Amendment to SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009
The key amendments notified by SEBI to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (‘ICDR Regulations’) on February 15, 2017 are:
i. Regulation 70 of the ICDR Regulations specifies certain instances when the provisions of the chapter relating to preferential issue do not apply. One such instance is when the preferential issue is pursuant to a scheme approved by a High Court under Sections 391 to 394 of the Companies Act, 1956 or the National Company Law Tribunal (‘NCLT’) under Sections 230 to 234 of CA 2013. The amendment clarifies that the pricing provisions for the preferential issue will apply to issuance of shares under such schemes in case the allotment of shares under such scheme is only to a select group of shareholders or to shareholders of unlisted companies.
ii. The amendment also empowers stock exchange(s) to take action against listed entities or any other person thereof contravening the provisions of the ICDR Regulations, in addition to applicable liabilities under securities laws, by way of imposition of fines, suspension of trading, freezing of promoter / promoter group holding of designated securities in coordination with depositories and/or any other action as may be specified by SEBI. Further, any failure to pay such fines within the specified time period may result in the stock exchange(s) initiating other actions in accordance with law, after giving a written notice.
Amendment to the SEBI (Portfolio Managers) Regulations, 1993
SEBI, by way of a notification dated January 2, 2017, has amended the SEBI (Portfolio Managers) Regulations, 1993 (‘PM Regulations’) to provide an enabling framework for registration of fund managers desirous of providing services to overseas funds. A new chapter on ‘Eligible Fund Managers’ has been introduced, which inter alia sets out the registration procedure and obligations and responsibilities of eligible fund managers. Pursuant to the amendment, SEBI has permitted existing portfolio managers as well as new applicants compliant with the requirements specified under Section 9A(4) of the Income Tax Act, 1961 (‘ITA’) to act as ‘Eligible Fund Managers’. Eligible Fund Managers are exempt from certain provisions of the PM Regulations.
Amendment to the SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2014
SEBI, by way of a notification dated February 27, 2017 has amended the SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2014. Some key amendments are:
i. In case of delay, the applicant has to file an application for condonation of delay and the settlement fees payable by the applicant will be increased by levying simple interest at the rate of 6% p.a.;
ii. An application for default, which has been previously rejected by SEBI or withdrawn by the applicant, may be refiled and considered in exceptional circumstances (such as lapse of time since the default, weight of evidence against the applicant) and the payment of the additional fees and/or interest as recommended by the High Powered Advisory Committee;
iii. The settlement amount must be paid within 15 calendar days from the receipt of the notice of demand and such period may be extended by the panel of whole time members by an additional 15 calendar days, but no later than 90 calendar days from the date of the receipt of the demand notice. If the amount is remitted between the 30th and 90th calendar day, interest at 6% p.a. will be levied from the date of the notice till the payment of the settlement amount. Upon failure by the applicant to remit the settlement amount within such period and/or abide by the relevant undertaking and waivers, SEBI may reject the application;
iv. Except in cases specifically excluded from settlement, a settlement notice indicating the substance of charges and the probable actions may be issued in advance of the notice to show cause so as to afford an opportunity to file a settlement application within 15 calendar days from the receipt of such settlement notice. However, SEBI will have the power to modify the enforcement action to be brought against the notice and the notice will not confer any right to seek settlement or avoid any enforcement action; and
v. Applications filed voluntary or suo moto will get the benefit of a proceeding conversion factor of 0.65 as opposed to the existing 0.75.
SEBI (Listing Obligations and Disclosure Requirements) Amendment Regulations, 2017
SEBI, by way of a notification dated February 15, 2017, has amended the SEBI (Listing Obligations and Disclosure Requirements Regulations, 2015 (‘LODR’). Regulation 37 of the LODR stipulates that a listed company desirous of undertaking a scheme of arrangement or involved in such scheme is required to file the draft scheme with the relevant stock exchanges and obtain a no-objection / no-observation letter from the stock exchange prior to filing such scheme under the provisions of the Companies Act, 1956 or CA 2013. Pursuant to the amendment, SEBI has provided that these provisions of Regulation 37 will not be applicable in case of a scheme, which provides solely for the merger of a wholly owned subsidiary with its holding company, provided that the draft scheme is filed with the stock exchanges for the purpose of disclosure.
SEBI Permits FPIs to Invest in Unlisted Debt Securities and Securitized Debt Instruments
SEBI has, by way of a notification dated February 27, 2017, amended the provisions of the SEBI (Foreign Portfolio Investors) Regulations, 2014 to permit registered FPIs to invest in (i) unlisted non-convertible debentures (‘NCDs’)/bonds issued by an Indian company subject to the guidelines issued by the Ministry of Corporate Affairs and (ii) securitized debt instruments, including certificates/instruments issued by special purpose vehicles set up for securitization of assets with banks, financial institutions or non-banking financial companies (‘NBFCs’) as originators, and certain listed securitized debt instruments. Additionally, SEBI has specified by its circular dated February 28, 2017, that investment by FPIs in unlisted corporate debt securities in the form of NCDs/bonds will be subject to minimum residual maturity of three years along with an end use-restriction on investments in ‘real estate business’, capital market and purchase of land. SEBI has also clarified that investment by FPIs in securitized debt instruments will not be subject to the minimum three-year residual maturity requirement. SEBI has also specified that investments in unlisted corporate debt securities and securitized debt instruments will be permitted up to an aggregate of Rs. 35,000 crores (approximately US$ 5.4 billion) within the existing investment limits prescribed for corporate debt from time to time (presently, Rs. 244,323 crores (approximately US$ 38 billion)).
RBI had earlier, by way of a notification dated October 24, 2016, introduced corresponding amendments to FEMA 20 and prescribed similar conditions for such investments by an FPI by way of a circular dated November 17, 2016. A summary of these RBI notifications has been captured in our January 2017 edition of Inter Alia.
Further, SEBI has also amended the definition of ‘offshore derivative instrument’ to permit FPIs to issue instruments with the underlying being unlisted debt securities or securitized debt instruments held by such FPI.
SEBI Revises Regulatory Framework on Schemes of Arrangement
SEBI has issued a circular dated March 10, 2017, as amended by circular dated March 23, 2017, (‘Scheme Circulars’) which replaces the circular dated November 30, 2015 issued by SEBI in relation to the regulatory framework on schemes of arrangement, amalgamation and capital reduction involving listed companies (‘2015 Circular’). Some of the key changes brought about by the Scheme Circulars are:
i. The Scheme Circulars will now not apply to schemes that solely provide for merger of a wholly owned subsidiary with the parent company. However, such draft schemes will have to be filed with the stock exchanges by way of disclosures and the stock exchanges are required to publish the scheme documents on their websites.
ii. The pricing related provisions of Chapter VII of the ICDR Regulations will be followed in case of issuance of shares to a select group of shareholders or shareholders of unlisted companies pursuant to such schemes. The ‘relevant date’ for the purpose of computing pricing will be the date of board meeting in which the scheme is approved.
iii. The circumstances under which the approval of majority of public shareholders of the listed entity will be required have been expanded to include the following:
a. where a scheme involving merger of an unlisted company results in reduction in the voting share of pre-scheme public shareholders of the listed entity in the transferee/ resulting company by more than 5% of the total capital of merged entity; and
b. where the scheme involves transfer of whole or substantially the whole of the undertaking of the listed entity and the consideration for such transfer is not in the form of listed equity shares.
iv. Listed entity is not required to provide the option of voting by postal ballot and is only required to provide shareholders with the option of e-voting.
v. Schemes of arrangement between listed and unlisted entities will be subject to the following conditions:
a. Percentage shareholding of pre-scheme public shareholders of the listed entity and of the qualified institutional buyers of the unlisted entity in the post scheme shareholding pattern of the resulting company must not be less than 25%;
b. Listed entity must disclose the material information pertaining to the unlisted entity(ies) involved in the scheme in the format specified for abridged prospectus as provided in Part D of Schedule VIII of the ICDR Regulations, as part of the explanatory statement sent to the shareholders while seeking approval of the scheme. Such disclosures are required to be certified by a SEBI registered merchant banker, and are also required to be uploaded on the stock exchange(s) website(s); and
c. Unlisted entities are permitted to merge with a listed entity only if the listed entity is listed on a stock exchange having nationwide trading terminals;
vi. In case of schemes involving the demerger of a division of a listed entity into an unlisted entity and the subsequent listing of the unlisted entity, specific conditions for seeking relaxation of the strict enforcement with respect to listing prescribed by the Securities Contracts (Regulation) Rules, 1957 have been modified as follows:
a. Conditions specified for lock-in of the pre-scheme share capital of the unlisted entity seeking listing are not applicable where the post scheme shareholding pattern of the unlisted entity is exactly same as the shareholding pattern of the listed entity; and
b. Pre-scheme share capital of the unlisted entity seeking listing held by non-promoters shall be locked-in for a period of one year from the date of listing of the shares of the unlisted entity, instead of the three years prescribed earlier;
vii. Subsequent to filing the draft scheme with SEBI, no changes to the draft scheme are permitted except with SEBI’s written consent. However, this requirement is not applicable for changes mandated by other regulators, authorities or by the NCLT; and
viii. The listed entity must pay a fee to SEBI in an amount of 0.1% of the paid-up share capital of the listed / transferee / resulting company, whichever is higher, post sanction of the scheme, subject to a cap of Rs. 5,00,000 (approximately US$ 7,800).
The provisions of the Scheme Circulars are not applicable to schemes already submitted to the stock exchanges, which will continue to be governed by the 2015 Circular.
 The expression has been defined under Section 180(1)(a)(i) of CA 2013 to mean 20% or more of value of the company in terms of consolidated net worth or consolidated total income during previous financial year.
Finance Act, 2017
Some of the key amendments introduced to the ITA by Finance Act, 2017 are:
i. Conversion of preference shares into equity shares will not be regarded as transfer and will be exempt from capital gains tax. Further, cost of acquisition and period of holding of the preference shares will be attributable to the equity share received upon conversion;
ii. Exemption from long term capital gains arising from transfer of equity share of a company that are chargeable to Securities Transaction Tax (‘STT’) will be available only if the acquisition of such shares was also subject to STT. Further, to protect some of the genuine transactions (e.g. acquisition pursuant to IPO, FPO, bonus or rights issue by a listed company, by non-resident as per the FDI Policy etc.), the GoI will notify transfers to which the proposed condition of chargeability of STT on acquisition will not apply;
iii. If consideration for transfer of unlisted shares is less than fair market value (‘FMV’) determined as per the prescribed manner, such FMV will be deemed to be the full value of consideration for the purposes of computing capital gains;
iv. Indirect transfer provisions will not be applicable to investments held by a non-resident, directly or indirectly, in FIIs/ Category-I or Category II FPIs;
v. Domestic transfer pricing provisions will now be applicable only in cases where one of the related party to the transaction is availing tax holidays; and
vi. The scope of applicable tax on any deemed gift has been widened by extending its applicability to all ‘persons’ and extending the scope of properties to all ‘properties’, except contribution of money or assets by an individual to a trust created solely for benefit of relative of the contributor.
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’), FPIs are required to comply with certain conditions for issuance of ODIs. Per the ODI Guidelines, FPIs issuing ODIs are required to comply with the following from July 7, 2017:
i. The ODI issuing FPIs will not be allowed to issue ODIs with derivatives as underlying, with the exception of those derivative positions that are taken by the ODI issuing FPIs for hedging the equity shares held by them, on a one-to-one basis;
ii. If there are existing ODIs issued by FPIs where the said underlying derivatives position are not for the purpose of hedging the equity shares held by it, the ODI issuing FPIs are required to liquidate such ODIs latest by the earlier of the date of maturity of the ODI instrument or by December 31, 2020. However, such FPIs must endeavor to liquidate such ODI instruments prior to the said timeline;
iii. If fresh ODIs 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 one-to-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 Rs. 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 Rs. 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.
Amendments to Schedule 5 of FEMA 20: Investment in Corporate Debt Securities
The Reserve Bank of India (‘RBI’) has, by way of a notification dated October 24, 2016, amended Schedule 5 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (‘FEMA 20’) to permit registered Foreign Institutional Investors and Foreign Portfolio Investors (‘FPIs’) to invest in unlisted non-convertible debentures (‘NCDs’)/bonds issued by an Indian company and securitized debt instruments, including certificates/instruments issued by special purpose vehicles set up for securitization of assets with banks, financial institutions or Non-Banking Financial Companies (‘NBFCs’) as originators, and any listed securitized debt instruments. Additionally, by its circular dated November 17, 2016, the RBI has specified that unlisted corporate debt securities in the form of NCDs/bonds issued by Indian companies would be subject to minimum residual maturity of three years along with an end use-restriction on investments in real estate business, capital market and purchase of land. The RBI has also specified that such investments in unlisted corporate debt securities and securitized debt instruments will be permitted up to an aggregate of Rs. 35,000 crores (approximately US$ 5 billion) within the existing investment limits prescribed for corporate bonds from time to time (presently, Rs. 2,44,323 crore (approximately US$ 35 billion)).
The Securities and Exchange Board of India (‘SEBI’) in its board meeting dated November 23, 2016 (‘SEBI Board Meeting’) approved corresponding amendments to the SEBI (Foreign Portfolio Investors) Regulations, 2014, which are yet to be notified by SEBI.
Corporate Governance Issues in Compensation Agreements
SEBI, in a consultation paper released by it on October 4, 2016, had noted the practice followed by private equity firms (‘PE Firms’) of entering into side agreements with senior management personnel and/or key managerial persons (‘KMP’) of listed companies (in which such PE Firms are shareholders). While SEBI acknowledged that it is not unusual for PE Firms to incentivize the promoters/ KMPs, it also raised concerns on potential unfair practices being resorted to by the promoters/ KMPs if such agreements were not approved by the board of directors and shareholders of such companies. Pursuant to the decisions of SEBI in the SEBI Board Meeting, the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘Listing Regulations’) have been amended with effect from January 4, 2017. The key amendments are as follows:
i. Restriction on all employees of listed companies (including KMPs, directors or promoters) from entering into an agreement with any shareholder or third party in relation to compensation or profit sharing regarding dealings of securities in such listed entity without the prior approval of the board of directors and public shareholders of the company by way of an ordinary resolution;
ii. All such agreements entered into during the previous three years (including those that have expired) are to be disclosed to the stock exchanges for public dissemination;
iii. Approval of the relevant company’s board of directors and its public shareholders is to be sought for all such subsisting agreements in the forthcoming board meeting and general meeting, respectively; and
iv. Interested persons involved in such transactions, i.e., persons who are directly or indirectly interested in the agreement or the proposed agreement, are not permitted to vote in such board / shareholder meetings to be held as per iii above.
