27 April, 2015
Proposed Amendments To The Restrictions On ‘Willful Defaulters’ Under The SEBI Act, 1992
SEBI has released a discussion paper on ‘Proposed Amendments to Regulations framed under SEBI Act, 1992 for Imposing Restrictions on Willful Defaulters’ dated January 5, 2015 (‘Discussion Paper’).
The present SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (‘ICDR Regulations’) provide that a person listed as a willful defaulter by the RBI is prohibited from making a public issue of convertible debt instruments. However, such person may still access capital markets to issue any other listed instrument. Under the Discussion Paper, SEBI has proposed imposing certain restrictions on ‘willful defaulters’ from accessing capital markets, includingthe following:
i. a person will not be permitted to make a public issue of equity securities, if such person, its promoter, its group company or its director, is listed as a willful defaulter by the RBI;
ii. such person will not be permitted to make a public issue of debt securities or non-convertible redeemable preference shares, if either such person, its promoter, its group company or its director, is listed as a willful defaulter by the RBI, or if such person is in default of payment of interest or principal amount in respect of debt instruments issued by it to the public;
iii. existing listed companies that are listed as willful defaulters by the RBI, or whose respective promoters, group companies or directors are listed as willful defaulters by the RBI, are permitted to make a rights issue or private placement to qualified institutional buyers, provided they make full disclosures in the offer document; and
iv. existing listed companies that are listed as willful defaulters by the RBI, or whose respective promoters, group companies or directors are listed as willful defaulters by the RBI, will not be permitted to acquire control over other listed entities pursuant to the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (‘Takeover Code’). However, in the event of a hostile bid, such companies will be permitted to make a counter offer pursuant to the Takeover Code. In this regard, also see our summary on the Master Circular on Willful Defaulters issued by the RBI, covered under the Banking and Finance section below.
Consultative Paper On Managing/Advising Of Offshore Pooled Assets By Local Mutual Fund Managers
SEBI has released a consultative paper on managing/advising of offshore pooled assets by local mutual fund managers (‘Consultative Paper’) with a view to amend the SEBI (Mutual Fund) Regulations, 1996 (‘MF Regulations’).
The existing provisions under Regulation 24(b) of the MF Regulations permit an asset management company (‘AMC’) to undertake the business activity of management and advisory of offshore pooled assets/fund. However, for managing an offshore fund, the AMC is allowed to appoint the same fund manager who is managing the domestic scheme, only if the following conditions are met: (i) the investment objective and asset allocation of the domestic scheme and the offshore fund are the same; (ii) the portfolio is replicated in both the funds managed by that fund manager; and (iii) offshore fund is required to be a broad based fund, i.e. to have at least 20 investors with no single investor accounting for more than 25% of corpus of the fund. If these conditions are not met, a separate fund manager is required to be appointed for managing / advising the offshore fund.
With a view to address the same, SEBI in the Consultative Paper proposes to amend the provisions of the MF Regulations such that the requirements specified in Regulation 24(b) (as specified above) will not be applicable to funds managed / advised by local fund managers of AMCs in respect of: (i) category I foreign portfolio investors (‘FPIs’), which includes Government and Government related entities such as central banks, Government agencies, Sovereign Wealth Funds; and (ii) broad based category II FPIs such as portfolio managers, investment managers, asset management companies, banks etc.
Discussion paper on review and further facilitation of capital raising process SEBI has released a discussion paper titled ‘Revisiting the capital raising process’ (‘Capital Raising Discussion Paper’) to review and further facilitate the capital raising process by (i) use of secondary market infrastructure in the application process in public issues; and (ii) extension of fast track procedure for follow-on public offerings and rights issues. Set out below are the salient features of the Capital Raising Discussion Paper:
I. Utilisation Of Secondary Market Infrastructure In The Application Process In Public Issues
With a view to reducing the post issue time from T+12 days to T+6 days, SEBI has, inter alia, proposed the following:
i. investors are to be enabled to submit applications with any stock broker, depository participant, registrar and transfer agent registered with SEBI and self certified syndicate banks (‘SCSB’);
ii. applications may also be filled in online and submitted on the web portal of the relevant trading member, depository participant, registrar and transfer agent or SCSB;
iii. investors will not be able to withdraw bids upon closure of the issue; and
iv. investors will get SMS/e-mail alerts for allotment under the public issue.
