31 October, 2016
SEBI Circular for Disclosure of the Impact of Audit Qualifications by Listed Entities
The Securities and Exchange Board of India (‘SEBI’), has issued a circular on May 27, 2016, for streamlining the existing process of disclosure of the impact of audit qualifications by list- ed companies under the SEBI (Listing and Other Disclosure Requirements) Regulations, 2015 (‘Listing Regulations’). Listed companies are required to disclose the cumulative impact of all audit qualifications in a separate format for the period ending on or after March 31, 2016, simultaneously, while submitting the annual audited financial results to the stock exchanges. SEBI has now dispensed with the requirement of filing Form A or Form B for audit report with unmodi- fied or modified opinion and the requirement of making adjustment in the books of accounts of the subsequent year, and the management of the listed entity will have the option to explain its views on the audit qualifications. If the impact of the audit qualification is not quantified by the auditor, the management must provide an estimate and if the management is unable to pro- vide an estimate, it must state reasons for the same. In both instances, the auditor is required to review and provide comments.
Informal Guidance under the Listing Regulations
SEBI has issued an informal guidance dated August 23, 2016, under the SEBI (Informal Guidance) Scheme, 2003 (‘IG Scheme’) in the matter of Krebs Biochemicals & Industries Limited regarding the requirement to obtain a shareholders’ resolution for reclassification of the promoters as per the Listing Regulations. SEBI has clarified that subject to compliance with Regulation 31A of the Listing Regulations (which lists down conditions for reclassification), reclassification of the promoters of a listed company as public shareholders, not being pursuant to an open offer (in terms of Regulation 31A(5) of the Listing Regulations) or pursuant to a listed entity becoming professionally managed (in terms of Regulation 31A(6) of the Listing Regula- tions), would not require any approval from the shareholders of the listed entity.
Amendment of the Listing Regulations
Pursuant to the notification dated July 8, 2016, SEBI has amended the Listing Regulations to include Regulation 43A, which states that the top 500 listed entities based on market capitalization (calculated as on March 31 of every financial year) are required to formulate a dividend distribution policy that must be disclosed in their annual reports and on their websites. Further, if a listed entity declares dividend on the basis of any additional parameters or proposes to amend the dividend declaration policy, it will be required to disclose the rationale for such changes in its annual report and on its website. However, companies other than the top 500 listed entities may voluntarily disclose their respective dividend distribution policies.
FAQs in Relation to the Electronic Book Mechanism for Issuance of Debt Securities on Private Placement Basis
The frequently asked questions (‘FAQs’) released by SEBI in relation to the circular dated April 21, 2016, pertaining to the electronic book mechanism (‘EBP Mechanism’) for issuance of debt securities on private placement basis, contain certain clarifications including:
For any issuance of debt securities on a private placement basis made after July 1, 2016, in case the issuer conducts multiple issuances in a financial year which are individually less than ¤500 crores (approximately US$76 million) but where the aggregate issue size in the same year crosses ¤500 crores (approximately US$76 million), the issuer is required to use the EBP Mechanism for any incremental private placement that takes the aggregate issue size in the year equal to ¤500 crores (approximately US$ 76 million) or above;
For any issuance of debt securities on a private placement basis made after July 1, 2016, the EBP mechanism is applicable for such tranche issuance(s) that may in- dividually be less than ¤500 crores (approximately US$ 76 million), but which are part of a shelf offer, including any green shoe option, is more than ¤500 crores (ap- proximately US$ 76 million) in a single financial year; and
In case of issues below ¤500 crores (approximately US$76 million) in a single financial year, where such issues have a single investor and the coupon rate is fixed, there is no requirement to mandatorily use the EB Mechanism. However, arrangers acting as underwriters will not be considered as single investors in these cases.
FAQs in Relation to Issuance and Transfer of ODIs
As per the key clarifications provided by SEBI in the FAQs dated September 2, 2016, in re- lation to its circular dated June 10, 2016, which had specified the conditions for issuance and transfer of ODIs:
The beneficial owners of an ODI subscriber cannot be a non-resident Indian, a person of Indian origin, or an Indian resident, (as defined under the Income-tax Act, 1961); and
Regarding verification of beneficial owners of ODI subscribers pursuant to the Prevention of Money-laundering (Maintenance of Records) Rules, 2005, SEBI has clarified that the relevant thresholds for identification of the beneficial owner are required to be applied at the subscriber level (and not to the material shareholder / owner entity of the subscriber, as prescribed earlier). Similarly, if no material shareholder / owner entity is identified as the ODI subscriber, the ODI issuer must obtain the identity and address proof of the relevant natural person who holds the position of senior managing official of the ODI subscriber entity (and not in the material shareholder / owner entity, as had been specified earlier).
