17 October, 2017
Guidelines on Issuance of Offshore Derivative Instruments with Underlying Derivatives
On July 7, 2017, the Securities and Exchange Board of India (‘SEBI ’) issued a circular on guidelines for issuance of offshore derivative instruments (‘ODIs ’), with derivatives as underlying, by the ODI issuing foreign portfolio investors (‘FPI ’) (‘ODI Guidelines ’). As per the SEBI (Foreign Portfolio Investors) Regulations, 2014 (‘FPI Regulations ’), FPI s are required to comply with certain conditions for issuance of ODI s. Per the ODI Guidelines, FPI s issuing ODI s are required to comply with the following from July 7, 2017:
i. The ODI issuing FPI s will not be allowed to issue ODI s with derivatives as underlying, with the exception of those derivative positions that are taken by the ODI issuing FPI s for hedging the equity shares held by them, on a one-to-one basis;
ii. If there are existing ODI s issued by FPI s where the said underlying derivatives position are not for the purpose of hedging the equity shares held by it, the ODI issuing FPI s are required to liquidate such ODI s latest by the earlier of the date of maturity of the ODI instrument or by December 31, 2020. However, such FPI s must endeavor to liquidate such ODI instruments prior to the said timeline;
iii. If fresh ODI s are issued with derivatives as underlying, a certificate would need to be issued by the compliance officer (or its equivalent) of the ODI issuing FPI , certifying that the derivatives position, on which the ODI is being issued, is only for hedging the equity shares held by it, on a one-to-one basis. The said certificate will be submitted alongwith the monthly ODI reports; and
iv. It has been clarified that the term ‘hedging of equity shares’ means taking a oneto-one position in only those derivatives which have the same underlying as the equity share.
Debt Investments by FPIs
SEBI issued a circular on July 20, 2017, which brought about the following modifications to the existing legal framework governing investments in corporate debt by FPIs:
i. 95% of the combined corporate debt limit (‘CCDL’) will be available for FPI investment on tap, after which an auction mechanism will be initiated for allocating the remaining limits.
ii. Once such limit is exceeded, the National Securities Depository Limited and Central Depository Services Limited will direct custodians to halt further investments in corporate debt securities by FPIs, and inform BSE Limited and National
Stock Exchange of India Limited to conduct an auction for allocation of the unutilised FPI corporate debt limit, provided such limit is at least . 100 crores (approx. US$ 15.3 million). If the unutilised FPI corporate debt limit continues to remain lower than the above amount for 15 consecutive trading days, then an auction is to be conducted on the 16th day.
iii. The minimum bid is . 1 crore (approx. US$ 153,000), and the maximum bid is for 10% of the unutilised FPI corporate debt limit. A single FPI/ FPI group cannot bid for more than 10% of the limits being auctioned.
iv. Once the unutilised FPI corporate debt limit has been auctioned, the FPIs have a utilisation period of 10 trading days to make investments, after which the unutilized FPI corporate debt limit allocated to them, reverts to the pool of free limits.
v. Investment in corporate debt by FPIs on tap and issuance of rupee denominated bonds overseas by Indian companies will again be available once the FPI corporate debt limit utilisation levels fall back to less than 92%.
vi. Investments by FPIs in unlisted corporate debt will compulsorily be in dematerialised form, and be subject to a minimum residual maturity period of three years.
Change in Corporate debt limits for FPIs
SEBI, on August 4, 2016, had redefined the corporate debt limit of . 244,323 crores (approx. US$ 38 billion) for FPIs as the CCDL for all foreign investments in rupee denominated bonds (‘RDBs’) issued onshore and offshore by Indian corporates. Subsequently, the RBI, by way of its circular dated September 22, 2017, excluded foreign investment in RDBs issued offshore by Indian corporates from CCDL, with effect from October 3, 2017. In line with the same, SEBI, on September 29, 2017, has notified that foreign investments in rupee denominated bonds issued offshore by Indian corporates would no longer form a part of CCDL. Additionally, CCDL would be renamed as the corporate debt investment limits (‘CDIL’) for FPIs and the upper limit for CDIL would be stated only in Rupee terms.
