investment proceeds to the investors, provided that details of such transactions are disclosed to the investors and the diversification requirements under Regulation 15(1)(c) of the AIF Regulations would be applicable to such investments as well.
SEBI Order on Buy-Back of Securities in the Matter of Wipro Limited
SEBI, by way of its order dated February 15, 2019 (‘Wipro Order’), has granted an exemption to Wipro Limited (‘Wipro’) from the strict enforcement of Regulation 24(ii) of the SEBI (Buy–back of Securities) Regulations, 2018 (‘Buyback Regulations’), which provided that a company cannot make a public announcement of buyback during the pendency of any scheme or amalgamation. Wipro had filed the application on account of a scheme of amalgamation providing for Wipro’s wholly owned subsidiaries with Wipro.
In the application seeking relaxation of enforcement of Regulation 24 (ii), Wipro submitted that there would be no new issue of equity shares or change in the shareholding pattern of Wipro consequent to the scheme of amalgamation with its wholly owned subsidiaries and that the merger is merely an internal re-organization with its group of companies and there will not be any material impact from the perspective of consolidated financial statements of Wipro. SEBI granted the exemption subject to the proposed buyback (if approved by the board of directors of Wipro) being in accordance with applicable laws, and the averments made by Wipro in its application and the scheme of amalgamation intimated to the relevant stock exchanges being true and correct.
SEBI Informal Guidance in the Matter of DSP Merrill Lynch Limited
SEBI issued an interpretative letter on February 8, 2019, to DSP Merrill Lynch Limited (‘DSPML’), a SEBI registered intermediary engaged in activities including stock broking, merchant banking, underwriting and research analysis, and provided guidance under the SEBI (Informal Guidance) Scheme, 2003 regarding the SEBI ( KYC (Know Your Client) Registration Agency) Regulations, 2011 (‘SEBI KRA Regulation’) and SEBI’s Master Circular on ‘Guidelines on Anti-Money Laundering ( AML) Standards and Combating the Financing of Terrorism ( CFT) /Obligations of Securities Market Intermediaries under the Prevention of Money Laundering Act, 2002 and Rules framed thereunder’ dated July 4, 2018 (‘Master Circular’).
DSPML had sought guidance on whether it could rely on the client’s status as ‘verified or registered’ on the KYC Registration Agency (‘KRA’) system while performing due diligence on the client, if certain KYC documents were deficient, obsolete or missing. SEBI clarified that the intermediary is responsible for identifying and verifying its client by using the KYC documents provided and any discrepancies in the documents are required to be informed to KRA for subsequent corrective action.
In this regard, SEBI highlighted various rules / regulations, including the SEBI KRA Regulations, the Master Circular, Frequently Asked Questions (FAQs) on KYC Requirements, and the Prevention of Money-laundering (Maintenance of Records) Rules, 2005 (‘PML Rules’) and stated that the ultimate responsibility to verify and identify the client is cast upon the registered intermediary while commencing an account-based relationship with the client. In case of mismatch in information, the intermediary is required to immediately refer the matter for corrective action to the custodian and KRA, before on-boarding the client.
Therefore, DSPML would not be permitted to rely on documents which are deficient, obsolete or missing, if the KYC status is shown as ‘verified/ registered’ in the KRA system. DSPML, as part of conducting a KYC check is required to do due diligence by seeking the proper KYC documents in accordance with SEBI regulations / circulars and the PML Rules, before onboarding the client.
SEBI Informal Guidance on Investment in Corporate Debt by FPIs
SEBI has issued an interpretative, non-binding letter dated November 28, 2018, to Genpact India Private Limited (‘Genpact’) under the SEBI (Informal Guidance) Scheme, 2003 providing guidance on SEBI ( FPI) Regulations, 2014 (‘FPI Regulations’), RBI circulars dated November 17, 2016 and April 17, 2018 and SEBI circular dated February 28, 2017 on Investment by FPIs in debt (collectively the ‘Circulars’).
Genpact had issued certain rated, unsecured, redeemable and non-convertible debentures (‘NCDs’) on a private placement basis to a FPI registered with SEBI (‘FPI Entity’).
The NCDs issued had a maturity period of more than three years and were utilized to meet funding requirements for day-to-day operations, downstream investments and general corporate purposes.