The above changes will be applicable for applications under retail and employee reservation categories in a public issue.
II. Extension Of Fast Track Procedure For Follow-On Public Offerings And Rights Issues
SEBI has proposed that the fast track route may be extended to companies having an average market capitalization of INR 2.5bn (currently, INR 30bn) and above, subject to fulfillment of certain additional conditions. The key additional conditions being: (i) promoters will mandatorily subscribe to their rights entitlement and cannot renounce their rights, except to the extent of renunciations within the promoter group, or for the purpose of complying with minimum public shareholding norms; (ii) annualized delivery based trading turnover requirement of 10% of the total paid up capital; and (iii) issuer, promoter group and directors of the issuer should not have settled any alleged violation of securities laws through the consent mechanism with SEBI in the last three years.
Changes In Investment Conditions For FPI Investments In Corporate Debt Securities And Government Debt Securities
SEBI has, by circulars dated February 3, 2015 and February 5, 2015, introduced certain changes in the investment conditions for investments by FPIs in corporate debt securities and Government debt securities respectively, in light of certain policy changes announced by RBI. RBI has also issued circulars dated February 3, 2015 and February 5, 2015 notifying corresponding changes to the applicable exchange control regulations framed under the provisions of the Foreign Exchange Management Act, 1999.
In relation to corporate debt securities, SEBI has mandated that: (i) going forward FPIs will be permitted to only invest in corporate bonds having a minimum residual maturity of three years; and (ii) FPIs are no longer permitted to invest in liquid and money market mutual fund schemes. SEBI has, however, clarified that there will be no lock-in period with respect to FPI investments in corporate debt securities, and FPIs will be free to sell such securities (including securities presently held that have less than three years residual maturity) to domestic investors.
Regarding Government debt securities, SEBI has prescribed that FPIs will be permitted to utilize any coupon received from investments in Government debt securities to invest in further Government debt securities within a period of five working days from receipt of such coupon, and that such investment of coupons will not be considered part of the currently permitted limit of USD 30bn for investments by FPIs in Government debt securities and will be a separate investment category over and above such limit. However, SEBI has clarified that all other existing conditions for investments by FPIs in Government debt securities will continue to apply to such investments.
The RBI has, by a circular dated February 6, 2015, also clarified that pursuant to the abovementioned changes, FPIs will not be permitted to make fresh investments in commercial papers or in debt instruments that have optionality clauses (such as a call or put option), which are exercisable within three years. However, it has stated that FPIs are permitted to continue making investments in amortised debt instruments, provided that the duration of such instruments exceeds three years.
SEBI Board Meetings: Issuance Of Partly Paid Shares And Warrants By Indian Companies; SEBI Mutual Fund Regulations; And Review Of Continuous Disclosure Requirements
SEBI, in its meeting held on January 22, 2015 has approved the following:
i. in case of partly paid shares issued through public/ rights issue, a minimum of 25% of the issue price will be required to be received upfront. If the issue size is less than INR 5bn , the balance consideration will be required to be received within 12 months. If the issue size exceeds INR 5bn and the issuer has appointed a monitoring agency, the issuer is permitted to determine the period for receipt of the balance consideration as per the existing regulatory framework.
ii. in case of warrants issued along with public/ rights issue of specified securities, 25% of the consideration is required to be received upfront by the issuer. Further, the tenure of such warrants will be 18 months as against the existing period of 12 months.
In its board meeting held on March 22, 2015, SEBI:
a. decided to remove the existing restrictions on managing offshore funds under the MF Regulations on a fund manager managing a domestic scheme , belonging to Category I FPIs and[/or] appropriately regulated broad based Category II FPIs.
b. proposed the following key changes to the proposed SEBI (Listing Obligations and Disclosure Requirements) Regulations were approved by the SEBI:
i. listed companies will be required to make disclosures of all events to the stock exchanges as soon as practicable and no later than 24 hours of occurrence of the relevant event;
ii. disclosure of the outcome of board meetings will be required to be made within 30 minutes of closure of the meeting;
iii. listed companies will be required to update disclosures on material developments till such time the event/ information is resolved/ closed, with explanations wherever necessary;
iv. each listed company will be required to disclose on its website all material events/ information on the website for a minimum of five years; and
v. SEBI will specify an indicative list of information that may be disclosed upon occurrence of an event.