Amendment to SEBI (Alternative Investment Funds) Regulations, 2012
Pursuant to the decision taken in the SEBI Board Meeting, the SEBI (Alternative Investment Funds) Regulations, 2012 have been amended with effect from January 4, 2017 as follows:
i. The upper limit of angel investors in a scheme has been increased from 49 to 200;
ii. Angel funds are permitted to invest in start-ups incorporated within five years from incorporation, which has been increased from the earlier limit of three years;
iii. The requirements of minimum investment amount by an angel fund in any venture capital undertaking has been reduced from Rs. 50,00,000 (approximately US$ 75,000) to Rs. 25,00,000 (approximately US$ 37,500), and the lock-in period of these investments has been reduced from three years to one year; and
iv. Angel funds will now be permitted to invest in securities of foreign companies, subject to the guidelines and conditions issued by the RBI and SEBI.
Change in Corporate debt limits for FPIs
SEBI, on August 4, 2016, had redefined the corporate debt limit of Rs. 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 Rs. 9,500 crores (approx. US$ 1.5 billion) from October 3, 2017 and will be enhanced to Rs. 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 FPIs in unlisted corporate debt securities and securitized debt instruments is not permitted to exceed Rs. 35,000 crores (approx. US$ 5.4 billion) within the extant CDIL.
Consultation Paper on Amendments/Clarifications to the Investment Adviser Regulations
On October 7, 2016, SEBI released a ‘Consultation Paper on Amendments / Clarifications to the SEBI (Investment Advisers) Regulations, 2013’, with the objective of specifying uniform standards for all intermediaries providing investment advisory services, regardless of whether it is their primary activity or not. The key changes proposed to the SEBI (Investment Advisers) Regulations, 2013 (‘IA Regulations’) are as follows:
i. Limitation of Exemptions: The extant regime exempts from registration certain persons who provide incidental investment advice to their clients, such as portfolio managers, chartered accountants, etc. SEBI has proposed that certain exemptions be removed, as set out below:
a. Mutual fund distributors who: (A) engage in providing incidental or basic investment advisory services on mutual fund products; or (B) want to shift from a commission-based model to an advisory fee-based model, be required to obtain registration; and
b. other classes of intermediaries who provide incidental investment advice, be limited to those persons who provide advice under other regulations specified by SEBI (for example, merchant bankers and portfolio managers);
ii. Investment Advice through Subsidiaries: Investment advisory services, which are currently provided through a separate division or department of banks, NBFCs and body corporates, should be provided exclusively through a separate subsidiary, and that a three year period be provided to comply with this provision;
iii. Definition of ‘Investment Products’: SEBI has proposed to define ‘investment products’ as all financial instruments that are regulated by any financial sector regulator in India, other than provision of advice exclusively on non-securities market that is regulated by a sectoral regulator;
iv. Advice through Electronic / Broadcasting Media: SEBI has now proposed to clarify that investment advice in any electronic or broadcasting or telecommunications medium, which is widely available to the public should comply with the provisions of Regulation 21 of SEBI (Research Analysts) Regulations, 2014 (‘RA Regulations’), which deals with recommendations in public media. Further, any such advice provided after getting clients enrolled, subscribed or registered on a public media platform will be considered as providing investment advisory services;
v. Provision of Trading Tips or Recommendations: SEBI has proposed that no person will be allowed to provide trading tips or specific stock recommendations to the general public via SMS, email, telephone calls or social networking media, unless such person is either registered under the IA Regulations or specifically exempt from registration; and
vi. Prohibition on Betting: SEBI has also proposed to prohibit any scheme, competition, game or league on securities or related to the securities market.
vii. Clarification on the Roles of Research Analysts and Investment Advisors: SEBI has proposed certain clarifications to distinguish the role of research analysts and investment advisers, with the key distinction being that research analysts should provide the research report to all classes of clients at the same time, whereas investment advisers aid their clients in making an informed decision on whether the recommendations given in the research report are suitable for his/her risk profile. Making recommendations (to buy / sell /hold) with regard to a security, by providing an entire report, would be governed by the provisions of the RA Regulations.
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.
Review of the Requirement of PAN Card to Open Accounts for Foreign Portfolio Investors
To ease the process of verification of the permanent account number (‘PAN’) of FPIs, SEBI by way of its notification dated November 17, 2016, decided that intermediaries may verify the PAN of FPIs online, using the website authorized by the Income Tax Department at the time of account opening for FPIs. Subsequently, a FPI would have a period of 60 days from the earlier of date of (i) the account opening, or (ii) remittance of funds out of India, to provide a copy of its PAN card to the intermediaries.
Amendment to SEBI (Real Estate Investment Trusts) Regulations, 2014 and SEBI (Infrastructure Investment Trusts) Regulations, 2014
Pursuant to the meeting of the SEBI board held on September 23, 2016, SEBI has amended the SEBI (Real Estate Investment Trusts) Regulations, 2014 and the SEBI (Infrastructure Investment Trusts) Regulations, 2014. Some of the key amendments include:
i. The minimum holding of the mandatory sponsor in the infrastructure investment trust (‘InvIT’) has been reduced from 25% to 15%;
ii. The existing limit of three sponsors has been removed from both regulations;
iii. The permissible investment limit for investment by real estate investment trusts (‘REIT’) in ‘under construction’ assets has been increased from 10% to 20%; and
iv. InvITs and REITs are allowed to invest in a two-level SPV holding structure, through a holding company.
Informal Guidance on Interpretation of the ICDR Regulations
A promoter of KJMC Financial Services Limited (‘KJMC’) transferred equity shares of KJMC by way of gift to his wife (‘Transfer’), which: (i) did not result in a change in the promoter shareholding; (ii) was without any consideration between immediate relatives; and (iii) complied with reporting requirements under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 and SEBI (Prohibition of Insider Trading) Regulations, 2015. KJMC has, by way of an interpretative letter, sought certain clarifications in relation to Regulation 72(2) of the SEBI (Issue of Capital and Disclosure Requirements), 2009 (‘ICDR Regulations’), which prohibits making a preferential issue to any person, including the promoter and promoter group, who have sold equity shares of such issuer during the six months preceding the relevant date. KJMC contended that the Transfer did not amount to a ‘sale’ under Section 4 of the Sale of Goods Act, 1930, which mandated that any sale or purchase should be done in lieu of a monetary consideration and therefore Regulation 72(2) of the ICDR Regulations will not be applicable. SEBI did not agree with KJMC’s analysis and referred to its Informal Guidance in the matter of Strides Arcolab Limited, where it was clarified that ‘any person’ would include persons who had made inter-se transfers within the promoter group. SEBI clarified that the primary intention of Regulation 72 was not with respect to consideration but with respect to ‘change in ownership of equity shares’, and consequently the inter-se transfer by way of gift would be considered a ‘sale’ as per Regulation 72(2) and the promoter(s) and promoter group ineligible for allotment of specified securities on a preferential basis.
Informal Guidance on Interpretation of the Listing Regulations
Alembic Pharmaceuticals Limited (‘Alembic’), by way of an interpretative letter, sought dispensation for seeking its shareholders’ approval to effect a reclassification of certain members forming part of its promoter group, and therefore, sought to approach the stock exchanges concerned directly as per the provisions of Regulations 31(A)(2) and 31(A)(3) of the Listing Regulations. The rationale mentioned by Alembic for such re-classification was that the concerned members were not connected directly or indirectly with the activities of Alembic, nor did they exercise control over its affairs or have any special rights through formal or informal arrangements or were privy to any price sensitive information, and these members had expressed their desire for reclassification of their shareholding from promoter group to public category.
SEBI granted the aforesaid dispensation to Alembic without providing specific reasons for the same.
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 Rs. 25 lakhs (approx. US$ 38,000) to Rs. 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 Rs. 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 Rs. 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.
Companies (Share Capital and Debentures) Third Amendment Rules, 2016
The significant amendments introduced by the MCA, by way of a notification dated July 19, 2016, to the Companies (Share Capital and Debentures) Rules, 2014 (‘Share Capital Rules’), are as follows:
i. A company that has defaulted in payment of: (a) dividend on preference shares or repayment of any term loan or interest that has become repayable; (b) dues with respect to statutory payments relating to employees; or (c) requisite amounts in the Investor Education and Protection Fund, is now permitted to issue shares with differential voting rights upon expiry of five years from the end of the financial year within which such default has been rectified;
ii. Start-ups have been provided with exemptions to issue: (a) sweat equity shares up to 50% of their paid-up capital for the first five years from the date of their incorporation as opposed to the limit of 25% applicable to other companies; and (b) employee stock option plans to its employee/s being a promoter or a director who either directly or indirectly, holds more than 10% of the outstanding equity shares of the company for the first 5 (five) years from the date of its incorporation (which is not permitted in case of other companies);
iii. There is no longer a requirement for all shares issued by way of preferential allotment to be fully paid up;
iv. In case of preferential allotment of convertible securities, the price of the resultant shares (pursuant to conversion) is permitted to be arrived at either: (a) at the time of issuance of the convertible securities, based on the valuation report given at the time of the offer; or (b) within 30 days prior to the date when the holder is entitled to apply for shares (on conversion), based on the valuation report given no earlier than 60 days from such date. Provided that, the relevant time for determination of the price is required to be determined and disclosed by the company at the time of offer of the convertible securities;
v. Security for “secured debentures” can now be created not only by the issuing company, but also by its subsidiaries, holding company or associates companies; and
vi. A company intending to redeem its debentures prematurely is now permitted to transfer such amounts as are in excess of the prescribed limits to the Debenture Redemption Reserve, the adequacy of which has been now clarified to mean at least 25% of the value of the outstanding debentures rather than the value of debentures issued.
 As defined in notification dated February 17, 2016 issued by the Department of Industrial Policy and Promotion.
Rupee Denominated Bonds Issued by Indian Companies Exclusively to Persons Resident Outside India exempted from certain provisions of the Companies Act
The MCA has, by way of a notification dated August 3, 2016, clarified that unless otherwise specified by the RBI, provisions of Chapter III of the Companies Act (relating to prospectus and allotment of securities) and Rule 18 of the Share Capital Rules (relating to debentures) do not apply to issue of rupee denominated bonds made exclusively to persons resident outside India. A corresponding amendment has been made to Rule 18(11) of the Share Capital Rules as well.
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 listed 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 unmodified 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 provide 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 Regulations), 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:
i. 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 Rs 500 crores (approximately USD 76 million) but where the aggregate issue size in the same year crosses Rs 500 crores (approximately USD 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 Rs 500 crores (approximately USD 76 million) or above;
ii. 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 individually be less than Rs 500 crores (approximately USD 76 million), but which are part of a shelf offer, including any green shoe option, is more than Rs 500 crores (approximately USD 76 million) in a single financial year; and
iii. In case of issues below Rs 500 (approximately USD 76 million) crores 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 electronic book mechanism. However, arrangers acting as underwriters will not be considered as single investors in these cases.
Amendments to the SEBI (Foreign Portfolio Investment) Regulations, 2014
SEBI, by way of a notification dated July 8, 2016, amended the SEBI (Foreign Portfolio Investment) Regulations, 2014, by substituting Regulation 22(2). The amendment stipulates that a foreign portfolio investor (‘FPI’) is required to ensure that transfer of offshore derivate instruments (‘ODIs’) issued by or on behalf of it, is made subject to: (i) the ODIs being transferred to persons subject to fulfilment of Regulation 22(1), i.e., no FPI may issue, subscribe to or otherwise deal in ODIs, directly or indirectly, unless: (a) such ODIs are issued only to persons who are regulated by an appropriate foreign regulatory authority, and (b) such ODIs are issued after compliance with ‘know your customer’ norms; and (ii) prior consent of the FPI having been obtained for such transfer (except when the transferee has been pre – approved by the FPI).
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 relation to its circular dated June 10, 2016, which had specified the conditions for issuance and transfer of ODIs:
i. 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);
ii. 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 permitted 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 clarified 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 information (‘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:
i. Currently, FPIs are required to transact in securities through stock brokers registered 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.
ii. 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.
d. The limit on the number of sponsors has been removed under the REIT Regulations.
iii. 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.
iv. 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.
v. The Securities Contracts (Regulation) (Stock Exchanges and Cleaning Corporations) Regulations, 2012 have been amended to increase the upper limit of shareholding 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.
Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016
The Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 (‘ESIRDA Act), which has been enacted by the Parliament and received Presidential assent on August 12, 2016, seeks to amend certain provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI’), the Recovery of Debts due to Banks and Financial Institutions Act, 1993, (‘RDBFI Act’), the Indian Stamp Act, 1899 (‘ISA’), and the Depositories Act, 1996 (‘Depositories Act’). Certain sections of the ESIRDA Act have been notified with effect from September 1, 2016.
i. Key Amendments to SARFAESI: (a) Debenture trustees registered with SEBI have now been included in the definition of ‘secured creditor’, and can take enforcement action under Section 13 of the SARFAESI, as the remedies under SARFAESI have been extended to apply to listed debt securities. The scope of SARFAESI has been widened to include hire purchase, financial leasing and conditional sale transactions; (b) the process of taking possession over collateral against which a loan has been provided by a secured creditor, with the assistance of the Chief Metropolitan Magistrate or District Magistrate, has been made time-bound, requiring an order to be passed within 30 days from the date of application by the secured creditor; (c) amendments relating to registration of security interest have been introduced, including: (1) a proposal to set up a central database to integrate records of security registered under various registration systems including those made under the Companies Act and the Registration Act, 1908; (2) Central Government may require creditors not qualifying as “secured creditors” under SARFAESI to register the creation, modification and satisfaction of security interest with such central registry; and (3) after registration of security interest with the central registry, the debts due to any secured creditor will have priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central, State or local Governmental authorities.
ii. Key Amendments to ISA: The ESIRDA Act amends the ISA to exempt stamp duty on instruments of transfer or assignment of rights or interest in financial assets to asset reconstruction companies, where such transfer is for the purpose of asset reconstruction or securitisation. Security receipts issued by such asset reconstruction companies may be subscribed to by non-institutional and other investors of prescribed classes.
iii. Key Amendments to RDBFI Act: (a) Debenture trustees registered with SEBI can initiate proceedings under the RDBFI Act regarding defaults in listed debt securities; (b) a bank or a financial institution has now been permitted to take proceedings under RDBFI Act before a tribunal in whose jurisdiction where the defaulted account is maintained / located; (c) a defendant, upon service of summons under the RDBFI Act, is restricted from transferring the secured assets or other assets disclosed in the application made by the bank or financial institution without the approval of the tribunal, except in the ordinary course of business; and (d) electronic filing of recovery applications, documents and written statements has been introduced.
iv. Other Significant Changes: The Depositories Act has been amended to require registration by a depository of any transfer of security in favour of an asset reconstruction company along with or consequent upon transfer or assignment of a financial asset of any bank or financial institution under SARFAESI. Additionally, every depository is also required to register any issue of new shares in favour of any bank or financial institution or asset reconstruction company or any of their assignees, by conversion of part of their debt into shares pursuant to reconstruction of debts of the company agreed between the company and the bank, financial institution or asset reconstruction company.
