11 May, 2018
Manner of achieving minimum public shareholding
The Securities Exchange Board India (‘SEBI’) has, by its circular dated February 22, 2018 (‘MPS Circular’), introduced the following two additional methods that can be adopted by listed entities to achieve minimum public shareholding in compliance with the requirements under the Securities Contracts (Regulation) Rules, 1957 and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘ICDR Regulations’):
i. Open Market Sale:
(a) Promoters/ promoter group are now permitted to sell up to 2% of their total paid-up equity share capital in the company in the open market, subject to five times’ average monthly trading volume of the shares of such company.
(b) The entity is required to, at least one trading day prior to every such proposed sale, announce the: (A) intention and purpose of sale; (B) details of the sellers and the shares to be sold; and (C) time period for completion of the sale, to the stock exchange(s) where its shares are listed.
(c) The listed entity is also required to give an undertaking to the relevant stockexchange(s) obtained from the promoters/ promoter group to not buy any shares in the open market on the dates on which the offer for sale is open.
ii. Qualified Institutions Placement of eligible securities under Chapter VIII of the ICDR Regulations: SEBI, by way of a circular dated February 12, 2018, has dispensed with the requirement of adhering to minimum public shareholding for a listed issuer intending to make a Qualified Institutions Placement.
The MPS Circular supersedes a previous circular issued by SEBI on November 30, 2015.
Easing of access norms for investments by Foreign Portfolio Investors
SEBI has, by way of circulars dated February 15, 2018 and March 13, 2018 (collectively, the ‘FPI Circulars’), revised the regulatory framework governing foreign portfolio investors (‘FPIs’) under the SEBI (Foreign Portfolio Investors) Regulations, 2014 (‘FPI Regulations’) to ease the access norms for investments by FPIs. Some of the key changes that have come into force are set out below:
i. The current requirement of prior SEBI approval for a change in local custodian/ designated depository participant (‘DDP’) has been replaced with the requirement of obtaining a no-objection certificate from the earlier DDP, followed by a post-facto intimation to SEBI.
ii. The regime has been liberalized concerning FPIs having ‘Multiple Investment Managers’ structure and the same permanent account number, with respect to ‘Free of Cost’ transfer of assets. Approval of SEBI is now not required and DPPs are now entitled to process such requests.
iii. In case of addition of a new share class, where a common portfolio of Indian securities is maintained across all classes of shares/fund/sub-fund and broad based criteria are fulfilled at a portfolio level after adding a new share class, prior approval of the DDP is no longer required.
iv. Private banks and merchant banks are now permitted to undertake investments on behalf of their respective investors, provided that the investment banker/merchant banker submits a prescribed declaration.
v. SEBI also clarified that appropriately regulated Category II FPIs viz. asset management companies, investment managers/ advisers, Portfolio managers, Broker-dealer and Swap-dealer etc. are permitted to invest their proprietary funds.
Participation by Strategic Investor(s) in InvITs and REITs
Pursuant to SEBI’s circular dated January 18, 2018 (‘SEBI Circular’), a Real Estate Investment Trust (‘REIT’) / Infrastructure Investment Trust (‘InvIT’) may invite subscriptions from strategic investors subject to inter alia the following:
i. The strategic investors can, either jointly or severally, invest not less than 5% and not more than 25% of the total offer size.
ii. The investment manager or manager is required to enter into a binding unit subscription agreement with the strategic investors proposing to invest in the public issue, which agreement cannot be terminated except if the issue fails to collect minimum subscription.
iii. The entire subscription price has to be deposited in a special escrow account prior to opening of the public issue.
iv. The price at which the strategic investors have agreed to buy units of the InvIT/ REIT should not be less than the public issue price. In case of a lower price, the strategic investors should bring in the additional amounts within two working days of the determination of the public issue price, and in case of a higher price, the excess amount will not be refunded and the strategic investors will be bound by the price agreed in the unit subscription agreement.
v. The draft offer document or offer document, as applicable, will disclose details of the unit subscription agreement, including the name of each strategic investor, the number of units proposed to be subscribed etc.
vi. Units subscribed by strategic investors, pursuant to the unit subscription agreement, will be locked-in for a period of 180 days from the date of listing in the public issue.
