India – Capital Markets & Securities Snapshots.

1 May, 2016

 

Amendment to ICDR Regulations 

 

On February 17, 2016, SEBI amended the ICDR Regulations by introducing Chapter VI-A, which provides for certain conditions and the manner of providing an exit opportunity to dissenting shareholders, who have voted against any proposal to vary the terms of contracts3 or objects referred to in a prospectus. Certain criteria for making an exit offer have been prescribed along with the requirements that an exit offer process is required to comply with. Consequential amendments have been made to the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (‘Takeover Regulations’) to exempt acquisition of shares or voting rights of a listed company pursuant to such exit offer made to dissenting shareholders, from the requirement of making an open offer. 

 

SEBI Board Meeting – Imposition of Restrictions on Willful Defaulters 

 

SEBI, in its board meeting held on March 12, 2016, approved the following proposals with respect to the imposition of restrictions on wilful defaulters:

 

1. no issuer will be allowed to make a public issue of equity securities / debt securities / non-convertible redeemable preference shares, if such issuer company or its promoter or its director is on the list of the wilful defaulters;
2. any company or its promoter or its director categorized as wilful defaulter may not be allowed to take control over any other listed entity. However, if a listed company or its promoter or its director is categorized as a wilful defaulter, and there is a takeover offer in respect of the listed company, such person(s) may be allowed to make a competing offer for such listed company in accordance with the Takeover Regulations; and
3. the criteria for determining a ‘fit and proper person’ under the SEBI enacted regulations should be amended to include that no fresh registration will be granted to an entity, if the entity or its promoters or its directors or key managerial personnel, as defined under the ICDR Regulations, are included in the list of wilful defaulters. 

 

SEBI releases Discussion Paper on Brightline Tests for Acquisition of ‘Control’ under SEBI Takeover Regulations 

 

SEBI has, on March 14, 2016, released a discussion paper seeking public comments on proposals for defining a brightline test for acquisition of ‘control’ under the Takeover Regulations. SEBI has sought comments and suggestions from the public on whether Option 1, Option 2 or any other option is preferable in the Indian context, on or before April 14, 2016. SEBI has noted that the definition of ‘control’ under the Takeover Regulations reflects a principle-based approach (namely, that ‘control’ includes the right to appoint majority of the directors or to control the management or policy decisions of a company), as opposed to a rule-based approach (which would provide for clear factors to be considered when determining ‘control’), which has led to multitude of opinions (and consequent litigations) regarding the meaning of ‘control’. SEBI has also observed that the different definitions of ‘control’ under various Indian regulations may result in multiple regulators arriving at differing results in the same scenario, thereby causing confusion in the market. Based on international practice, SEBI has concluded that in most jurisdictions, ‘control’ has been defined in terms of a specified quantum of voting rights, irrespective of de facto control.

 

In view of the foregoing, SEBI is of the view that there is a need to identify brightlines for defining ‘control’, and has put forth two proposals in this regard, which are briefly described below:

 

Option 1: Framework for Protective Rights This proposal recognises the principle that veto rights may be protective in nature rather than participative, provided the concerned investor does not have the power to exercise control over the day-to-day business or policy making. SEBI has recognized that rights with regard to decisions involving a significant change in the current business activity, or which apply only in exceptional circumstances, would be considered protective rights. SEBI has, inter alia, proposed that, subject to certain conditions: (i) investors may appoint the chairman/vice chairman of the company as well as an observer to the board; (ii) lenders may be given rights that are customary rights to the lending business; and (iii) rights may be conferred on parties pursuant to commercial agreements. SEBI has further set out an illustrative list of veto/affirmative rights, which would not be construed as ‘control’ pursuant to this proposal and that may be provided to the investor subject to the certain conditions.

 

Option 2: Adopting a numerical threshold This proposal is premised on defining ‘control’ on the basis of the right or entitlement to exercise a specified quantum of voting rights of a company, or the right to appoint a specified number of directors. In this context, SEBI has proposed the following thresholds: (i) the right or entitlement to exercise at least 25% of voting rights of the company, irrespective of whether such holding provides de facto control; and/or (ii) the right to appoint majority of the non-independent directors of the company. 