FAQs in Relation to the SEBI (Alternative Investment Funds) Regulations, 2012
According to the SEBI (Alternative Investment Funds) Regulations, 2012, a debt fund is per- mitted to invest in ‘debt or debt securities’. In the past, there was ambiguity on whether a debt fund is permitted to give loans. As per the FAQs issued by SEBI on August 18, 2016 , it was clari- fied that alternative investment funds are not permitted to give loans and, accordingly, loans cannot be considered under the ambit of “debt or debt securities”.
Informal Guidance on Insider Trading in case of HDFC Bank Limited
SEBI has issued an interpretive letter under the IG Scheme to HDFC Bank Limited (‘HDFC’) on July 25, 2016 on whether a trade by a portfolio manager (‘PM’) under a discretionary portfolio management scheme can amount to insider trading under the SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘IT Regulations’), due to possession of unpublished price sensitive infor- mation (‘UPSI’) by a client. Under a discretionary portfolio management concept, a PM makes investments on behalf of a client, including the terms of such investments, and such decision-making of the PM is not influenced by the client. In this regard, SEBI has clarified the following:
i. Regulation 4(1) of the IT Regulations states that no insider “shall trade in securities that are listed or proposed to be listed on a stock exchange when in possession of unpublished price sensitive information.” Further, as per the explanatory notes to Regulation 4 of the IT Regulations, when a person trades in securities when in possession of UPSI, his trades are presumed to be motivated by knowledge and awareness of the UPSI.
ii. Accordingly: (a) when considering any dealing in securities, it is not relevant whether such dealing was direct or indirect; (b) under the IT Regulations, any insider when in possession of UPSI should not deal in securities of the company to which the UPSI pertains; and (c) even if such insider (having access to UPSI of a company) deals in such securities through a discretionary portfolio management scheme, the trades of insider will be presumed to be motivated by the knowledge and awareness of UPSI.
Meeting of the SEBI Board
The SEBI Board met on September 23, 2016 and took the following decisions:
Currently, FPIs are required to transact in securities through stock brokers regis- tered with SEBI, while domestic institutions such as banks, insurance companies, pension funds etc. are permitted to access the bond market directly (i.e. without brokers). SEBI has decided to extend this privilege to Category I and Category II FPIs.
In order to facilitate the growth of Investment Trusts (“InvIT”) and Real Estate Investment Trusts (“REIT”), SEBI has decided to amend the SEBI (Infrastructure Investment Trusts) Regulations, 2014 and the SEBI (Real Estate Investment Trusts)
Regulations, 2014 (“REIT Regulations”). The key amendments will include:
(a) InvITs and REITs will be allowed to invest in the two level SPV structure through the holding company subject to sufficient shareholding in the holding company and other prescribed safeguards. The holding company would have to distribute 100% cash flows realised from the underlying SPVs and at
least 90% of the remaining cash flows.
(b) The minimum holding of the mandatory sponsor in the InvIT has been reduced to 15%.
(c) REITs have been permitted to invest upto 20% in under construction assets.
The SEBI Board has approved amendments to the SEBI (Portfolio Managers) Regulations, 1993, to provide a framework for the registration of fund managers for overseas funds, pursuant to the introduction of section 9A in the Income Tax, 1961.
The SEBI Board has decided to grant permanent registration to the following categories of intermediaries: merchant bankers, bankers to an issue, registrar to an issue & share transfer, underwriters, credit rating agency, debenture trustee, depository participant, KYC registration agency, portfolio managers, investment advisers and research analysts.
The Securities Contracts (Regulation) (Stock Exchanges and Cleaning Corporations) Regulations, 2012 have been amended to increase the upper limit of share- holding of foreign institutional investors mentioned in the Indian stock exchanges from 5% to 15% and to allow an FPI to acquire shares of an unlisted stock exchange through transactions outside of recognised stock exchange including allotment.
For further information, please contact:
Zia Mody, Partner, AZB & Partners