Prior to the Circulars, except for infrastructure companies, FPIs were allowed to invest in listed NCDs only. Pursuant to the Circulars, FPIs had been permitted to invest in unlisted corporate debt, subject to a minimum residual maturity of more than one year, and an end-use restriction on investment in real estate business, capital market and purchase of land.
A clarification was sought on whether Genpact is permitted to delist its existing listed NCDs subscribed to by the FPI Entity prior to the date of the Circulars coming into effect and utilize the proceeds of such listed NCDs in making downstream investments on private arrangement basis. In this regard, SEBI was of the view that:
i. There was no violation to the end-use restriction rules for the proceeds raised from the issuance of NCDs as Genpact’s nature of business was in accordance with the said rules; and
ii. On de-listing of NCDs, SEBI was of the view that it depends on the terms of the offer document/private placement memorandum issued by Genpact to the FPI Entity on whether the NCDs are required to be necessarily listed or ‘may be’ listed.
If as per the offer document/private placement memorandum, the NCDs have to necessarily be listed, then they should be held till maturity and subsequently delist in accordance with the procedure set out in Regulation 59 of the SEBI (Listing Obligations and Disclosure Requirement) Regulations, 2015.
SEBI Informal Guidance in the Matter of Infosys Limited
On March 12, 2019, SEBI issued an informal guidance pursuant to certain questions raised by Infosys Limited in relation to SEBI (Share Based Employee Benefits) Regulations, 2014 (‘SBEB Regulations’) and the Buyback Regulations. Infosys had sought the following clarifications:
i. Whether Infosys can issue stock options grant letters (‘Grant Letters’) for issuing stock options (‘ESOPs’) to eligible employees during the ‘buyback period’ in the
context of Regulation 24(i)(b) of the Buyback Regulations;
ii. If the equity shares are to be issued by the company, pursuant to exercise of ESOPs granted during the ‘buyback period’, whether the minimum vesting period of one
year (as stated in Regulation 18(1) of the SBEB Regulations) is to be computed from the date of grant of such ESOPs or from the date being one year from the expiry of the ‘buyback period’; and
iii. Further, with respect to equity shares to be transferred by the Infosys Employee Benefits Trust to the eligible employees pursuant to exercise of ESOPs granted during
the ‘buyback period’ (there being no new equity shares issued by the Infosys upon exercise of such ESOPs), whether the minimum vesting period of one year is
to be computed from the date of grant of such ESOPs.
The Buyback Regulations define ‘buyback period’ as the period between the date of board of directors resolution or date of declaration of results of the postal ballot for special resolution of shareholders (as the case may be) to authorize the buyback of shares and the date on which the payment of consideration to shareholders who have accepted the buyback offer is made.
Regulation 24(i)(b) of the Buyback Regulations provides that a company must not issue any shares or other specified securities including by way of bonus till the date of expiry of ‘buyback period’. Specified securities under the Buyback Regulations also include ESOPs. Regulation 18(1) of the SBEB Regulations provides that the minimum vesting period for employee stock options will be one year.
With respect to the first query, SEBI noted that the company is not prohibited from issuing Grant Letters to the employees during the buyback period but the ESOPs would convert or vest only after expiry of the buyback period and subject to Regulation 18(1) of the SBEB Regulations (which provides that in case of ESOPs, there should be a minimum vesting period of one year). With respect to the second query, SEBI noted that the minimum vesting period of one year would be computed from the date of the Grant Letters. Further, with respect to the third query, SEBI noted that with respect to equity shares which are to be transferred by the Infosys Employee Benefits Trust to the employees pursuant to exercise of ESOPs granted during the ‘buyback period’, the minimum vesting period of one year should be computed from the date of grant of such ESOPs.
Amendments to SEBI (Prohibition of Insider Trading) Regulations, 2015
SEBI on December 31, 2018 has issued key amendments to the SEBI (Prohibition of Insider Trading) Regulations, 2015 with effect from April 1, 2019. Please refer to our Client Alert dated April 8, 2019 available at https://www.azbpartners.com/bank/amendments-to-sebi-prohibition-of-insider-trading-regulations-2015-key-highlights, for more details.
For further information, please contact:
Zia Mody, Partner, AZB & Partners
zia.mody@azbpartners.com