Companies (Removal of Difficulties) Third Order, 2016
Section 139 of CA 13, which deals with appointment of auditors, inter alia, provides that no listed company and companies falling within the prescribed class are allowed to appoint / re-appoint an individual / an audit firm, respectively, as an auditor for more than one term of five consecutive years in case of an individual and two terms of five consecutive years in any other case. As per the provisions of Section 139(1), companies are required to appoint / re-appoint auditors at annual general meetings only.
Pursuant to the Companies (Removal of Difficulties) Third Order, 2016, effective retrospectively from April 1, 2014, MCA has allowed compliance with the above requirements within a period ending no later than the date of the first annual general meeting held three years after the date of commencement of CA 13.
RBI Circular on Investment in Credit Information Companies
Pursuant to the circular dated May 19, 2016 issued by RBI, all credit information companies (‘CIC’) have been directed to comply with the following:
i. Investments by any person (whether resident or otherwise), directly or indirectly, in a CIC, must not exceed 10% of the equity capital of the investee company. However, RBI may consider allowing higher FDI limits to entities with an established track record in running a credit information bureau in the following cases:
• up to 49%, if ownership is not well diversified (i.e., one or more shareholders each hold more than 10% of voting rights in the company);
• up to 100%, if ownership is well diversified, or if their ownership is not well diversified, but at least 50% of the directors of the investee CIC are Indian nationals/ NRIs/ persons of Indian origin (out of which at least one third of the directors must be Indian nationals resident in India); and
• The investor company should preferably be listed on a recognised stock exchange.
ii. A foreign institutional investor (‘FII’)/ foreign portfolio investor (‘FPI’) is permitted to invest in a CIC subject to certain prescribed conditions.
If the investor in a CIC is a wholly owned subsidiary (directly or indirectly) of an investment holding company, then the above conditions will be applicable to the operating group company that is engaged in the credit information business and has undertaken to provide technical know-how to the CIC in India.
Foreign Investment in Units Issued by REITs, InvITs and AIFs
Salient features of foreign investment permitted by RBI, pursuant to its circular dated April 21, 2016, in the units of investment vehicles for real estate and infrastructure registered with the SEBI or any other competent authority are as under:
i. A person resident outside India (including a Registered Foreign Portfolio Investor (‘RFPI’) and NRIs may invest in units of real estate investment trusts (‘REITs’);
ii. A person resident outside India who has acquired or purchased units in accordance with the regulations may sell or transfer in any manner or redeem the units as per regulations framed by SEBI or directions issued by RBI;
iii. An Alternative Investment Fund Category III with foreign investment can make portfolio investment in only those securities or instruments in which a RFPI is allowed to invest; and
iv. Foreign investment in units of REITs registered with SEBI will not be included in ‘real estate business’.
Guidelines for Public Issue of Units of Infrastructure Investment Trusts
SEBI has, on May 11, 2016, issued Guidelines for Public Issue of Units of Infrastructure Investment Trusts (‘Guidelines’), which amend the provisions of the SEBI (Infrastructure Investment Trusts) Regulation, 2014 (‘SEBI InvIT Regulations’).
The Guidelines set out the procedure to be followed by an infrastructure investment trust (‘InvIT’) in relation to a public issue of its units, which includes the appointment of a lead merchant banker and other intermediaries, procedure for filing of offer documents with SEBI and the stock exchanges, the process of bidding and allotment. Further, the allocation in a public issue is required to be in the following proportion: (i) not more than 75% to institutional investors; and (ii) not less than 25% to other investors; provided that the investment manager has the option to allocate 60% of the portion available for allocation to institutional investors and anchor investors (which includes strategic investors), subject to certain conditions. Further, the investment manager, on behalf of the InvIT is required to deposit and keep deposited with the stock exchange(s), an amount equal to 0.5% of the amount of the units offered for subscription to the public or Rs 5 crores (approximately US$ 7,45,000), whichever is lower. The price of units can be determined either: (i) by the investment manager in consultation with the lead merchant banker; or (ii) through the book building process. However, differential prices are not permitted.
Amendment of Guidance Note on SEBI (Prohibition of Insider Trading) Regulations, 2015
SEBI has, on April 12, 2016, amended the guidance note on SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘PIT Regulations’) which was issued on August 24, 2015 to extend the exemption from ‘contra trade’ restrictions under the PIT Regulations to exit offers in addition to buy back offers, open offers, rights issues, Follow – on Public Offers, bonus issues, etc.
Revised Formats under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
The formats for disclosures prescribed by SEBI under Regulation 10(5) and 10(7) of the SEBI (Substantial Acquisition of Shares and Takeover Regulations), 2011 (‘Takeover Regulations’) require the acquirers to report compliance with Chapter V of the Regulations (dealing with disclosure of shareholding and control). The prescribed formats for acquisitions under Regulation 10(1)(a)(i), (ii), (iii), (iv) and (v), did not specify the time period to be considered while reporting compliance with respect to such disclosures. Pursuant to its circular dated May 2, 2016, SEBI has amended the format to require acquirers to provide such information for a period of three years prior to the date of acquisition.
SEBI Board Meetings
SEBI, in its board meeting held on May 19, 2016, approved the incorporation of the internal guidance note in the SEBI (Settlement of Administrative and Civil Proceedings) Regulations 2014 (‘Settlement Regulations’), to clarify that only serious and substantial cases are to be taken for enforcement under Regulation 5(2)(b) of the Settlement Regulations. For this purpose, defaults which in the opinion of SEBI have a bearing on the securities market as a whole and not just the listed security and its investors may be considered to have market wide impact.
Thereafter, in its meeting held on June 17, 2016, SEBI approved the two consultation papers in relation to the changes to be made to the SEBI (Portfolio Managers) Regulations and the SEBI InvIT Regulations.
SEBI Circular on Restriction on Redemption in Mutual Funds
SEBI, on May 31, 2016 issued a circular providing details of certain specified circumstances in which mutual funds/ asset management companies/ trustees could impose restrictions on redemption of units of their mutual fund schemes. SEBI has provided that the restriction on redemption cannot exceed ten working days in any 90 day period and would be applicable for redemption requests above Rs 200,000 (approximately US$ 2,975). Further, specific approval of the board and trustees of an asset management company is required before imposing such restrictions and SEBI should be notified of such approval immediately.
Changes in Conditions for Issuance and Transfer of Offshore Derivative Instruments
SEBI has, by way of a circular dated June 10, 2016, introduced the following key changes in the conditions for issuance and transfer of Offshore Derivative Instruments (‘ODI’), effective from July 1, 2016:
i. Beneficial owners of corporate subscribers are to be verified on a look-through basis, as per the thresholds set out in the Prevention of Money-laundering (Maintenance of Records) Rules, 2005, i.e., 25% in the case of a company and 15% in case of partnership firms/ trusts/ unincorporated bodies, and Know Your Customer documentation has to be obtained from beneficial owners exceeding these thresholds. If no entity’s holding is in excess of the thresholds, 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 material shareholder/ owner entity;
ii. Any transfer of ODIs, issued by or on behalf of the ODI issuer, is to be made to only persons eligible to deal in ODIs, with the prior consent of the ODI issuer (unless the transferee is pre-approved by it) and reported to SEBI on a monthly basis;
iii. ODI issuers must file suspicious transaction reports (if any) with the Indian Financial Intelligence Unit;
iv. ODI issuers must reconfirm ODI positions on a semi-annual basis, and report any deviations from the monthly reports to SEBI; and
v. ODI Issuers must carry out a periodical review and evaluation of its controls, systems and procedures with respect to ODIs, and their chief executive officer must submit a certificate in this regard to SEBI annually.
Amendments to FEMA 2017
The RBI has, by its notification dated March 26, 2018 introduced the following amendments to the sector specific policy for foreign investment, under FEMA 2017:
i. Foreign investment in investing companies: (a) Foreign investments in investing companies not registered as non-banking financial companies (‘NBFCs’) with the RBI and in core investment companies, both engaged in the activity of investing in the capital of other Indian entities, will require prior Government approval; and (b) foreign investment in investing companies registered as NBFCs with the RBI, will not require any prior approval and will be permissible under 100% automatic route.
ii. Single brand product retail trading: In case of entities undertaking single brand retail trading of products having ‘state-of-art’ and ‘cutting-edge’ technology and where local sourcing is not possible, a committee under the chairmanship of the Secretary, DIPP, with representatives from Niti Aayog, concerned Administrative Ministry and independent technical expert(s) on the subject will examine the claim on the issue of the products being in the nature of ‘state-of-art’ and ‘cutting-edge’ technology, and give recommendations for such relaxation.
iii. Issuance of capital instruments to persons resident outside India: No prior Government approval will now be required for issuance of capital instruments to persons resident outside India against: (a) import of capital goods / machinery / equipment (excluding second hand machinery); or (b) pre-operative / pre-incorporation expenses, unless the Indian investee company is engaged in a sector under the Government route.
As set out in our January 2018 edition of the Inter Alia, the Union Cabinet had approved certain amendments to the foreign direct investment regime in India on January 10, 2018, which have now been incorporated in FEMA 2017.
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.
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.; 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.
 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.
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 Rs. 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 Rs. 5 crores to Rs. 10 crores (approx. US$ 750,000 to US$ 1.5 million); (ii) mandatory minimum corpus of an angel fund has been reduced to Rs. 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.
Disclosure Requirements for Issuance and Listing of Green Debt Securities
The Securities and Exchange Board of India (‘SEBI’) has, by way of circular dated May 30, 2017, set out certain requirements to be considered, along with the requirements set out in the SEBI (Issue and Listing of Debt Securities) Regulations, 2008, for the issuance of and disclosures pertaining to ‘Green Debt Securities’.
A debt security will be considered as a ‘Green Debt Security’, if the funds raised through its issuance are to be utilized for the following project(s)/ asset(s): (a) renewable and sustainable energy; (b) clean transportation; (c) sustainable water management; (d) climate change adaptation; (e) energy efficiency; (f) sustainable waste management; (g) sustainable land use; and (h) biodiversity conservation.
The issuer of green debt securities is required to make certain disclosures in its offer / disclosure documents including inter alia: (a) a statement on the environmental objectives of the issuance; (b) details of the system / procedures to be employed for tracking the deployment of proceeds of the issue; and (c) details of the project and/or assets where the issuer proposes to utilize the proceeds of the green debt securities.
Amendment to the SEBI (Foreign Portfolio Investors) Regulations, 2014
SEBI has amended the SEBI (Foreign Portfolio Investors) Regulations, 2014 (‘FPI Regulations’) with effect from May 29, 2017 to prohibit the issuance or transfer of an offshore derivative instrument (‘ODI’) to persons who are resident Indians or non resident Indians and to entities that are beneficially owned by resident Indians or non resident Indians.
Amendment to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009
Pursuant to its notification dated May 31, 2017, the key amendments introduced to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (‘ICDR Regulations’) are as follows:
i. The definition of Qualified Institutional Buyers (‘QIBs’) has been amended to include systemically important and RBI registered non-banking financial companies, having a net-worth of more than INR 500 crores (approx. USD 77 million), as per the last audited financial statements.
ii. Regulation 16, which deals with monitoring agencies, has been amended to provide that:
a. if the issue size, excluding the size of offer for sale (‘OFS’) by selling shareholders, exceeds INR 100 crores (approx. USD 15 million), the use of proceeds is to be monitored by a public financial institution / scheduled commercial bank identified as the banker of the issue in the offer document;
b. the monitoring agency will be required to submit quarterly reports to the issuer until utilization of at least 95% of the proceeds, excluding the proceeds under the OFS and amount raised for general corporate purposes; and
c. the issuer to publically disseminate such report on its website and to the stock exchanges within 45 days from the end of each quarter.
Participation of Category III Alternative Investment Funds in the Commodity Derivatives Market
SEBI has by way of its circular dated June 21, 2017, permitted Category III Alternative Investment Funds to participate in the commodities derivatives market subject to the following conditions:
i. to participate on the commodity derivatives exchanges as ‘clients’, subject to compliance of all SEBI rules, regulations, position limit norms issued by SEBI / stock exchanges etc., as applicable to clients;
ii. to not invest more than 10% of the investable funds in one underlying commodity;
iii. leveraging or borrowing subject to consent from the investors and maximum limit specified by SEBI (presently capped at 2 times the net asset value of the fund);
iv. disclosures to be made in the private placement memorandum of intent to invest in commodity derivatives, consent of existing investors to be taken and exit opportunities to be provided to the dissenting investors; and
v. to comply with SEBI reporting requirements.