Schemes of arrangement by listed entities
SEBI, by its circular dated January 3, 2018 (‘Scheme Circular’), has amended its circular issued in March, 2017 (‘March Circular’). Some of the key amendments are as follows:
i. The scope of the March Circular has been extended to schemes which solely provide for merger of a division of a WOS with its parent company, in addition to the merger of a WOS with its parent company.
ii. In respect of the valuation report and a fairness opinion by an independent chartered accountant and an independent SEBI registered merchant banker to be submitted by a listed entity, SEBI has clarified that the term ‘independent’ will mean that there is no material conflict of interest among the chartered accountant and the merchant banker or with the company, including that of common directorships or partnerships.
iii. The percentage of pre-scheme public shareholders of the listed entity and the Qualified Institutional Buyers of the unlisted entity should not be less than 25% on a fully diluted basis in the post-scheme shareholding pattern of the merged company.
iv. The requirements under the March Circular, in relation to the scheme once the scheme has been sanctioned by the High Court or the NCLT, have been dispensed with.
v. The lock-in requirements relating to the pre-scheme share capital of the unlisted issuer seeking to be listed in case of a scheme involving merger of a listed company or its division into an unlisted entity have been amended as follows:
- Shares held by promoters up to the extent of 20% of the post-merger paid-up capital of the unlisted issuer to be locked-in for three years from the date of listing of the shares of the unlisted issuer.
- The remaining shares are to be locked-in for one year from the date of listing of the shares of the unlisted issuer.
- No additional lock-in is applicable if the post-scheme shareholding pattern of the unlisted entity is exactly similar to the shareholding pattern of the listed entity.
SEBI informal guidance in the matter of UBS AG
UBS AG is a Category II registered FPI and is not a promoter of any listed entity. Regulation 32(2)(d) of the FPI Regulations requires the depository participant engaged by an FPI to ensure that equity shares held by the FPI are free from encumbrances and to obtain a declaration from the FPI to this effect. UBS AG, under the SEBI (Informal Guidance) Scheme, 2003, sought certain clarifications from SEBI:
i. whether the term ‘encumbrance’ would include non – disposal undertakings in relation to the FPIs who are investors in the capacity of acquirer and not promoter.2; and
ii. whether the FPIs are restricted from executing non disposal undertaking with third parties by providing limited undertaking to the depository participant.
SEBI, by way of clarification dated March 14, 2018, was of the view that the term ‘encumbrance’ would include non – disposal undertakings and accordingly, FPIs would not be permitted to execute the non – disposal undertakings.
SEBI Order in the matter of Price Waterhouse relating to the case of Satyam Computer Services Limited.
An order was passed by SEBI in relation to the financial fraud perpetrated by the senior management of Satyam Computer Services Limited (‘Satyam’).
PriceWaterhouseCoopers, Chartered Accountants (‘PWC’) were the statutory auditors of Satyam since April 1, 2000. When the financial irregularities at Satyam came to light, SEBI issued notices to 11 entities in the PWC group and the 2 signatories of the auditors’ report of Satyam on behalf of PWC, namely, Mr. S Gopalakrishnan and Mr. Srinivas Talluri (collectively, the ‘Noticees’). The Noticees were accused by SEBI of
(i) acting in violation of certain provisions of the SEBI Act and the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (‘FUTP Regulations’) and in gross violation of their duties and responsibilities as auditors while certifying the financial statements of Satyam for the period from 2000 to 2008; and
(ii) being complicit or acquiesced in the fraud perpetuated at Satyam.
In its order of January 10, 2018 (‘Order’), SEBI observed that there had been a total abdication by PWC of its duty to follow minimum standards of diligence (including PWC’s own manual), which inter alia required external confirmation of bank balances and fixed deposits. Further, PWC failed to reconcile discrepancies in the records of Satyam, which it had full knowledge of and which had been flagged by Satyam’s internal auditors, and its report certified the fairness of Satyam’s financial statements, forming a vital component of the prospectus inducing investors to trade in the scrip of Satyam believing it to be in a sound financial position.