The circular also contemplates the creation of a sub-limit within the overall CDIL exclusively for investments by long term FPIs in the infrastructure sector, which sub-limit would include investment in both listed and unlisted corporate debt issued by companies in the infrastructure sector. The sub-limit would be . 9,500 crores (approx. US$ 1.5 billion) from October 3, 2017 and will be enhanced to . 19,000 crores (approx. US$ 3 billion) on January 1, 2018 and will also be available for investment on tap. As mandated by SEBI previously, investment by FPI s in unlisted corporate debt securities and securitized debt instruments is not permitted to exceed . 35,000 crores (approx. US$ 5.4 billion) within the extant CDIL.
Consultation Paper on Easing of Access Norms for Investment by FPIs
SEBI, on June 28, 2017, issued a consultation paper on Easing of Access Norms for Investment by FPIs, which inter alia proposes the following key amendments to the FPI Regulations:
i. The jurisdictions from which Category I FPI registrations are allowed should also include jurisdictions that are compliant with the extant foreign exchange regulatory framework and that have formal diplomatic ties with India (such as Canada).
Presently, such registrations are limited to those entities which are resident of a country whose securities market regulator is either a signatory to International Organisation of Securities Commissions’ Multilateral Memorandum of Understanding or has a bilateral Memorandum of Understanding with SEBI;
ii. Discontinuance of the requirement to seek prior approval from SEBI in case of change of the designated depository participant / custodian of the FPI.
iii. Deeming as ‘broad based’ (for the purpose of Category II FPI registration) applicant funds which have banks, sovereign wealth funds, insurance/ reinsurance companies, pension funds, and/or exchange traded funds as underlying investor(s), subject to the condition that such underlying investor(s) in the applicant fund should either individually or jointly hold majority stake in the applicant fund at all times; and
iv. Permitting different custodians for FPI and foreign venture capital investor (‘FVCI’) registrations for the same entity (presently, an entity holding FPI and FVCI registration is required to have the same custodian for both registrations). SEBI has also proposed that if an entity has a FPI registration and a FVCI registration, then the investment limit of 10% under the FPI Regulations should also include FVCI investments by entities forming a part of the same investor group.
Further, SEBI proposes that FPIs must report details of all other FVCIs which share more than 50% common beneficial ownership to the designated depository participant at the time of seeking registration, and FVCI applicants are also proposed to be mandated to provide details of ‘group’ FPI accounts to SEBI at the time of making an application for FPI registration.
The Consultation Paper also prescribes norms for rationalization of fit and proper criteria for FPIs, rationalization of certain compliance requirements, and other related matters. SEBI invited comments and views on the consultation paper by stakeholders, the window for which is now closed.
Disclosure of Divergence in the Asset Classification and Provisioning by Banks
Pursuant to the RBI notification dated April 18, 2017 requiring certain disclosures by banks in cases of divergence in asset classification and provisioning, SEBI , by its circular dated July 18, 2017 mandated banks with listed specified securities (equity shares and convertible securities) to disclose divergences in asset classification and provisioning to the stock exchanges in the prescribed format where:
i. the additional provisioning requirements assessed by the RBI exceed 15% of the published net profits after tax for the reference period; and/or
ii. the additional gross non performing assets identified by the RBI exceed 15% of the published incremental gross non performing assets for the reference period.
Such disclosures are required to be made along with the annual financial results filed immediately following communication of such divergence by the RBI to the concerned bank, as an annexure to the disclosures to the annual financial results filed with the stock exchanges in accordance with the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
Disclosure by Listed Entities of Defaults on Payment of Interest or Repayment of Principal Amount on Loans
SEBI had issued a circular on August 4, 2017 mandating disclosures by listed entities that have defaulted on inter alia, either the payment of interest or the repayment of the principal amount on loans taken from banks or financial institutions, with effect from October 1, 2017. Accordingly, all entities which have listed any specified securities (equity and convertible securities), non-convertible debt securities or non-convertible and redeemable preference shares, are required to disclose any default with respect to, either the payment of interest, or instalment obligation on debt securities (including commercial paper), medium term notes, foreign currency convertible bonds, loans from banks and financial institutions, external commercial borrowings, etc.
However, SEBI, through its press release dated September 29, 2017, has decided to indefinitely defer the implementation of this circular.
Amendments to the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
SEBI, on August 14, 2017, notified amendments to Regulation 10 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (‘Takeover Regulations’) pursuant to which exemptions from making an open offer have been accorded to certain acquisitions under the Insolvency and Bankruptcy Code, 2016 (‘IBC’) and under debt restructuring schemes subject to compliance with the conditions specified therein.