Proposals approved at SEBI Board Meetings
Some of the key proposals approved in the board meetings of the SEBI held on April 26, 2017 and June 21, 2017 are as follows:
i. Amendment to the SEBI (Stock Brokers and Sub-brokers) Regulations, 1992 to permit stock brokers / clearing members currently dealing in commodity derivatives to deal in other securities and vice versa, without setting up a separate entity;
ii. Relaxations from preferential issue requirements under the ICDR Regulations and from open offer obligations under the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 (‘SAST Regulations’) which are currently available to lenders undertaking strategic debt restructuring of listed companies in distress, and be extended to new investors acquiring shares in such distressed companies pursuant to such restructuring schemes. Such relaxations, however, will be subject to shareholder approval by way of a special resolution and lock-in of shares for a minimum period of 3 years. The relaxations will also be extended to lenders under other restructuring schemes undertaken in accordance with the guidelines of the RBI;
iii. Exemption from open offer obligations under the SAST Regulations, for acquisitions pursuant to resolution plans approved by the NCLT under the IBC;
iv. Extension of relaxations in relation to the lock-in provisions currently available to Category I AIFs in case of an initial public offering to Category II AIFs as well;
v. Proposal for initiation of a public consultation process to make amendments to the FPI Regulations: (a) expansion of the eligible jurisdictions for the grant of FPI registrations to Category I FPIs by including countries having diplomatic tie-ups with India; (b) simplification of broad based requirements; (c) rationalization of fit and proper criteria; and (d) permitting FPIs operating under the multiple investment managers structure and holding FVCI registration to appoint multiple custodians; and
vi. Levy of a regulatory fee of USD 1,000 on each ODI subscriber, once every 3 years, starting from April 1, 2017 and to prohibit ODIs from being issued against derivatives except those which are used for hedging purposes.
Recording of Non Disposal Undertaking in the Depository System
In order to enable the recording of non-disposal undertakings (‘NDU’) in the depository system, SEBI has, by way of circular dated June 14, 2017, permitted depositories to offer a system for capturing and recording NDUs subject to prescribed conditions. The provisions of the circular are required to be implemented by the depositories within four months.
Pursuant to the circular, on the creation of the freeze for recording the NDU, the depository will not effect any transfer, pledge, hypothecation, lending, rematerialisation or alienation in any form or any dealing of the encumbered securities till instructions are received from both parties for the cancellation of the NDU. The depository participants are prohibited from facilitating or being parties to any NDU created outside the depository system.
Review of OFS of Shares through Stock Exchange Mechanism
SEBI has modified the guidelines pertaining to OFS of shares through stock exchange mechanism by way of its circular dated June 27, 2017. The rationale for such revisions was to encourage greater participation by employees. The key modifications are as follows:
i. Promoters of eligible companies are permitted to sell the shares within 2 weeks from the OFS transaction to the employees, and such an offer would be considered to be a part of the OFS transaction.
ii. Promoters have the discretion to offer the shares at the price discovered in the OFS transaction, or at a price which is at a discount to such discovered price.
Promoters are required to make necessary disclosures in the OFS notice disseminated to the stock exchanges, and such disclosure would be required to contain details of the number of shares offered to employees and the discount offered, if any.
Changes in the Foreign Investment regime in India
The Reserve Bank of India (‘RBI’) recently issued the Master Directions on Foreign Investment in India (‘Master Directions’) on January 4, 2018, on the heels of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 (‘New FEMA 20’) issued by way ofNotification dated November 7, 2017, which replace the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (‘Erstwhile FEMA 20’) and the Foreign Exchange Management (Investments in Firms of Proprietary Concerns in India) Regulations, 2000.
The New FEMA 20 and the Master Directions now contain comprehensive rules on foreign investment in India as issued by the RBI. A summary of some of the key changes to the Erstwhile FEMA 20 introduced by the RBI are set out below:
i. Definition of ‘Capital Instruments’: The New FEMA 20 has introduced a definition of ‘Capital Instruments’. While the base definition remains similar to that of ‘Capital’ under the Erstwhile FEMA 20, two clarifications have been provided as follows:-
(a) Non-convertible/ optionally convertible/ partially convertible preference shares issued up to April 30, 2007, as well as optionally convertible/ partially convertible debentures issued up to June 7, 2007 will be considered to be capital instruments till their original maturity; and
(b) Share warrants can be issued to a person resident outside India only in accordance with the regulations issued by the Securities and Exchange Board of India (i.e. the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009), i.e. share warrants can be issued to a person resident outside India only by a listed Indian company.
ii. Definition of ‘Foreign Investment’: ‘Foreign investment’ has been defined under the New FEMA 20 to mean any investment by a person resident outside India in the capital instruments of an Indian company or in the capital of a limited liability partnership (‘LLP’), on a repatriable basis; thereby clarifying that investments made on a non-repatriable basis are to be treated as domestic investments and not included in the foreign investment limits.
iii. Definition of ‘Foreign Direct Investment’: The definition of ‘foreign direct investment’ (‘FDI’) under the New FEMA 20 distinguishes between investments in unlisted and listed Indian companies. While any investment by a person resident outside India in the capital instruments issued by an unlisted Indian company is to be treated as FDI, in case of listed Indian companies, only investments of 10% or more of the post issue paid-up equity capital of a listed Indian company, computed on a fully diluted basis, is to be treated as FDI.
iv. New Concept – Foreign Portfolio Investment: Under New FEMA 20, RBI has introduced a new concept of an investment being categorized as ‘Foreign Portfolio Investment’ if the investment made by a person resident outside India in a listed Indian company is less than 10% of the post issue paid-up equity share capital (on a fully diluted basis) of such listed Indian company or less than 10% of the paid up value of each series of capital instruments of such listed Indian company. Please note that there a distinction between foreign portfolio investment and investment by an entity registered with SEBI as a foreign portfolio investor (‘FPI’). All investments by each FPI will necessarily be foreign portfolio investment, whereas investment by entities who are not registered as FPI can also be categorized as ‘foreign portfolio investment’ depending upon the percentage of investment made. Purchase / sale of capital instruments of listed Indian company on a stock exchange by FPIs is set out in Schedule 2 of the New FEMA 20.
Foreign portfolio investment by way of a primary subscription is exempt from the reporting requirements prescribed in respect of FDI transactions. In the event foreign portfolio investment exceeds the 10% limit, such investment will stand re-classified as FDI. However, on the other hand, in the event an existing investment by a non resident in a listed Indian company falls to a level below 10% of such company’s post issue paid up equity capital (on a fully diluted basis), such investment will continue to be treated as FDI.
v. Definition of ‘Indian entity’: The tern Indian entity has been defined to mean an Indian company and an LLP.
vi. Definition of ‘Investment Vehicle’: The Master Directions clarify that venture capital funds established in the form of a trust, company or a body corporate and registered under the SEBI (Venture Capital Funds) Regulations, 1996 will not be considered as investment vehicles for the purposes of the New FEMA 20. Prior Government approval would be required for making foreign investments in venture capital funds established as trusts.
vii. Definition of ‘Listed Indian Company’: Listed Indian Company has been defined to mean an Indian company which has any of its capital instruments listed on a recognized stock exchange in India. Accordingly, an Indian company which has only its non-convertible debentures listed on a stock exchange would not be considered as a Listed Indian Company.
viii. Acquisition through a rights or bonus issue: While the conditions relating to acquisition of capital instruments (other than warrants) by way of rights or bonus issue continue to remain the same, it have been clarified that the conditions would also apply to subscription to capital instruments issued as a rights issue that are renounced by the person(s) to whom they were offered.
Further, a person resident outside India exercising any rights in respect of capital instruments issued when he / she was resident in India, can exercise such rights on a non-repatriation basis (i.e. the original status of the holding will not change even in the event the residential status of the holder changes).
Similarly, an individual resident outside India exercising an option granted pursuant to an employee stock option scheme when he / she was resident in India, can hold the shares so acquired on exercising the option on a non-repatriation basis.
ix. Transfer of capital instruments: Transfer by way of sale of capital instruments by a non-resident Indian (‘NRI’) to non-residents other than NRIs no longer requires prior RBI approval, subject to certain conditions.
x. Reporting Requirements: The onus of filing Form FC-TRS for transfers on a recognized stock exchange will now vest with the non-resident party and not the relevant Indian company. The New FEMA 20 has further clarified that in case of transfer of repatriable capital instruments by a non-resident transferor to another non-resident transferee on non-repatriable basis, the onus of such filing would vest with resident transferor / transferee or the non-resident holding capital instruments on a non-repatriable basis, as the case may be. It is also clarified that a transfer of capital instruments between a non- resident transferor holding such instruments on non-repatriable basis and a resident transferee would not attract such a reporting requirement.
Further, Form FC-TRS is now required to be filed with the authorised dealer bank with 60 days of transfer of capital instruments or receipt / remittance of funds, whichever is earlier.
xi. Downstream investments: While the definition of ‘downstream investments’ under the Erstwhile FEMA 20 only considered indirect foreign investments by one Indian company into another Indian company, the definition has now been revised to include investments by Indian companies, LLPs or investment vehicles (each, an Indian entity), in the capital instruments or the capital (as the case may be), of another Indian company or LLP. Further, downstream investments are now required to be reported by way of a Form DI within 30 days of such investment to the Secretariat for Industrial Assistance, Department of Industrial Promotion. However, the format of this Form DI is yet to be specified by the RBI.
xii. Clarifications regarding reporting and pricing guidelines: In addition to the above, the New FEMA 20 has further clarified that capital instruments of any Indian company held by another Indian company which is not owned and not controlled by resident Indians or is owned and controlled by persons resident outside India (‘FOCC’), can be transferred to:
(a) a person resident outside India without any requirement to adhere to pricing guidelines, provided however such transfer is reported by way of Form FC-TRS;
(b) a person resident in India, subject to adherence with pricing guidelines only; and
(c) another FOCC, without any requirement to adhere to pricing guidelines or to the reporting requirements.
xiii. Rate of dividend on preference shares: Under the New FEMA 20, the ceiling limit of 300 basis points over the prime lending rate of State Bank of India on the rate of dividend on preference shares or convertible preference shares issued under the said regulations has been done away with.
xiv. Alignment with the provisions of Companies Act, 2013: In addition to the above, the New FEMA 20 has attempted to align several provisions with those of the Companies Act, 2013, in order to address ambiguities that existed under the Erstwhile FEMA 20. A few of such alignments include:
(a) the definitions of ‘employees’ stock option’ and ‘sweat equity shares’ have been aligned with the corresponding definitions under the Companies Act, 2013; and
(b) timeframe for allotment of capital instruments has been reduced from 180 days to 60 days.
xv. Late submission fee for delayed filings: The New FEMA 20 states that delay in complying with reporting requirements (including Forms FC-GPR and FC-TRS) will now attract late submission fee (‘LSF’) of such amount as may be determined by the RBI in consultation with the Central Government. Paragraph 12 of Part IV of the Master Direction on Reporting under Foreign Exchange Management Act, 1999 provides for the quantum of LSF for regularizing reporting delays without undergoing the compounding procedure as under:
Amount involved in reporting
LSF as a % of amount involved*
Maximum amount of LSF applicable
Up to 10 million
Rs.1 million or 300% of amount involved, whichever is lower.
More than 10 million
Rs.10 million or 300% of amount involved, whichever is lower.
* The LSF would be doubled every 12 months.
The LSF shall be applicable for the transactions undertaken on or after November 7, 2017.
xvi. New forms to be filed:
(a) A Indian company issuing employee stock option to, inter-alia, persons resident outside India who are its employees / directors, is required to submit Form –ESOP within 30 days of such issuance.
(b) An LLP receiving amount of consideration for capital consideration and acquisition of profits shall submit Form LLP (I) within 30 days of receipt of amount of consideration.
(c) The divestment of capital contribution between a resident and non-resident in case of an LLP shall be reported in Form LLP (II) to the authorised dealer within 60 days from the date of receipt of funds.
(d) An Indian start-up company issuing Convertible Notes to a person resident outside India shall report such inflows to authorised dealer bank in Form CN within 30 days of such issue.
 Regulation 2(v) of New FEMA 20 read with Paragraph 2.2 of the Master Directions.
 Regulation 2(xviii) of New FEMA 20 read with Paragraph 2.9 of the Master Directions.
 Regulation 2(xvii) of New FEMA 20 read with Paragraph 2.6 of the Master Directions.
 Regulation 2(ix) of New FEMA 20 read with Paragraph 2.7 of the Master Directions.
 Regulation 2(xxv) of New FEMA 20 read with Paragraph 2.11 of the Master Directions.
 Paragraph 2.14 of the Master Directions.
 Regulation 2(xxxi) of New FEMA 20 read with Paragraph 2.16 of the Master Directions.
 Explanation to Regulation 6 of New FEMA 20 read with Paragraph 6.11.4 of the Master Directions.
 Proviso to Regulation 6 of New FEMA 20 read with Paragraph 6.11.2 of the Master Directions.
 Proviso to Regulation 7 of New FEMA 20 read with Paragraph 6.12.2 of the Master Directions.
 Regulation 13.1(4)(b) of New FEMA 20.
 Regulation 13.1(4) of New FEMA 20.
 Regulation 13.1(4) of New FEMA 20.
 Regulation 4 of New FEMA 20 read with Paragraph 9 of the Master Directions.
 Regulation 13.1(11) of New FEMA 20.
 Regulation 14(5)(c) of New FEMA 20 read with Paragraph 9.6 of the Master Directions.
 Regulation 13.1(5) of New FEMA 20.
 Regulation 13.1(7) of New FEMA 20.
 Regulation 13.1(8) of New FEMA 20.
 Regulation 13.1(12) of New FEMA 20.
Know Your Client Requirements for FPIs
SEBI has, by way of its circular dated April 10, 2018, prescribed the following key changes to the existing Know Your Client (‘KYC’) requirements for FPIs:
i. Identification and verification of beneficial owner (‘BO’) should be in accordance with Rule 9 of Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (‘PMLA Rules’). Accordingly, the BOs of FPIs having a company or trust structure should be identified on controlling ownership interest and control basis, and in case of partnership firms and unincorporated association of individuals, should be identified on ownership or entitlement basis.
ii. The materiality threshold for identification of BOs on controlling ownership interest will be: (i) 25% in case of a company; and (ii) 15% in case of a partnership firm, trust and unincorporated association of persons. In respect of FPIs from ‘high risk jurisdictions’, intermediaries may apply lower materiality threshold of 10% for identification of BOs and also ensure compliance with KYC documentation as applicable for category III FPIs. This threshold will first be applied at the FPI level, and next look through principle will be applied to identify the BO of the material shareholder / owner entity level. When no BO is identified, the BO will be the senior managing official of the FPI
iii. Non Resident Indians (‘NRIs’) / Overseas Citizens of India (‘OCIs’) / resident Indian cannot be BOs of FPIs. However, if an FPI is Category II investment manager of other FPIs and is a non-investing entity, it may be promoted by NRIs / OCIs.