SEBI inferred that their involvement was mala fide, and that the only reason for such a casual approach taken by PWC could be either complacency or complicity, and that PWC’s acts amounted to commission of fraud for the purposes of the SEBI Act and the PFUTP Regulations. In SEBI’s view, while PWC group entities are separate entities, they functioned as a single unit for all practical purposes in the context of the fraud at Satyam, and therefore, SEBI directed: (i) debarment from directly or indirectly issuing certificates of audit of listed companies, compliance of obligations of listed companies and intermediaries registered with SEBI for a period of two years for all PWC entities practicing as chartered accountants in India, and for a period of three years for the Noticees; (ii) disgorgement of wrongful gains of approximately ¤ 13.09 crore (approx. US$ 2 million) (joint and several liability) by PWC, Bangalore and the Noticees, with interest; and (iii) all listed companies and intermediaries registered with SEBI not to engage audit firms forming part of the PWC network for issuing any certificate with respect to compliance of statutory obligations for a period of two years.
An appeal against this Order filed by PWC is pending before the Securities Appellate Tribunal (‘SAT’). SAT has refused to grant a stay on the two-year audit ban imposed by SEBI, but has clarified that PWC is permitted to service its existing clients for the fiscal year 2017-2018 and is also permitted to complete assignments already undertaken for listed entities that follow the calendar year as their fiscal year, but is not permitted to undertake any new listed assignments.
Outcome of SEBI meeting held on March 28, 2018
In its meeting held on March 28, 2018, SEBI accepted the recommendations of the Kotak Committee on Corporate Governance (‘Committee’) along with certain other proposals discussed. Set out below are some of the key proposals:
i. (a) Reduction in the maximum number of listed entity directorships from 10 to (x) eight by April 1, 2019, and (y) seven by April 1, 2020;
(b) expanding the eligibility criteria for independent directors;
(c) disclosure of utilization of funds from qualified institutional placement or preferential issue;
(d) separation of chief executive officer/managing director and chairperson (to be initially made applicable to the top 500 listed entities by market capitalization with effect from April 1, 2020);
(e) enhancing the role of the audit committee, nomination and remuneration committee and the risk management committee;
(f) strengthening the disclosures pertaining to related party transactions and related parties being permitted to vote against such transactions;
(g) enhancing the obligations on listed entities with respect to subsidiaries; and
(h) shareholder approval (majority of minority) for royalty/brand payments to related party exceeding 2% of consolidated turnover.
ii. Certain amendments to SEBI (Alternative Investment Funds) Regulations, 2012, with respect to ‘Angel Funds’: (i) Maximum investment amount in venture capital undertakings by an angel fund has been increased from ¤ 5 crores to ¤ 10 crores (approx. US$ 750,000 to US$ 1.5 million); (ii) mandatory minimum corpus of an angel fund has been reduced to ¤ 5 crores (approx. US$ 750,000); and (iii) provisions of the Companies Act have been made applicable to an angel fund, if formed as a company.
iii. Revision of the existing framework for non-compliance of the listing regulations by listed companies, inter alia, empowering the stock exchanges to freeze the shareholding of the promoter and promoter group in a non-compliant entity along with their shareholding in other securities. SEBI is empowered to order suspension if the non-compliance persists.
iv. Undertaking a public consultation process for a review of the SEBI (Buy-back of Securities) Regulations, 1998 and the Takeover Regulations and inviting comments from stakeholders in relation to compliance with various SEBI regulations by listed entities subject to the corporate insolvency resolution process under the IBC.
2 It is pertinent to note that the term ‘encumbrance’ is not defined under the FPI Regulations. However the term includes pledges, liens, non disposal undertakings and other transactions in terms of SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011.
For further information, please contact:
Zia Mody, Partner, AZB & Partners
zia.mody@azbpartners.com