 

Discussion paper on ‘Review of framework for public issuance of Convertible Securities’ 

 

Based on the recommendations of the primary market advisory committee set out in the discussion paper dated December 1, 2015 on ‘Review of framework for public issuance of Convertible Securities’, SEBI has placed for public comments, key suggestions relating to tenure, issuance and terms of listed convertible securities by companies. 

 

Report of the SEBI Alternative Investment Policy Advisory Committee 

 

In March 2015, SEBI had constituted the Alternative Investment Policy Advisory Committee (‘AIPAC’), headed by Mr. Narayan Murthy, for further development of AIFs in India. Based on the report submitted by AIPAC, SEBI had invited public comments on the report until February 10, 2016. 

 

3 – There currently exists an ambiguity as to what would amount to “terms of contracts… referred to in the prospectus”. While the discussion paper dated December 1, 2015 issued by SEBI sought to restrict this understanding to contracts which substantially affect the main line of business or revenue generation of the company, this understanding is not reflected in the SEBI (Issue of Capital and Disclosure Requirements) (Second Amendment) Regulations, 2016. 

 

 

For further information, please contact:

 

Zia Mody, Partner, AZB & Partners

zia.mody@azbpartners.com

 

 

22 July, 2015

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• The Securities and Exchange Board of India (‘SEBI’) has notified the SEBI (Buy-back of Secu-

rities) (Amendment) Regulations, 2015 (‘Buy-back Amendment Regulations’) on March 24, 2015 amending the SEBI (Buy-back of Securities) Regulations, 1998 (‘Buy-back Regulations’).

 

In addition to meeting the prescribed requirements for ‘Offer Procedure’ under the Buy- back Regulations, the Buy-Back Amendment Regulations provide that the promoter or acquirer are required to facilitate the tendering and settlement of shares in a buy-back through the stock exchange mechanism as specified by SEBI. 

 

• SEBI has notified the SEBI (Mutual Funds) (Amendment) Regulations, 2015 (‘MF Amend- ment Regulations’) on May 15, 2015. Pursuant to the MF Amendment Regulations, asset man- agement companies (‘AMCs’) of mutual funds are now also permitted to provide management and advisory services to (i) Category I foreign portfolio investors (‘FPIs’); and (ii) Category II FPIs that are appropriately regulated broad based funds, as specified under the SEBI (FPI) Regulations, 2014 (‘FPI Regulations’).

 

The MF Amendment Regulations also provide that the requirement for the AMC to appoint a separate fund manger for each separate fund managed by it (unless the investment objectives and asset allocation are same and the portfolio is replicated across all the funds managed by the fund manger) will not be applicable if the fund managed by the AMC are the said Category I FPI and/or Category II FPIs. Further the definition of ‘broad based fund’ as provided in the explanation of Regulation 24 will not be applicable to the said Category II FPIs and the defini- tion of ‘broad based fund’ as provided under the FPI Regulations will be applicable for the said Category II FPIs.

 

• DLF Limited (‘DLF’), six of its directors and its Chief Financial Officer (‘CFO’) appealed against the order dated October 10, 2014 passed by SEBI, which restrained them from accessing the securities market in any manner for a period of 3 years.

These appeals were disposed off by an order of the Securities Appellate Tribunal (‘SAT’) on March 13, 2015 where the majority quashed the SEBI order and overturned the ban on DLF, its directors and CFO.

The root of the matter relates to the adequacy of disclosures made by DLF in its initial public offering prospectus; specifically, whether DLF failed to disclose certain companies as its subsidiaries or associate companies in violation of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 and the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 2003 (‘FUTP Regulations’).