Clubbing of investment limits for FPIs will also be based on the abovementioned manner of identification of BOs.
Amendments to the SEBI Listing Regulations
The key amendments introduced by the Securities and Exchange Board of India (‘SEBI’) on May 9, 2018 to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘Listing Regulations) are as follows:
i. Any person or entity belonging to the promoter or promoter group holding 20% or more of the shareholding in the listed entity is now deemed to be a ‘related party’.
ii. Payments made by the listed entities to related parties with respect to brand usage/royalty amounting to more than 2% of consolidated turnover of the listed entity as per the last audited financial statements, will be considered to be a material related party transaction.
iii. The definition of ‘independent director’ has been amended to exclude: (i) any director who is or was a member of the promoter group of the listed entity; and (i) any director who is not a non-independent director of another company on the board of which any non-independent director of the listed entity is an independent director.
iv. At least one independent woman director is required to be appointed on the Board of the top 500 listed entities by April 1, 2019, and of the top 1000 listed entities by April 1, 2020.
v. The threshold for determining whether a subsidiary is a ‘material subsidiary’ has been reduced from 20% to 10% of the consolidated income or net worth of the listed entity and its subsidiaries in the previous accounting year.
vi. Additional requirements have been imposed in relation to age limits for non-executive directors, eligibility criteria for the chairman of the board, quorum for board and committee meetings, remuneration of directors and other related matters.
vii. No person can be a director on the Board of more than eight listed companies (with effect from April 1, 2019) and seven listed companies (with effect from April 1, 2020).
viii. Listed companies are now required to include clear threshold limits, duly approved by the Board of Directors, in their materiality policy for related party transactions and such policy must be reviewed once every three years.
Implementation of Certain Recommendations of the Committee on Corporate Governance
SEBI has issued a circular dated May 10, 2018 (‘Circular’) that provides for implementation of certain recommendations of the committee on corporate governance under the chairmanship of Uday Kotak. The following provisions will now apply to entities whose equity shares are listed on a recognized stock exchange:
i. Disclosures on Board Evaluation: A listed entity may consider including observations about Board evaluation of the current year, the previous year’s observations and any actions taken pursuant to the same and proposed actions based on the current year’s observations as part of its disclosure on Board’s evaluation.
ii. Group Governance Units: If a listed entity has several unlisted subsidiaries, it may monitor their governance through a dedicated group governance unit or governance committee comprised of members of its Board and a strong and effective group governance policy.
iii. Medium term and long term strategy: The listed entity may consider disclosing its medium-term and long-term strategy under the management discussion and analysis section of the annual report, within limits of its competitive position and for a time frame as set by the board of directors. Additionally, the listed entity may articulate a clear set of long-term metrics specific to the company’s long term strategy to allow for appropriate measurement of progress.
Guidelines for Preferential Issue of Units by InvITs
SEBI issued a circular dated June 5, 2018 (‘Circular’) setting out guidelines for preferential issue of units by InvITs.As per the Circular, listed InvITs may make a preferential issue of units to an institutional investor subject to the fulfillment of the following conditions:
i. Conditions for preferential issue: (a) Unitholders of the InvIT have to pass a resolution approving the preferential issue; (b) InvIT must be in compliance with the minimum public unitholding requirements, conditions for continuous listing and disclosure obligations; (c) No preferential issue of units by the InvIT should have been made in the six months preceding the relevant date and the issue will be completed within 12 months of the authorizing resolution; (d) The preferential issue of units can be offered to a minimum of two and maximum of 1000 investors in a financial year.
ii. Placement document: The preferential issue of units by an InvIT will be done on the basis of a placement document, which must contain disclosures as specified in the Circular. While seeking in-principle approval from the recognised stock exchange, InvIts to furnish a copy of the placement document, a certificate issued by its merchant banker or statutory auditor confirming compliance with the provisions of this Circular along with any other documents required by the stock exchange
iii. Pricing: The preferential issue is required to be made at a price not less than the average of the weekly high and low of the closing prices of the units quoted on the stock exchange during the two weeks preceding the relevant date. The InvIT cannot allot partly paid-up units. Further, the prices determined for preferential issue will be subject to appropriate adjustments, if the InvIT: (i) makes a right issue of units; and (ii) is involved in such other similar events or circumstances, which in the opinion of the concerned stock exchange, requires adjustments.
iv. Restriction on allotment: No allotment can be made to any party to the InvIT or their related parties except to the sponsor.
v. Restriction on transferability: The units allotted under preferential issue cannot be sold by the allotee for a period of one year from the date of allotment, except on a recognized stock exchange.
Guidelines for Issuance of Debt Securities by REITs and INVITs
SEBI had recently permitted Real Estate Investment Trusts (‘REITs’) and Infrastructure Investment Trusts (‘InvITs’) to issue debt securities by amending the SEBI (REIT) Regulations, 2014 (‘REIT Regulations’) and the SEBI (INVIT) Regulations, 2014 (‘InvIT Regulations’). SEBI has issued guidelines for issuance of such debt securities by REITs and InvITs by its circular dated April 13, 2018 (‘Circular’) which provides that REITs and InvITs issuing debt securities must follow the provisions of SEBI (Issue and Listing of Debt Securities Regulations), 2008 (‘ILDS Regulations’) in the following manner:
i. Restriction in Regulation 4(5) of the ILDS Regulations on issue of debt securities for providing loan to or acquisition of shares of any person, who is party of the same group or under the same management and the requirement for creation of a debenture redemption reserve, will not apply to issue of debt securities by REITs and InvITs;
ii. Compliances to be made under Companies Act in terms of the ILDS Regulations, will not apply to REITs / InvITs for issuance of debt securities, unless specifically provided in the Circular.
For the issuance of debt securities, REITs / InvITs will appoint one or more SEBI registered debenture trustees, other than the trustee to the REIT / InvIT issuing such debt securities. Further, the securities will be secured by the creation of a charge on the assets of the REIT / InvIT or holding company or SPV, having a value which is sufficient for the repayment of the amount of such debt securities and interest thereon. The Circular also provided for certain additional disclosure and compliance requirements.
IBC Exemptions introduced under the Delisting Regulations and Takeover Regulations
SEBI has, as on May 31, 2018, notified the amendments to the SEBI (Delisting of Equity Shares) Regulations, 2009 (‘Delisting Regulations’) and the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (‘Takeover Regulations’) to provide that, with respect to a listed entity, the Delisting Regulations and the Takeover Regulations will not be applicable to a transaction proposed to be undertaken pursuant to a resolution plan approved under the Insolvency and Bankruptcy Code (‘IBC’). The key amendments have been set out below:
i. The Delisting Regulations will not be applicable to delisting of equity shares of a listed entity made pursuant to a resolution plan, if such a plan: (i) lays down a specific procedure to complete the delisting of such shares; or (ii) provides an exit option to the existing public shareholders at a price specified in the resolution plan. However, the exit to shareholders should be at a price which is not less than the liquidation value as determined in accordance with the Section 35 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, after paying off dues in the order of priority as set out in the IBC. If the existing promoters or any other shareholders are proposed to be provided an opportunity to exit under the resolution plan at a price, then the delisting should be at a price which is not less than the price at which such promoters or other shareholders, directly or indirectly, are provided exit.
ii. The prohibition set out under the proviso to Regulation 3(2) of the Takeover Regulations, which restricts an acquirer from acquiring shares or voting rights in a target company, which would result in the aggregate shareholding of the acquirer, along with persons acting in concert with it, exceeding the maximum permissible non public shareholding i.e. 75%, will not be applicable to an acquirer proposing to acquire shares pursuant to a resolution plan approved under the IBC.
Enhanced Disclosure and Transparency Norms for Credit Rating Agencies
SEBI issued a circular dated May 30, 2018 (‘Circular’) setting out guidelines to enhance the governance, accountability and functioning of Credit Rating Agencies (‘CRA’).
i. Review of Ratings All cases of requests by issuers for review of the rating(s) provided to their instrument(s) by the CRA are required to be reviewed by a rating committee of the CRA that will consist of a majority of independent members.
ii. Disclosures for non-acceptance of Ratings: All non-accepted ratings have to be disclosed on the CRA’s website for a period of 12 months from the date of such rating being disclosed as a non-accepted rating.
iii. Rationalisation of Disclosures: CRAs are required to upload a rating summary sheet presenting a snapshot of the rating actions carried out during the half-year on their websites, on a half-yearly basis, within 15 days from the end of the half-year (March / September). These ratings must be segregated into securities and financial instruments other than securities.
 Persons not having any pecuniary relationship with the CRA or any of its employees.
Clarification on Clubbing of Investment Limits of Foreign Government / Foreign Government related entities
SEBI has, by way of its circular dated April 10, 2018 (‘Circular’), issued certain clarifications in relation to clubbing of investment limits of foreign Governments and their related entities viz. foreign central banks, sovereign wealth funds and foreign Governmental agencies registered as foreign portfolio investors (‘FPIs’) in India. The key clarifications are set out below:
i. In case of the same set of underlying beneficial owner(s), the holding of all foreign Government and its related entities from the same jurisdiction, as well as foreign Government agencies forming part of the same investor group, is required to be cumulatively below 10% of the total paid-up capital of the Indian company;
ii. If the Government of India enters into treaties with other sovereign Governments specifically recognizing certain entities to be treated distinctly, SEBI may, during the validity of such treaties, recognize them as such for the purpose of investment limits applicable to FPIs;
iii. The investment by foreign Government/ its related entities from provinces/ States of countries with federal structure will not be clubbed if such provinces/ States have different beneficial owners identified in accordance with the Prevention of Money Laundering (Maintenance of Records) Rules, 2005.
Lastly, the Circular clarifies that in case of a breach of the investment limits, the FPIs are required to divest their holdings within five trading days from the date of settlement of trades causing the breach. Alternatively, at the FPI’s option, such investment may be considered as a foreign direct investment.
Monitoring of Foreign Investment limits in listed Indian companies
SEBI has, by way of its circular dated April 5, 2018 (‘Circular’), issued guidelines for monitoring of foreign investment limits (based on the paid-up equity capital of the company on a fully diluted basis) in listed Indian companies. The Foreign Exchange Management Act, 1999 (‘FEMA’), read with the regulations issued thereunder, prescribes the various foreign investment limits in listed Indian companies such as the aggregate FPI limit, the aggregate NRI limit and the sectoral caps. The onus of compliance with these foreign investment limits rests on the Indian company. In order to facilitate compliance by listed Indian companies, SEBI formulated a framework with effect from June 1, 2018.
The necessary infrastructure and IT systems for monitoring the limits in Indian listed companies are required to be implemented and housed at the depositories i.e. National Securities Depository Limited and Central Depository Securities Limited. Companies will have to appoint any one depository as its ‘Designated Depository’ for monitoring the foreign investment limits. The stock exchanges will provide the data on the paid-up equity capital of an Indian company to such company’s Designated Depository.
A red flag will be activated whenever the foreign investment is within 3% or less than 3% of the aggregate FPI / NRI limits or the sectoral cap. Once a red flag has been activated for a given company, the foreign investors will take a conscious decision to trade in the shares of the company, with a clear understanding that in the event of a breach of the aggregate FPI / NRI limits or the sectoral cap, the foreign investors will be liable to disinvest the excess holding within five trading days from the date of settlement of the trades.
Capital Markets Update
Memorandum and comparison of the key changes and a detailed analysis of the ICDR Regulations which became effective from November 10, 2018.
Please click on “English” below to view the memorandum.
SEBI and further ease of listing – A step in the right direction
Over the past few years, the Indian stock market has soared on account of various factors. The growing GDP index and a number of policy changes have made investment in securities market a more lucrative option.
Following its policy on making progressive reforms to ease listings and limit the width and scope of information requests, SEBI constituted the Issue of Capital and Disclosure Requirements Committee (“ICDR Committee”). The ICDR Committee came out with a consultation paper for review of the SEBI ICDR Regulations on May 4, 2018 (“Consultation Paper”) with the intent to, among others:
• simplify the language and complexities in the SEBI ICDR Regulations, and
• incorporate changes or new requirements which have occurred due to change in market practices and regulatory environment.
Pursuant to the recommendations of the Primary Market Advisory Committee (“PMAC”) of SEBI and on receiving public comments on the Consultation Paper, SEBI in its board meeting dated June 21, 2018, has given its approval to, among others, the following important proposed changes to the SEBI ICDR Regulations:
• Change in timeline for announcement of price band: the timeline for announcement of price band for a public issue has been reduced from five working days to two working days before opening of an issue
• Changes to the disclosure requirements of financial statements in offer documents for public issues and rights issues: (i) financial disclosures for an issuer company are to be made for a period of three years instead of five years, (ii) restated and audited financial statements of an issuer company are to be disclosed in a consolidated, as opposed to the current requirement of disclosing such financial statements on a consolidated as well as standalone basis. However, the audited standalone financials of the issuer and its material subsidiaries shall have to be disclosed on the website of the issuer company, and (iii) incorporation of the principles governing disclosures of Indian Accounting Standards (IndAS) on Indian GAAP (IGAAP) Financials;
• Changes in modes for meeting any shortfall in minimum promoters’ contribution: Shortfall of up to 10% in minimum promoters’ contribution may be met by bringing in contribution from institutional investors. In addition to Alternative Investment Funds, such institutional investors may be foreign venture capital investors, scheduled commercial banks, public financial institutions and insurance companies registered with IRDAI, all of whom may bridge the shortfall in minimum promoters’ contribution without being identified as “Promoters”;
• Changes to the definition of ‘promoter group’: , The definition of ‘promoter group’ has been approved to be amended for cases where the promoter of an issuer company is a body corporate. The amended definition contemplates: (i) increasing the shareholding threshold from 10% to 20% or more, for identifying ‘promoter group’. Accordingly, any other body corporate in which a corporate promoter holds 20% or more, or which holds 20% or more of such promoter would be classified ‘promoter group’; and (ii) any body corporate in which a group of individuals or companies, or a combination thereof, holds 20% or more equity share capital in that body corporate, and also holds 20% or more of the issuer, can be classified as promoter group as long as the common shareholders are acting in concert;
• Changes to the definition of ‘group companies’: The current definition of ‘group companies’ which refers to the companies covered under the applicable accounting standards, and other companies considered material by the board of an issuer, has often been felt to be generic. Consequently, this leaves room for interpretational differences. SEBI has now approved the certain changes to such definition to make it more specific, primarily to state that, a group company shall include such companies, (i) other than promoter(s) and subsidiary(ies) of the issuer, with which there were related party transactions, during the period for which financial information is disclosed in the offer documents, as covered under the applicable accounting standards, and (ii) as considered material by the board of the issuer;
• Additions to the Anchor Investor Category: In addition to mutual funds promoted by lead managers, insurance companies and FPIs, promoted by entities related to the lead manager have now been permitted to participate in the Anchor Investor category. Category III FPIs however are an exception to this; and
• Underwriting of an IPO to be aligned to requirements of minimum subscription: As opposed to the current requirement of underwriting 100% of an IPO, SEBI has now approved that, if 90% of the fresh issue is subscribed in a IPO (on the main board), underwriting will be restricted only to such extent.