SEBI Releases ‘Frequently Asked Questions’ on the SEBI (Investment Advisers) Regulations, 2013.
SEBI has, on February 25, 2015, released a set of frequently asked questions(‘FAQs’) in relation to the SEBI (Investment Advisers) Regulations, 2013 (‘IA Regulations’).
By way of the FAQs, SEBI has clarified that an entity / person, which is otherwise regulated by other sector-specific regulators, will be required to obtain registration under IA Regulations if such entity / person is providing advice in relation to financial products or securities other than those covered by the said sector-specific regulators. For instance, such registration will be applicable to insurance agents or insurance brokers or pension advisers or mutual fund distributors, registered with Insurance Regulatory and the Development Authority of India (‘IRDA’),
Pension Fund Regulatory and Development Authority or the Association of Mutual Funds in India respectively, who will, in addition to providing investment advise relating to insurance products or pension products or mutual fund products respectively, also provide investment advice on other financial products or securities.
Further, with respect to the applicability of the IA Regulations to SEBI-registered intermediaries, such as stock brokers or merchant bankers, SEBI has clarified that such entities are required to obtain registration under the IA Regulations only if (i) a stock broker is providing investment advice to investors other than broking clients, or (ii) if a merchant banker is providing investment advice to its clients that are other than merchant banking and corporate advisory services covered under the SEBI Merchant Bankers Regulations. Moreover, SEBI has clarified that an individual registered as an investment adviser will not undertake any distribution / execution services for his clients.
With respect to risk profiling by investment advisers, SEBI has clarified that although institutional/ corporate clients may normally be treated as sophisticated investors and not require risk profiling, if any advice is in relation to investment in derivatives, complex structured products, etc., then the investment adviser may be required to perform risk profiling.
Amendments To The SEBI (Delisting of Equity Shares) Regulations, 2009
By way of notification dated March 24, 2015, the SEBI has made the following key amendments to the SEBI (Delisting of Equity Shares) Regulations, 2009 (‘Delisting Regulations’):
i. no promoter or promoter group will be permitted to propose delisting, if any entity belonging to the promoter or promoter group has sold equity shares of the relevant company during a period of six months prior to the date of the board meeting in which the delisting proposal was approved;
ii. the amendments specify the process to be followed by the board of directors of the company prior to granting approval to the delisting proposal;
iii. entities belonging to the acquirer, promoter and promoter group of the relevant company have been prohibited from selling shares of such company during the period from the date of the board meeting in which the delisting proposal was approved till the completion of the delisting process;
iv. a delisting offer will be considered successful if (i) the post offer promoter shareholding (along with the persons acting in concert with the promoter) taken together with the shares accepted through eligible bids, reaches 90% of the total issued shares of that class excluding the shares that are held by a custodian and against which depository receipts have been issued overseas; and (ii) at least 25% of the public shareholders holding shares in the demat mode as on date of the board meeting have participated in the book building process;
v. SEBI has also been empowered to grant relaxation from any of the requirements of the Delisting Regulations, for reasons recorded in writing, if SEBI is satisfied that the relaxation is in the interests of investors in securities and the securities market.
Amendments To ICDR Regulations
By way of a notification dated March 24, 2015, SEBI has made the following key amendments to the ICDR Regulations, whereby warrants may be issued along with a public issue or rights issue of specified securities if the following conditions are met in addition to the existing conditions:
i. the price and conversion formula of the warrants are required to be determined upfront and at least 25% of the consideration amount is also required to be received upfront;
ii. in the event the warrant holder does not exercise the option to take the equity shares against any of the warrants held by him, the consideration paid in respect of such warrants will be forfeited by the issuer.
SEBI (Issue And Listing of Debt Securities) (Amendment) Regulations, 2015
By way of its notification dated March 24, 2015, SEBI has amended the SEBI (Issue and Listing of Debt Securities) Regulations, 2008 to insert two new regulations, namely Regulation 17A and Regulation 20A. Regulation 17A provides an issuer making public issue of debt securities with the right to recall such securities prior to the maturity date at his option or provide such right of redemption prior to the maturity date to all investors or only to retail investors, at their option, subject to satisfaction of certain conditions specified by SEBI in this regard. Further, pursuant to Regulation 20B, an issuer has been permitted to carry out consolidation and reissuance of its debt securities, subject to fulfillment of certain prescribed conditions.