 

The key issues involved included:

 

1. DLF had three wholly owned subsidiaries, viz., (i) DLF Estate Developers Limited (‘DLF Estate’); (ii) DLF Home Developers Limited (‘DLF Home’); and (iii) DLF Retail Developers Limited (‘DLF Retail’). These three wholly owned subsidiaries in turn incorporated three companies, namely Sudipti Estates Private Limited (‘Sudipti’), Felicite Builders and Constructions Private Limited (‘Felicite’) and Shalika Estate Developers Private Limited (‘Shalika’). Thereafter, DLF Estate, DLF Home and DLF Retail transferred their shares in Shalika to Felicite, while DLF Es- tate and DLF Home transferred their shares to Sudipti and Shalika. Further, the three wholly owned subsidiaries of DLF transferred their shares in Felicite to the spouses of DLF employees. Following these transactions, Sudipti became a sub- sidiary of Shalika, which in turn became a subsidiary of Felicite. The key issue per- tains to the nature of these transactions and the appropriate treatment regarding the disclosure of these companies in DLF’s initial public offer prospectus.
2. SAT followed SEBI’s approach in categorising the issues involved into the follow- ing: (i) whether the set of transactions listed above were executed through sham transactions; (ii) whether the three companies continued to be subsidiaries of DLF; (iii) whether the prospectus contained material information that was true and adequate; and (iv) whether the parties knowingly suppressed material infor- mation and facts so as to mislead and defraud the investors in the stock market.
3. The principal question pertained to the nature of the transactions involving the transfer of shares of Sudipti, Felicite and Shalika and whether they constituted genuine transactions or sham transactions.

 

On the above issues, SAT held as follows:

 

1. It was held that the transactions are not sham transactions as they were carried out properly and that the purchasers of the shares of Felicite financed their acquisitions through proper means.
2. Further, it was held that the relevant companies, Sudipti, Felicite and Shalika need not have been disclosed in the initial public offer prospectus given that they were not subsidiaries of DLF.

 

Finally, on the question of whether there was fraud or misleading conduct under the FUTP

Regulations, it was held that the elements necessary to constitute ‘fraud’ were onerous and were not satisfied in the present case.

 

• SEBI notified the SEBI (Public Offer and Listing of Securitised Debt Instruments) (Amend- ment) Regulations, 2015 (‘Amendment Regulations’) on April 9, 2015 amending the SEBI (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2008 (‘Primary Regulations’).

 

In terms of Regulation 4 of the Primary Regulations, on and from the commencement of the Primary Regulations, no person is entitled to make a public offer of securitised debt instruments, unless inter alia all the trustees are registered with SEBI under the Primary Regulations. However, the Primary Regulations exempt certain entities from this requirement to seek regis- tration for the purpose of acting as a trustee. The Amendment Regulations have supplemented this list of exempt entities to now include (i) any scheduled commercial bank other than a re- gional rural bank; (ii) any public financial institution as defined under Clause (72) of section 2 of the Companies Act; and (iii) any other person as may be specified by SEBI are also exempt from the requirement to seek registration with SEBI for the purpose of acting as a trustee such as commercial banks and public financial institutions.

 

The Primary Regulations did not prescribe any eligibility criteria for a person desirous of making an application to act as a trustee. However, the Amendment Regulations have now prescribed the certain eligibility criteria for acting as a trustee, such as, a networth of ¤2 million and having a minimum of 2 employees with prescribed experience.

 

The Primary Regulations did not specifically lay down the obligations to be fulfilled by a trustee and in very generic terms stipulated that a trustee is required to carry out his duties and perform his functions under the Primary Regulations, the trust deed and other documents, with due care and diligence and that a trustee is required to ensure that the covenants in the trust deed and any other transaction documents are complied with by all the concerned parties.

 

The Amendment Regulations have now specifically stipulated certain obligations to be fulfilled by a trustee.

Schedule III to the Primary Regulations sets out the code of conduct that is required to be adhered to by a trustee. The Amendment Regulation has stipulated certain additional conduct rules such as:

 

1. the trustee must fulfill its obligations in a prompt, ethical and professional manner;
2. the trustee or any of its directors, partners or managers are required to refrain from insider trading; and 
3. the trustee will not be a party to creating a false market, price rigging or manipulation.

 

Schedule V to the Primary Regulations set out the disclosures that are required to be made in an ‘Offer Document’. The Amendment Regulations now require that along with such disclo- sures a summary term sheet will also be disclosed in the Offer Document, which summary term sheet is required to set out certain specified main terms as provided in the Amendment Regula- tions with regard to the offer of securitised debt instruments. 

 

 

For further information, please contact:

 

Zia Mody, Partner, AZB & Partners

zia.mody@azbpartners.com