• Change in threshold for submission of draft letter of offer (“DLOF”) to SEBI in case of a rights issue: The threshold for submission of a DLOF to SEBI in case of a rights issues has been increased to ₹ 10 Crores (aggregate value of specified securities offered) as opposed to the current requirement of ₹ 50 Lacs. Accordingly, an issuer shall be required to file a DLOF with SEBI only if the aggregate value of the specified securities offered in such rights issue is ₹ 10 Crores or more;
• Change in eligibility for making a fast track issuance: Currently, issuers with audit qualifications are eligible to undertake a fast track rights issue, provided that the impact of such qualification, if any, on the audited accounts of the issuer in respect of the financial years for which accounts are disclosed in the offer document does not exceed 5% of the net profit or loss after tax of the issuer. SEBI now mandates that for a company to be eligible to make a fast track rights issue, it should not have any audit qualifications or adverse opinion against it.
• Minimum size of application by anchor investors: The minimum application size by an anchor investor has been approved to be reduced to ₹ 2 Crore from the existing threshold of ₹ 10 Crore.
Institutional Placement Programme (“IPP”) and other changes:
• Deletion of certain provisions: SEBI has approved the deletion of: (i) provisions pertaining to raising of funds by way of an IPP, and (ii) provisions pertaining ‘safety net arrangement’ and ‘IPO grading’.
It should be noted that while SEBI has approved the aforementioned recommendations of PAMAC in its board meeting, such changes shall come into force only upon the revised SEBI ICDR Regulations, in part or full, being notified by way of an official gazette.
The prospectus of any public or rights issue is required to carry relevant and material information. Market participants, including, issuers, lead managers, auditors and lawyers have been grappling with some of the requirements in the SEBI ICDR Regulations, which seemed out of context and not relevant for investors. For instance, the five year accounts did not seem necessary, and in keeping with global standards, reducing this to three years seems practical and more viable. Further, SEBI’s approval on the proposal for clarifying the definition of “group companies” is a welcome change to the ambiguities and speculation around the categorization from deal to deal. Similarly, allowing other entities to contribute towards “promoters’ contribution” and linking underwriting to subscription seems market friendly, and is a step that appreciates the overarching commercial consideration of every public offer.
While we welcome the proposed changes by SEBI, there is still room to relook at the regulations to address additional practical issues which arise from the current definition of ‘promoter group’ under the SEBI ICDR Regulations which includes ‘immediate relatives’ of the promoters, which definition further includes, relations such as, ‘father-in-law’, ‘mother-in-law’, ‘brother-in-law’ and ‘sister-in-law’ of a promoter of an issuer, and companies in which they hold 20 per cent shareholding. Consequently, an issuer whose business is run totally independent of such relatives may be barred from access to capital markets on account of their conduct or conduct of companies where any of them hold 20 % or more of the equity share capital. One option is to include those relatives who are acting in concert with the promoter of the issuer company.
Nevertheless, although we await the fine print of the revised regulations, SEBI’s endeavor to rationalize the SEBI ICDR Regulations is a welcome step.
 National Stock Exchange of India, ‘Indian Securities Market: A review’. Last accessed at, www.nseindia.com
 This shall also be applicable on rights issues, to the extent provided under the SEBI ICDR Regulations.
 This provision shall also be applicable to rights issues, in case such rights issue is made under Part A of Schedule VIII, of the SEBI ICDR Regulations.
 This shall also be applicable to all issuances where participation by ‘anchor investors’ are contemplated.
1. Madhurima Mukherjee, Partner
SEBI Circular on Investment by Foreign Portfolio Investors in Debt
On June 15, 2018, the Securities and Exchange Board of India (‘SEBI’) issued a circular withdrawing the minimum residual maturity restriction of three years for investment by Foreign Portfolio Investors (‘FPIs’) in Government Securities (‘G-Secs’) and State Development Loan’s (‘SDLs’) and permitting FPIs to invest in corporate bonds with minimum residual maturity of above one year, subject to certain specific conditions relating to short-term investments. Further, the circular discontinued the auction process being carried out by BSE Limited and the National Stock Exchange of India Limited, as had been previously stipulated in SEBI’s circular dated October 9, 2014. The circular also provides for the overall monitoring of G-Secs and SDLs to be conducted by the Clearing Corporation of India Ltd., and not depositories, as was previously required, and sets out other revised requirements for investments by FPIs in corporate debt securities, including in relation to concentration limits, investment limits in corporate bonds, pipeline investments in corporate bonds, partly paid instruments and actions in case of default. These changes were made in accordance with the RBI A.P. (DIR Series) circular No. 31 dated June 15, 2018 (Investment by Foreign Portfolio Investors in Debt – Review).
Investments by FPIs through Primary Market Issuances
On July 13, 2018, SEBI issued a circular on monitoring of investment limits applicable to FPIs in case of primary market issuances. Under the SEBI (Foreign Portfolio Investors) Regulations, 2014 (‘FPI Regulations’), a single FPI or an investor group (including entities with the same ultimate beneficial owner) cannot acquire more than 9.99% of the total issued capital of a company.
SEBI had previously clarified in its FAQs that, for the purpose of identifying the investor group, the Designated Depository Participant (‘DDP’) is required to obtain the details provided by the FPI under reporting requirements in accordance with the FPI Regulations and that depositories should monitor the investment limits at the level of the investor group based on information provided by DDPs. To ensure compliance with these requirements, SEBI has mandated that at the time of finalizing the basis of allotment during primary market issuances, Registrar and Transfer Agents (‘RTA’) should: (i) use Permanent Account Numbers to verify compliance for a single foreign portfolio investor; and (ii) obtain validation from depositories to ensure there is no breach of investment limits within the timelines for issue procedure.
Role of Sub-Broker vis-a vis Authorized Person
SEBI has, by a circular dated August 3, 2018, discontinued the intermediary category of sub-broker (‘Sub-Broker’). Accordingly, SEBI has instructed that no fresh registration will be granted to any person as a Sub-Broker and any pending applications would be returned. The registered Sub-Brokers have until March 31, 2019, to migrate to act as an Authorized Person and/ or Trading Member. Sub-Brokers who do not choose to migrate would be deemed to have surrendered their registration.
Enhanced Monitoring of Qualified Registrars to Issue and Share Transfer Agents
SEBI has, by a circular dated August 10, 2018, notified that qualified Registrars to Issue and Share Transfer Agents (i.e., Registrars to Issue and Share Transfer Agents servicing more than 200 million folios) (‘QRTA’) are required to comply with enhanced monitoring requirements through adoption and implementation of internal policy framework, periodic reporting on key risk areas, data security measures, business continuity, governance structures, measures for enhanced investor services, service standards, grievance redressal, insurance against risks, etc.
Consequently, QRTAs must formulate and implement a comprehensive policy framework, approved by the Board of Directors of the QRTAs, which will include aspects relating to maintaining risk management policies, business continuity plan, manner of keeping records, wind-down plans, data access and data protection policy, ensuring integrity of operations, scalable infrastructure, reports of board of directors/ committees of the board of directors, investor services and service standards and insurance against risks. All QRTAs must ensure compliance with this circular within six months of its notification. They must also submit compliance reports within 60 days of the expiry of each calendar quarter.
SEBI Streamlines Process of Public Issue of Debt Securities, Non-convertible Redeemable Preference Shares and Securitized Debt Instruments
On August 16, 2018, SEBI issued a circular to make the existing process of the issuance of debt securities, non-convertible redeemable preference shares (‘NCRPS’) and securitised debt instruments (‘SDI’) easier, simpler and cost effective for both issuers and investors under the SEBI (Issue and Listing of Debt Securities) Regulations, 2008, SEBI (Issue and Listing of Debt Securities by Municipalities) Regulations, 2015, SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013 and SEBI (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2008. The circular has sought to reduce the time taken for listing after the closure of the issue to six working days (instead of the earlier requirement of twelve working days). Some of the other key features of the circular are:
i. Submission of application form: For subscription to a public issue, all investors have to use an application supported by blocked amount facility for making payment, and submit a completed bid-cum-application form to Self-Certified Syndicate Banks (‘SCSBs’) (with whom the bank account to be blocked is maintained) or certain specified intermediaries.
ii. Role of SCSBs and intermediaries: The circular provides for the process of acknowledgement of applications by investors, uploading details in the electronic bidding system and blocking of funds in specified bank accounts to the extent of application money.
iv. Role of stock exchanges: Stock exchanges are required to validate electronic bid details with depository’s records for the DP ID, client ID and Permanent Account Number, by the end of each bidding day and notify the inconsistencies to SCSBs or intermediaries concerned, for rectification and re-submission. Stock exchanges are also required to develop systems to facilitate investors to view the status of their applications.
This circular is applicable for all public issues of debt securities, NCRPS and SDI opening on or after October 1, 2018.
SEBI order in the matter of United Spirits Limited
In 2012, the Diageo Group (comprising Relay B.V., Diageo Plc and their related parties) entered into certain share acquisition arrangements (which included a shareholders’ agreement (‘SHA’)) with the UB Group (comprising United Breweries Holding Ltd., Kingfisher Finvest India Limited and their related parties) in relation to shares of United Spirits Limited (‘USL’). The SHA accorded certain limited veto rights to the UB Group and prescribed certain voting arrangements between the shareholders in relation to USL. An open offer was undertaken pursuant to execution of such arrangements, followed by a voluntary open offer by the Diageo Group, as a result of which the shareholding of Diageo Group and UB Group in USL was 54.78% and 4%, respectively, thereby rendering the voting arrangement clause in the SHA infructuous. Subsequently, (following certain events) the SHA ceased to exist with effect from November 24, 2015. By way of its order dated September 6, 2018, SEBI inter alia deliberated on the issue of whether the UB Group held joint control over USL due to its veto rights under the SHA after completion of the voluntary open offer and prior to cessation of the SHA.
SEBI held that the UB Group’s veto rights were protective in nature and could not be construed as the UB Group having ‘control’ over USL, and that veto rights can grant control only if they are sufficient enough to govern the decision making process of a company’s management. It was also observed that listed companies would undergo repeated corporate restructuring if limited protective shareholder rights were equated with control. Therefore, the Diageo Group had acquired sole control over USL post the voluntary open offer, when the voting arrangement clause had ceased to exist. No change in control had taken place on November 24, 2015 with the cessation of the SHA. It was also noted that cessation of any one person from joint control, leaving the remaining person with sole control, cannot be considered as ‘change in control’ under the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 considering that the public shareholders are already aware of the persons who are in control.
SEBI Order in the matter of In Re Insider Trading in the Scrip Of Multi Commodity Exchange of India Limited
On August 29, 2018, SEBI passed an order (‘Order’) against Mr. Hariharan Vaidyalingam (‘Respondent’) who had traded in the scrip of Multi Commodity Exchange of India Limited (‘MCX’) while in possession of certain information considered to be price sensitive by SEBI. By way of the Order, SEBI disposed of an interim order passed against the Respondent on August 2, 2017 which inter alia directed the impounding of losses averted by the Respondent while dealing in shares of MCX, given that the Respondent had not actually made a profit or averted a loss pursuant to such trading. However, SEBI did clarify that as to the charge of insider trading, it is irrelevant whether the person indulging in insider trading made a profit/ averted a loss, and therefore directed that the Respondent be restrained from accessing the securities market and be prohibited from buying, selling or otherwise dealing in securities either directly or indirectly for a period of seven years from the date of the Order.
 SEBI Order No. WTM/MPB/EFD-DRA-3/33/2018.
SEBI Circulars on KYC Requirements and Eligibility Criteria for Foreign Portfolio Investors
Pursuant to recommendations of the SEBI Working Group under the chairmanship of Shri H.R. Khan, SEBI issued two circulars on September 21, 2018, relating to guidance on the manner in which FPIs are required to identify and verify their respective beneficial owners and provide disclosures relating thereto, and dealing with eligibility criteria for participation in and management and control of FPIs by non-resident Indians, overseas citizens of India and resident Indians.
Key Changes under the SEBI (Buy-back of Securities) Regulations, 2018
On September 11, 2018, SEBI issued the SEBI (Buy-back of Securities) Regulations, 2018 (‘New Regulations’), repealing the erstwhile SEBI (Buy-back of Securities) Regulations, 1998 (‘1998 Regulations’), which inter alia aligns the provisions of the New Regulations with those under the Companies Act. In addition to such alignment, some of the key changes prescribed under the New Regulations include: (i) providing much needed clarity on the meaning of the ‘buy-back period’ (which is now defined to mean the period between the date of board of directors’ resolution or date of declaration of results of the postal ballot for special resolution, as the case may be, to authorize buyback of shares of the company and the date on which the payment of consideration to shareholders who have accepted the buyback offer is made), and (ii) according SEBI with discretionary powers to relax strict enforcement of procedural requirements under these regulations, subject to certain exceptions.