Amendments To The Takeover Code
By way of notification dated March 24, 2015, SEBI has made the following key amendments to the Takeover Code:
i. an acquirer making a public announcement of an open offer in terms of Regulations 3, 4 or 5 of the Takeover Code, is now permitted to delist the target company in accordance with the Delisting Regulations, provided that the acquirer declares upfront his intention to delist at the time of making the detailed public statement;
ii. in case of a delisting offer, the acquirer is permitted to complete the acquisition of shares attracting the obligation to make an open offer in terms of Regulations 3, 4 or 5 of the Takeover Code, only after making the public announcement regarding the success of the delisting proposal made pursuant to Regulation 18(1) of the Delisting Regulations.
The SEBI (Prohibition of Insider Trading) Regulations, 2015
SEBI has notified the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 (‘IT Regulations 2015’) on January 15, 2015 effective from May 15, 2015. Set out below are the key features of the IR Regulations, 2015:
i. The definition of “insider” includes any person in possession of or having access to unpublished price sensitive information relating to a company or securities listed or proposed to be listed (‘UPSI’).
ii. Communication, procurement or allowing access to UPSI is prohibited with the exception of communication in furtherance of legitimate purposes, performance of duties, or discharge of legal obligations.
iii. UPSI can be communicated or procured in connection to a transaction in certain cases, including for due diligence, if the board of the company believes the transaction to be in the best interests of the company, provided that information is made generally available at least two trading days prior to the proposed transaction being effected;
iv. An insider is prohibited from trading when in possession of UPSI except in cases of an off-market inter-se transaction between promoters of the company, in certain situations and when (i) the individuals who possessed the UPSI and those who made trade decisions were different; (ii) the trade making individuals did not possess UPSI at the time of the trade; and (iii) there are adequate and appropriate arrangements to ensure that the IT Regulations 2015 are not violated.
v. The IT Regulations 2015 have introduced the concept of irrevocable ‘trading plans’ for permitted trades by insiders subject to specific conditions as specified in the IT Regulations 2015.
vi. Every promoter, key managerial personnel and director of every listed company, is required to disclose his holding to the company as on May 15, 2015 by June 14, 2015.
vii. The IT Regulations 2015 have also modified the continual disclosure requirements to extend to only promoter, key managerial personnel, employees and directors.
Discussion Paper On Alternate Capital Raising Platform And Review Of Other Regulatory Requirements
SEBI has released a discussion paper titled ‘Alternate Capital Raising Platform and Review of other regulatory requirements’ to (i) permit listing of small and medium scale enterprises on the institutional trading platform without having to make an initial public offering of its securities; and (ii) review of certain other regulatory requirements on disclosures. (‘Alternate Capital Raising Discussion ’). Set out below are certain key features of the Alternate Capital Raising Discussion Paper.
i. With a view to providing existing institutional investors such as angel investors an exit from investments in start-ups and to provide start-ups with an alternate source of funding, the Alternate Capital Raising Discussion Paper proposes to list the securities of start-ups and SMEs on a separate institutional trading platform accessible to Qualified Institutional Buyers and Non-Institutional Investors subject to certain restrictions;
ii. Further, with a view to relaxing the listing process, relaxations have been proposed by SEBI to the existing disclosure norms prescribed under the ICDR Regulations in relation to objects of the issue, lock-in of shares, including shares held by the promoters of the issuer and the calculation of the basis of the issue price.
iii. Additionally, the Alternate Capital Raising Discussion Paper has also proposed certain changes to the existing disclosure requirements and definitions under the ICDR Regulations, including in relation to disclosure of litigation involving the issuer and disclosures in relation to creditors.
For further information, please contact:
Zia Mody, AZB & Partners
zia.mody@azbpartners.com
Abhijit Joshi, AZB & Partners
abhijit.joshi@azbpartners.com
Shuva Mandal, AZB & Partners
shuva.mandal@azbpartners.com
Samir Gandhi, AZB & Partners
samir.gandhi@azbpartners.com
Percy Billimoria, AZB & Partners
percy.billimoria@azbpartners.com
Aditya Bhat, AZB & Partners
aditya.bhat@azbpartners.com