Definition of ‘Control’ under the Takeover Regulations
With a view to bring about clarity on the definition of “control” under the Takeover Regulations, SEBI had, on March 14, 2016, published a discussion paper setting out certain bright line tests for the interpretation of the term “control”, which, inter alia , sets out a set of protective (as opposed to participative) rights which would not be constituted as ‘control’.
However, SEBI has, by a press release, on September 8, 2017, clarified that it does not propose to formalize these rights into the Takeover Regulations and, instead, proposes to continue with the subjective definition of “control”, and determine what constitutes “control” on a case to case basis.
Consultation Paper on Amendments/Clarifications to the SEBI (Investment Advisers) Regulations, 2013
SEBI, on June 22, 2017, issued a consultation paper on Amendments/ Clarifications to the SEBI (Investment Advisers) Regulations, 2013 (‘IA Regulations’), setting out the following key proposals:
i. Segregation between “investment advisory” services and “distribution/execution services”: To maintain a clear segregation between these two services provided by the same entity and to prevent associated conflicts of interest, SEBI has proposed amending the IA Regulations to prohibit entities offering investment advisory services from offering distribution/execution services, including in cases of banks, non-banking financial companies and body corporates that offer such services through separately identifiable departments or divisions. Such departments will be required to be segregated within a period of six months through a separate subsidiary. Entities which provide advice solely on products which do not qualify as securities have been excluded from the purview of the IA Regulations.
ii. Distribution of mutual fund schemes by distributors: To maintain a clear segregation between “advising” and “selling / distribution” of mutual fund products”, SEBI proposes that mutual fund distributors will only be permitted to explain the
features of schemes of which they are distributors and distribute them while ensuring suitability of the scheme to the investors, but will not give any investment advice.
iii. Incidental advice by recognized intermediaries: Under the existing framework, exemptions from IA registration have been granted to inter alia various intermediaries, who give investment advice to their clients incidental to their primary activity.
SEBI has now proposed that in order to have a clear segregation between “investment advisory services” and other services provided by such intermediaries, all intermediaries who receive separate identifiable consideration for investment advisory services will need to register with SEBI as an investment adviser. Moreover, persons who provide holistic advice/ financial planning services are compulsorily required to be registered as investment advisers.
iv. Relaxation in registration requirements: SEBI has proposed that the educational qualification requirements for representatives/employees of registered investment advisers be relaxed. It has also been proposed to reduce the net worth requirement for body corporates from . 25 lakhs (approx. US$ 38,000) to . 10 lakhs
(approx. US$ 15,000).
v. Regulation of the activity of ranking of mutual fund scheme: SEBI has proposed that the activity of ranking of mutual fund schemes be brought within the ambit of SEBI (Research Analyst) Regulations, 2014, under a separate chapter.
SEBI Circular in relation to Schemes of Arrangement by Listed Entities
Rule 19(7) of the Securities Contracts (Regulation) Rules, 1957 (‘SCRR ’) provides that SEBI may, at its own discretion or on the recommendation of a recognized stock exchange, waive or relax the strict enforcement of any or all of the requirements with respect to listing as prescribed under the SCRR in relation to schemes of arrangements by listed entities. By its circular dated March 10, 2017, SEBI had provided that at least 25% of the post-scheme paid up share capital of the transferee entity seeking relaxation from Rule 19(2)(b) of the SCRR (which provides specific conditions for securities offered to the public for subscription) should comprise shares allotted to the public shareholders in the transferor entity.
By its circular dated September 21, 2017, SEBI has provided that in the event the entity fails to comply with the aforementioned requirement, it may alternatively satisfy the following conditions:
i. It has a valuation in excess of . 1,600 crores (approx. US$ 246 million) as per the valuation report;
ii. The value of post-scheme shareholding of public shareholders of the listed entity in the transferee entity is not less than . 400 crores (approx. US$ 62 million);
iii. At least 10% of the post-scheme paid-up share capital of the transferee entity comprises shares allotted to the public shareholders of the transferor entity; and
iv. It must be required to increase its public shareholding to at least 25% within a period of one year from the date of listing of its securities and an undertaking to this effect is incorporated in the scheme of arrangement.
For further information, please contact:
Zia Mody, Partner, AZB & Partners
zia.mody@azbpartners.com