SEBI Circular on Disclosure of Significant Beneficial Ownership
Pursuant to the Companies (Significant Beneficial Owners) Rules, 2018 (‘SBO Rules’), the Securities and Exchange Board of India (‘SEBI’) issued a circular dated December 7, 2018 (‘SBO Circular’) modifying disclosure requirements under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘Listing Regulations’) relating to the quarterly disclosures of shareholding patterns by listed entities. The SBO Circular requires disclosure of details pertaining to significant beneficial owners in a prescribed format, including details of the significant beneficial owner, registered owner, shares in which significant beneficial interest is held and the date of creation / acquisition of significant beneficial interest. The SBO Circular is to come into force with effect from the quarter ending on March 31, 2019.
However, the MCA issued a clarification on September 10, 2018 stating that it would be issuing an amended format for making disclosures under the SBO Rules and has granted an extension for making the filing. Consequently, if the amended SBO Rules are not issued before March 31, 2019, there is likely to be uncertainty regarding the scope and applicability of the SBO Circular.
SEBI (Depositories and Participants) Regulations, 2018
SEBI has, on October 3, 2018, issued the SEBI (Depositories and Participants) Regulations, 2018 (‘New DP Regulations’), replacing the SEBI (Depositories and Participants) Regulations, 1996 (‘Old DP Regulations’) introducing amendments largely related to structuring, shareholding and governance of depositories. Some of the key aspects are set out below:
(i) Structuring: Under the New DP Regulations, a SEBI registered depository has been permitted to carry on any other activity (whether involving the deployment of funds or otherwise), after obtaining prior SEBI approval, as against the Old DP Regulations as per which depositories were only permitted to undertake other activity which were incidental to the activity of the depository. Moreover, the New DP Regulations now expressly provide that the prior approval of SEBI shall not be required in case of treasury investments, if such investments are as per the investment policy approved by the governing board of the depository. Similar to the position under the Old DP Regulations, the New DP Regulations permit the depository to carry out an activity not incidental to its activities as a depository through the establishment of strategic business unit(s) specific to each activity as may be assigned to the depository by the Central Government or by a regulator in the financial sector (through deployment of funds or otherwise).
(ii) Shareholding: Under the New DP Regulations, the maximum prescribed shareholding in a depository, directly or indirectly, either individually or together with persons acting in concert has been retained at 5% of its paid-up equity share capital with the newly introduced exception of both Indian and foreign stock exchanges, Indian and foreign depositories, Indian and foreign banking companies, Indian and foreign insurance companies, public financial institutions, a foreign commodity derivatives exchange and a bilateral/multilateral financial institution approved by the Central Government, which may acquire or hold up to 15% of the paid-up equity share capital of such depository. An ‘applicant’ who proposes to establish a depository under the New DP Regulations is now locked in for a period of five years from the date of registration and can only hold up to 15% of the share capital of the depository, whereas under the Old DP Regulations, the sponsor was required to hold at least 51% of the equity share capital.
(iii) Governance: Under the New DP Regulations, the number of public interest directors cannot be less than the number of shareholder directors on the governing board of a depository. The requirement under the Old DP Regulations for at least one public interest director to be present in the meetings of the governing board to constitute the quorum, has been replaced with the requirement of the public interest directors not being less than the number of shareholder directors to constitute the quorum. The New DP Regulations has now specifically included the managing director in the category of shareholder directors and provide for voting on a resolution of the governing board to be valid only when the number of public interest directors that have cast their vote on such resolution is equal to or more than the number of shareholder directors who have cast their vote on such resolution, with a casting vote in favour of the chairperson of the governing board. Subject to prior approval of SEBI, the chairperson will be elected by the governing board from amongst the public interest directors. Lastly, no foreign portfolio investor (‘FPI’) will have any representation on the governing board.
Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018
SEBI, on October 3, 2018, has issued the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018 (‘New SECC Regulations’), effectively replacing the erstwhile Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012 and the circulars issued thereunder, to regulate the recognition, ownership and governance in stock exchanges and clearing corporations. Some of key features of the New SECC Regulations are:
(i) For valid quorum at a meeting of the board of stock exchanges and clearing corporations, the number of ‘public interest directors’ should not be less than the number of ‘shareholder directors’ at such meeting. The managing director is to be compulsorily categorized as a shareholder director.
(ii) The voting on board resolutions shall be valid only when the number of public interest directors who have cast their vote on such resolution is more than the number of shareholder directors who have cast their vote on such resolution.
(iii) The directors and key management personnel should be ‘fit and proper’ persons at all times, as per the criteria have been specified in the regulations as well as the disqualifications in this regard.
SEBI approves the Framework for Institutional Trading Platform
SEBI, on October 26, 2018, had released the ‘Consultation Paper to Review the Framework for Institutional Trading Platform’, with the objective of proposing changes to the regulatory framework for institutional trading platform, under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (‘ICDR Regulations’). Subsequently, at its meeting held on December 12, 2018, SEBI approved the proposals for amendments to the ICDR Regulations pertaining to the platform. The platform will be renamed the ‘Innovators Growth Platform’ (‘IGP’). The key proposals approved by SEBI in relation to listing on the IGP are set out below:
(i) 25% of the pre-issue capital of the issuer company should have been held for at least a period of two years by qualified institutional buyers, family trusts with a net worth exceeding INR 500 crores (approx. US$ 72 million), certain regulated entities (including Category III FPIs) and/or certain ‘Accredited Investors’ (who should not hold more than 10% of the pre-issue capital).
(ii) The requirement that no person (individually or with persons acting in concert) should hold 25% or more of the post-issue capital of the issuer company will be removed;
(iii) The minimum application size and trading lot of INR 10 lakhs (approx. US$ 14,000) will be reduced to INR 2 lakhs (approx. US$ 2,900) and in multiples thereof;
(iv) The minimum reservation of allocation to any specific category of investors will be removed;
(v) The minimum number of allottees will be reduced from more than 200 to 50; and
(vi) The minimum net offer to the public will be required to be in compliance with the minimum public shareholding norms of SEBI and the minimum offer size to be INR 10 crores (approx. US$ 14 million).
SEBI Circular on Participation of Eligible Foreign Entities in the Commodity Derivatives Market
SEBI, by way of its circular dated October 9, 2018, has permitted participation of eligible foreign entities (‘EFEs’) in the commodity derivatives market in India. Prior to the issue of this circular, foreign entities were not permitted to directly participate in the Indian commodity derivatives market, even if they imported/exported various commodities from/to India. EFEs’ participation has not been allowed in contracts having an underlying commodity which has been termed as a ‘sensitive commodity’, in terms of SEBI Circular dated July 25, 2017, on Position Limits for Agricultural Commodity Derivatives or by any other stipulation by SEBI, which are disclosed on the websites of recognized stock exchanges having commodity derivatives segment (‘CDS Exchanges’). Key eligibility conditions have been prescribed by SEBI for participation of EFEs in commodity derivatives market in India.
The Circular also specifies certain other compliance requirements to be met by EFEs including, inter alia, the know your client requirements, position limits, documentation and other applicable conditions, risk management; monitoring of limits and physical exposure, etc.
SEBI Circular on Fund Raising by Issuance of Debt Securities by Large Entities
With the purpose of deepening the access to the bond market and with a view to operationalise the Union Budget announcement for 2018-19, SEBI issued a circular on November 26, 2018 (‘Circular’), mandating ‘Large Corporates’ to meet one-fourth of their financing needs from the debt market. ‘Large Corporates’ refers to listed entities (except Scheduled Commercial Banks), which as on last day of the financial year (‘FY’) have:
(i) specified securities / debt securities / non-convertible redeemable preference shares listed on recognised stock exchanges in terms of the Listing Regulations;
(ii) an outstanding long term borrowing (with original maturity of more than one year, and excluding external commercial borrowings and inter-corporate borrowings between a parent and subsidiaries) of INR 100 crores (approximately US$ 14 million) or above; and
(iii) a credit rating of “AA and above”, in accordance with specified criteria.
A Large Corporate is required to raise not less than 25% of its incremental borrowings, during the FY subsequent to the FY in which it is identified as a Large Corporate, by way of the issuance of debt securities, as defined under the SEBI (Issue and Listing of Debt Securities) Regulations, 2008. For FY 2020 and FY 2021, this requirement will be required to be met on an annual basis and from FY 2022 onwards, the requirement will be required to be met over a continuous block of two years. The Circular also requires Large Corporates to make the stock exchange disclosures (certified by both the Company Secretary and Chief Financial Officer) with respect to identification as a Large Corporate and the details of the incremental borrowings made during the FY.
The Circular will become effective from April 1, 2019 (except for those entities which follow the calendar year as their financial year, in which case the Circular shall become applicable from January 1, 2020).
SEBI Circular on ‘Guidelines for Enhanced Disclosures by Credit Rating Agencies’
SEBI, by way of a circular dated November 13, 2016, has prescribed enhanced disclosures to be made by Credit Rating Agencies (‘CRAs’) to bring about greater transparency. The disclosures, inter alia, include:
(i) CRAs to include rationales in the ‘analytical approach’ and ‘liquidity’ sections of the press release, when the rating either relies on support from group companies/ parent company and to highlight parameters like liquid investments or cash balances access to unutilized credit lines, liquidity coverage ratio, adequacy of cash flows for servicing maturing debt obligation etc.;
(ii) CRAs to analyze the deterioration in the liquidity conditions of the issuer and also take into account any asset-liability mismatch while monitoring repayment schedules;
(iii) CRAs may treat sharp deviations in bond spreads of debt instruments vis-à-vis relevant benchmark yield as a ‘material event’;
(iv) CRAs to publish information about the historical average rating transition rates across various rating categories; and
(v) CRAs to bi-annually furnish data on sharp rating actions in investment grade rating category to stock exchanges and depositories for disclosure on their respective websites.
Changes Introduced for Streamlining the Process of Public Issues of Equity and Convertibles
SEBI, by way of its circular dated November 1, 2018, in its endeavor to provide an efficient fund-raising process, and in consultation with various stakeholder groups, has decided to introduce the Unified Payments Interface (‘UPI’), as a payment mechanism supported with the Application Supported by Block Amount (‘ASBA’), for applications in public issues through various channels. This will be done by retail investors through various kinds of intermediaries (i.e. syndicate members, registered stock brokers, registrar and transfer agents and depository participants). This new process is expected to improve efficiency and reduce the duration from issue closure to listing by up to three working days in a phased manner. Prior to the introduction of ASBA, this process usually took 12 working days.
For the purpose of public issues, UPI would allow the facility to block the funds at the time of the application. In order to ensure that there is parity across the various channels for the submitted application, it has been decided that the investor must only use his/her own bank account linked UPI ID to make an application in public issues. Further, merchant bankers are required to ensure appropriate disclosures with respect to UPI in offer documents and advertisements of a company undertaking a public issue.
This circular is applicable to all red herring prospectuses filed for public issues opening on or after January 1, 2019.
 UPI is an instant payment system, developed by the National Payments Corporation of India (‘NPCI’), which enables merging several banking features and allows instant transfer of money between any two persons’ bank accounts using a unique payment address.
SEBI notifies the SEBI (Settlement Proceedings) Regulations, 2018
On November 30, 2018, SEBI issued the SEBI (Settlement Proceedings) Regulations, 2018 (‘New Settlement Regulations’) which are effective from January 1, 2019, on the basis of the report of the High Level Committee chaired by Justice Dave and have replaced the SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2014 (‘Old Settlement Regulations’). The key changes introduced by the New Settlement Regulations are as follows:
(i) Definition of ‘securities laws’ has been widened to include all laws administered by SEBI. The Old Settlement Regulations merely covered the SEBI Act, 1992, the Securities Contract (Regulations) Act, 1956 and the Depositories Act, 1996. Similarly, the definition of ‘specified proceedings’ has been expanded to include proceedings pending before any forum, and not just SEBI.
(ii) The ‘cooling-off’ period of 24 months prescribed under the Old Settlement Regulations between the date of the last settlement order and an application for a new settlement has been done away with. Further, the restriction on applying for a settlement, if the applicant has received two settlement orders in the past 36 months, has also been removed.
(iii) Under the Old Settlement Regulations, violation of laws pertaining to insider trading, communication of unpublished price sensitive information, fraudulent and unfair trade practices having market-wide impact (such as front-running, mis-selling to an investor, violation of internal code of conduct in insider trading), could not be considered for settlement, as these were considered ‘serious offences’. The New Settlement Regulations remove any such restriction, subject to the qualification that SEBI may not consider any such specified proceeding, where the alleged default tends to have a market-wide impact, cause losses to a large number of investors or affect the integrity of the market.
(iv) A person cannot apply for a settlement if he is classified as a willful defaulter, a fugitive economic offender or a person who has defaulted in payment of any fees due or penalty imposed under any securities law.
(v) The New Settlement Regulations additionally grant SEBI the discretionary power to settle a proceeding confidentially, in order to benefit applicants who agree to provide ‘substantial assistance in the investigation, inspection, inquiry or audit, to be initiated or ongoing, against any other person in respect of a violation of securities laws’. The applicant’s identity and any information, evidence or documents provided by the applicant will be kept confidential in such a case.
The New Settlement Regulations have introduced a new concept of ‘settlement schemes’, by way of which SEBI will specify the procedure and terms of settlement of specified proceedings under a settlement scheme for any class of persons involved in respect of any similar defaults specified. A settlement order issued under such a settlement scheme will be deemed to be a settlement order under the New Settlement Regulations.
New SEBI Order in the Satyam Matter
SEBI order dated November 2, 2018 (‘New Satyam Order’) modified its previous orders in the matter of Satyam Computer Services Limited (‘Satyam’), in respect of B. Ramalinga Raju, B. Rama Raju, B. Suryanarayan Raju, and SRSR Holdings Private Limited (collectively, the ‘Satyam Noticees’). In the previous orders, the Satyam Noticees had been restrained from trading in the stock market for a certain period and had been directed to disgorge wrongful gains made by them, inter alia, by falsifying financial statements of Satyam and committing insider trading in Satyam’s shares.
The key legal issue involved in the New Satyam Order was whether the benefit of ‘intrinsic value’ can be given to the Satyam Noticees while computing the disgorgement amount (by deducting the ‘intrinsic value’ of shares from the receipts from sale of such shares in order to arrive at the illegal gain). SEBI, relying on its previous decisions, held that the Satyam Noticees should not be given the benefit of discounting the intrinsic value, as it would amount to conferring undeserving benefits and may act as a moral hazard rather than as a deterrent. Therefore, only the acquisition cost and statutory dues were deducted from the sale proceeds to arise at the disgorgement amount.
SEBI also considered the point in time from which interest may be levied on the disgorgement amount. Relying on a previous decision of the Supreme Court (‘SC’) on this question, SEBI reiterated that interest could be levied right from the inception of the cause of action (i.e. date of commission of the fraudulent actions). However, SEBI did not interfere with its previous orders in this matter which had levied interest on the disgorgement amount from January 7, 2009, being the date on which Mr. Ramalinga Raju confessed that he had committed fraud with respect to Satyam’s books of accounts.
SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 – Key Considerations for a Selling Shareholder in an IPO
The Securities and Exchange Board of India (‘SEBI’) notified the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (‘ICDR 2018’) on September 11, 2018, which came into effect on November 10, 2018, thereby rescinding and repealing the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (‘ICDR 2009’).
These regulations primarily govern the process of an initial public offering (‘IPO’), which is an offer of specified securities by an unlisted issuer to the public for subscription for the first time. An IPO consists of either or both of the following components:
(i) a primary component, being a fresh issue of securities by the issuer,
(ii) or a secondary component, being an offer for sale by existing shareholders of the issuer (‘OFS’).
Some of the key changes brought about by and salient features of ICDR 2018 along with existing practices, more specifically provisions which are relevant from a private equity investor’s perspective vis-à-vis IPOs are summarized below:
1. Selling Shareholders
(i) ICDR 2018 has introduced a definition of ‘selling shareholder(s)’ which is defined as any shareholder of the person who is offering for sale the specified securities in a public issue. Consequently, the definition of ‘issuer’ has also been amended to mean a company or a body corporate authorized to issue specified securities under the relevant laws and whose specified securities are being issued and/or offered for sale in accordance with the provisions of ICDR 2018 (‘Issuer’). Therefore, the ambiguity under ICDR 2009 on whether a selling shareholder would amount to an Issuer, has been clarified.
(ii) Pursuant to the inclusion of the aforesaid definitions, corresponding provisions for disclosures / confirmation requirements have been provided, which, inter alia, include the following:
• Statement by the selling shareholder on the cover page of the draft offer document/ offer document stating that it accepts responsibility for, and confirms, the statements made by it in the offer document to the extent of information specifically pertaining to it and its portion of the offered shares and that such statements are true and correct in all material respects and not misleading in any material respect;
• Aggregate pre-issue shareholding of the selling shareholder as a percentage of the paid-up share capital of the Issuer;
• Weighted average price at which specified security was acquired by the selling shareholder in the last one year;
• Average cost of acquisition of shares for the selling shareholder;
• Pre-IPO details (if applicable);
• A confirmation that the selling shareholder is not prohibited from accessing the capital market or debarred from buying, selling or dealing in securities under any order or direction passed by SEBI or any securities market regulator in any other jurisdiction or any other authority/court; and
• A confirmation that the selling shareholder is in compliance with the Companies (Significant Beneficial Ownership) Rules, 2018.
(i) Some of the changes introduced in respect of the eligibility requirements for promoters, directors and selling shareholders for an IPO are set ou below:
• The debarment of selling shareholders from accessing the capital markets has now been made an eligibility condition. However, ICDR 2018 clarifies that this restriction will not apply to a person or entity whose period of debarment has expired as on the date of filing of the draft red herring prospectus (‘DRHP’) by the Issuer with SEBI.
• Further, none of the promoters or directors of an Issuer should be fugitive economic offender (as defined under the Fugitive Economic Offenders Act, 2018).
(ii) Additionally, the following amendments were introduced in respect of financial information linked to eligibility:
• The condition that the size of the IPO, including any previous issues in the same fiscal year, must not exceed five times the net worth of the Issuer, has been done away with.
• It has been clarified that the net tangible assets, average operating profits (with operating profit in each of these preceding three years), net worth and revenue of the Issuer has to be calculated on a restated and consolidated basis.
(iii) It has also been clarified that the offered shares arising from convertible instruments may now be converted prior to filing the red herring prospectus (‘RHP’).
3. Group Companies
(i) Group companies have been defined to include: (a) companies with which the Issuer has had related party transactions during the past three fiscal and stub periods (as appearing in the audit report and financial statements), and (b) other companies considered material by the board of directors of the Issuer.
(ii) Promoters and subsidiaries have been excluded from the definition of group companies.
4. Definition of Promoter
(i) The definition of ‘promoter’ has been aligned with the definition provided under Section 2(69) of the Companies Act, 2013. Accordingly the following persons can be classified as promoters: (a) persons named as such in the offer document or identified by the Issuer in the annual return; (b) persons who have control over the affairs of the Issuer, directly or indirectly whether as a shareholder, director or otherwise; and (c) persons in accordance with whose instructions the board of the Issuer is accustomed to act (except a person acting in a professional capacity).
(ii) The threshold of shareholding which exempts a person from being categorized as a promoter has been increased from 10% to 20%. Further, venture capital funds, alternate investment funds (‘AIFs’), foreign venture capital investors (‘FVCIs’) and insurance companies have been added to the list of investors who (in addition to financial institutions, scheduled commercial banks, foreign portfolio investors other than Category III foreign portfolio investors, mutual funds) will not be deemed to be promoters merely because they hold 20% or more in the Issuer. Consequential changes have been made in various provisions, including, the definition of promoter group.
(iii) Persons instrumental in formulation of a plan or programme of the offer have now been excluded from the definition of promoter.
(iv) The proviso under the definition of ‘promoter’ under ICDR 2009 in relation to a financial institution, scheduled commercial bank, foreign portfolio investor other than Category III foreign portfolio investor and mutual funds, continuing to be deemed promoters of the subsidiaries or companies promoted by them or mutual funds sponsored by them has been done away with.
5. Minimum Promoters’ Contribution, its Eligibility, Pledging and Certification
(i) In addition to the promoters of an Issuer, certain regulated entities such as AIFs, FVCIs, scheduled commercial banks, public financial institutions (‘PFIs’) or insurance companies registered with Insurance Regulatory and Development Authority of India (‘IRDAI’), are now permitted to contribute in a manner which would enable meeting the shortfall (if any) in the minimum promoters’ contribution, subject to a limit of 10% of the post-issue capital (without being identified as promoters).
(ii) Ineligibility conditions have now been extended to securities which are contributed towards promoters’ contribution by the additional regulated entities identified above, i.e., securities acquired by promoters, AIFs, FVCIs, scheduled commercial banks, PFIs or insurance companies registered with IRDAI, during the preceding one year at a price lower than the offer price of the IPO.
(iii) As per ICDR 2018, promoters’ contribution and other securities held by the promoters (and locked-in) can also be pledged with systemically important non-banking financial companies and housing finance companies, in addition to scheduled commercial banks and PFIs.
(iv) In line with ICDR 2009, ICDR 2018 provides that lock-in on minimum promoters’ contribution is effective for a period of three years from the latter of the date of allotment in the IPO or the date of commencement of commercial production. However, the definition of the term ‘date of commencement of commercial production’ has been amended to mean the last date of the month in which commercial production of the ‘project’ in respect of which the IPO proceeds are proposed to be utilized as per the DRHP/ offer documents, is expected to commence.
(v) Statutory auditors are mandatorily required to certify the amount paid as well as credited to the Issuer’s account by each of the promoters.
6. Pre-IPO / Restriction on Further Capital Issues
For further capital issuances between the date of filing the DRHP and the listing of the specified securities offered in the IPO, the Issuer is required to disclose details of either the number of securities proposed to be issued or amount proposed to be raised in the DRHP/ offer document and not both. ICDR 2018, as was the case in the ICDR 2009, contemplates only issuance of securities.
7. Re-filing of the Draft Offer Document
Pursuant to the amendment to ICDR 2018, which was effective from December 31, 2018, any changes in the draft offer document, as elaborated below, will require re-filing of the draft offer document with SEBI:
(i) in case of a fresh issue of securities, any increase or decrease to the estimated issue size by more than 20%;
(ii) in case of an offer for sale, any increase or decrease in either the number of equity shares offered for sale or the estimated issue size by more than 50%; and
(iii) in case of a fresh issue of securities and an offer for sale, the respective limits set out above will apply.
The aforesaid changes brought about by ICDR 2018 to the regulatory regime governing Indian capital markets transactions will have a bearing on investors in private companies who intend to exit by way of an OFS as part of an IPO. Accordingly, investors may take note of the factors impacting any transactions that are contemplated subsequent to the date of notification of ICDR 2018.
CCI Dismissed Case against NSE Alleging Violation of Section 4 of CA02
On January 7, 2019, CCI dismissed information filed by Jitesh Maheshwari against National Stock Exchange of India Limited (‘NSE’) alleging violation of Section 4. The informant highlighted that the current case ongoing with Securities Exchange Board of India (‘SEBI’), Income Tax Department (‘ITD’) and Central Bureau of Investigation should also be investigated by CCI for contravention of Section 4 of the CA02.
The information pertained to co-location services provided by NSE to traders where the traders availing the service were granted access to confidential information about traded prices of shares ahead of other traders. It was alleged that from the year 2010-2014, NSE abused its dominant position by providing preferential access to some trading members of its co-location services thereby distorting competition with the trading members not availing of such facility.
CCI noted that the case is currently under adjudication by SEBI, and the exact role of NSE with respect to the alleged contravention is being investigated and that the information available against NSE was insufficient to find a contravention of Section 4 of the CA02. Accordingly, CCI ordered the matter to be closed.
 Case Number 47 of 2018.
FPI & Debt Securities – Hop on Hop off
Reserve Bank of India (“RBI”) vide circular dated June 15, 2018 (“Circular”) revised norms with respect to investments made by Foreign Portfolio Investors (“FPIs”) in corporate debt securities in India. While the Circular was supposed to have eased norms with respect to investment in corporate bonds by introducing new amendments like revising the minimum residual period of 3 years to 1 year, the Circular, at the same time, had restricted FPIs from investing in more than 50% of a single issue of corporate bond and also restricted FPIs from investing more than 20% of its debt portfolio into a single corporate entity. These two restrictions dampened FPI investments in debt market and created a blockage on the flow of foreign capital from FPIs into India. RBI may have intended to diversify risk for FPIs and incentivize them into seeking more investment opportunities; however these two conditions halted, upto a large extent, investment transactions in debt securities by FPIs.
Given the widespread consternation generated as a result of the restrictions imposed by the Circular and the likely implications on investments in debt markets in India by FPIs, RBI on October 5, 2018, made another attempt and released a discussion paper titled, ‘Voluntary Retention Route’ for investment by FPIs by (“VRR Paper”) which proposes to introduce a separate channel to enable investments by FPIs in debt markets in India (“VRR Route”).
We have examined the VRR Paper and some of the key aspects proposed in the VRR Paper are as follows:
· RBI to prescribe a limit on the total amount that may be invested via the VRR Route (“Investment Limit”).
· Investment Limit shall be in addition to ‘General Investment Limit’ as per RBI Circular No. 22 dated April 6, 2018.
· The total amount for investment through the VRR Route shall be separately indicated for government securities and corporate debt and shall be individually allocated to FPIs through an auction process
· RBI shall allocate an investment amount to each FPI (“Committed Portfolio Size”) which allocation will be determined basis the period for which the FPI proposes to invest the Committed Portfolio Size (“Retention Period”). The Retention Period shall be for a minimum of 3 years or a period as prescribed by RBI for each auction.
· FPIs are required to, within a period of 1 month from the date of announcement of auction results, invest a minimum of 67% of the Committed Portfolio Size, in debt instruments and remain invested for the Retention Period.
· Investments through this route shall be exempt from regulatory restrictions imposed by the Circular such as the cap on short-term investments (less than one year) at 20% of portfolio size, concentration limits and caps on exposure to a corporate group (20% of portfolio size and 50% of a single issue).
· Income from investments through the VRR Route may be reinvested at the discretion of the FPI and such investments can exceed the Committed Portfolio Size.
· FPIs shall open a special non-resident rupee ‘SNRR’ bank account for investment made through the VRR Route and securities account for holding debt securities under the VRR Route.
· FPIs, one month prior to Retention Period, can choose to extend the Retention Period, for an additional period equivalent to the Retention Period. FPIs can also exercise their option to exit, liquidate its portfolio or move the investments to the ‘General Investment Limit’ at the end of the Retention Period.
· FPIs can exit and liquidate their investments, prior to the Retention Period, by selling their investments to other FPIs.
Although the VRR Paper seeks to provide operational flexibility for investments by FPIs in corporate debt instruments in India and eliminate the challenges faced by FPIs due to the Circular, the real impact can be assessed only once the final circular is out. With the proposed relaxation being enforced, FPIs will be able to access the VRR Route by voluntarily committing to retain a certain percentage of their investments in India for a period of their choice. While the timelines and modalities around the implementation of the auction process and the structuring of investment transactions by FPIs still remain to be tested, given the relaxation proposed to be introduced by RBI, FPIs may be able to undertake investment transactions, in debt securities as sole or majority investors. One can argue that there exists a strong case for removal of the two conditions imposed by the Circular in place of a new policy or scheme.
Foreign capital is one of the most important ingredients for continuous growth of the economy considering the financial crunches and scarcity of domestic capital. Therefore, the need of the hour is to remove any such obstacles for allowing FPIs, amongst others, source of foreign capital, to invest into Indian debt securities.
Hardeep Sachdeva, Senior Partner
Ankit Jaiswal, Associate
SEBI (Appointment of Administrator and Procedure for Refunding to the Investors) Regulations, 2018
SEBI, on October 3, 2018, issued the SEBI (Appointment of Administrator and Procedure for Refunding to the Investors) Regulations, 2018 (‘APRI Regulations’) to provide for appointment of administrators after attachment of properties of defaulters, by SEBI authorized recovery officers, who are exercising powers under the Securities Contracts (Regulation) Act, 1956 or the Depositories Act, 1956. The APRI Regulations set out eligibility norms for appointment of administrators (including that the administrator is required to be registered as an insolvency resolution professional with the Insolvency and Bankruptcy Board of India and be empaneled by SEBI), the functions, responsibilities and powers of administrators and also deal with matters such as their terms of appointment (including remuneration), procedures for sale of properties and refund of monies.