SEBI Approves Big Bang Reforms Under Ajay Tyagi, Sets Tone For A New Market
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SEBI Approves Big Bang Reforms Under Ajay Tyagi, Sets Tone For A New Market

Bar & Bench

By Sumit and Vaneesa Agarwal

SEBI Board met today in Mumbai and took some important decisions, which shows its approach in the coming years. This board meeting was also important as it was the very first board meeting of new SEBI Chairman Mr. Ajay Tyagi along with Whole Time Members Mr. S Raman, Mr. G Mahalingam and Ms. Madhabi Puri Buch.

Suvan Law Advisors scrutinizes each item to explain what, why and the path ahead, in the capital and commodities markets.

1. INSTANT ACCESS FACILITY (IAF) IN MUTUAL FUND SCHEMES AND USE OF e-WALLETS FOR INVESTMENT IN MUTUAL FUNDS

SEBI Board Decision: With an objective to channelize households’ savings into capital market and to promote digitalization in mutual funds, SEBI Board after deliberation has decided the following:

a) Mutual Funds / Asset Management Companies (AMCs) can offer instant access facility (through online mode) of upto INR 50,000 or 90% of folio value, whichever is lower, to resident individual investors in liquid schemes by applying lower of Previous Day NAV or Prospective NAV. For providing such facility AMCs would not be allowed to borrow. Liquidity is to be provided out of the available funds from the scheme and AMCs to put in place a mechanism to meet the liquidity demands. This facility can also be used for investment in mutual funds through tie-ups with Payments Banks provided necessary approvals are taken from RBI. Presently, any scheme providing this facility would reduce the limit to INR 50,000, immediately and other than liquid schemes providing this facility would completely stop this facility within one month from the date of circular.

b) Investment of upto INR 50,000 per Mutual Fund per financial year can be made using e-wallets. However, redemptions of such investments can be made only to a bank account of the unit holder. E-wallet issuers must not offer any incentive such as cash back etc., directly or indirectly for investing in mutual fund scheme through them. E-wallet’s balance loaded through cash or debit card or net banking, can only be used for subscription to mutual funds schemes and balance loaded through credit card, cash back, promotional scheme etc. should not be allowed for subscription to MF schemes. Further, this limit of INR 50,000 would be an umbrella limit for investment by an investor through e-wallet and/or cash, per mutual fund per financial year.

Suvan Comment: SEBI has always been in favor of promoting mutual fund

investments, especially for first-time investors. This decision is likely to make small investors more comfortable about investing in the securities market since their funds will be more liquid and accessible in case of emergencies.

Instant Access Facility allows investors to access their funds almost immediately. Some fund houses have started Instant Access Facility or Instant Redemption Facility already. This amendment will help in streamlining the calculation of Net Asset Value for such redemptions. For now, this facility is only available for an amount up to Rs. 50,000. For additional amounts, the 10-day period for redemption prescribed under regulation 53 of SEBI (Mutual Fund) Regulations, 1996 will continue.  

On the issue of tie-up between Payment Banks and Mutual Funds, the ball is in RBI’s court and we will have to wait and watch if RBI allows Payment Banks to automatically invest certain amounts in liquid funds. The important decision will be in case of disputes over fund transactions, whether it will be SEBI or RBI that will have jurisdiction.

e-wallets are being used more and more frequently since demonetization. To strengthen the regulation of this sector, RBI had invited comments on Master Directions on Issuance and Operation of Prepaid Payment Instruments in India recently. It is a positive step that SEBI has taken by allowing mutual fund investments to be done directly e-wallets. Since the KYC of e-wallet is not as stringent as bank accounts until now, the amount that can be invested through e-wallets has been restricted to start with. However, the redemption amount should also have been allowed to be credited to the e-wallets and that too on an instant basis. This decision will boost the mutual fund industry, which has limited penetration in India.

2. AMENDMENTS TO SC(R) (SECC) REGULATIONS, 2012

SEBI Board Decision: While presenting the Union Budget for the FY 2016-2017, the Hon’ble Union Finance Minister, made an announcement for permitting new derivative products in the commodity derivatives market. In pursuance thereof, SEBI vide circular dated September 28, 2016, permitted launch of ‘options’ in commodity derivatives market. In this regard, to enable the Commodity Derivatives Exchanges to organize trading of ‘options’, the Board, after undertaking due public consultation process, has approved a proposal to amend the relevant provisions of Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012. Detailed guidelines for trading in ‘option’ on commodity derivatives exchanges will be issued by SEBI.

Suvan Comment: This decision is a follow-up action on budget speech FY 2016-2017. Looking at SEBI Board decision, it seems that the capital and commodities regulator is considering a new product launch. In Commodities market, one of the widespread product internationally is allowing options with commodity futures contracts as underlying, where there may be settlement through delivery of the commodity futures contracts on expiry. Though we do not know at this stage what product regulator is considering but if such internationally accepted product is being considered, in the Indian context, it will be good especially for agriculture commodities where cash settlement is not appropriate because of lack of ready availability of efficient spot market price.

It needs to be noted that such an ‘option’ currently may not be covered within the definition of ‘commodity derivatives’ as per Securities Contracts (Regulation) Act, 1956 [SCRA]. Legalese of SCRA is hurdle. Adding to this, under Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012, a commodity derivatives exchange cannot deal in any other product except for commodity derivatives, an option contract with commodity futures as underlying and settled by devolving into commodity futures are not eligible for trading on commodity derivatives exchanges currently. Therefore, at least these SEBI regulations would require amendment till SCRA is cleaned up by parliament in future. To start with clarity on what constitutes a ‘Commodity Derivatives Exchange’ and ‘National Commodity Derivatives Exchange’, would be a welcome step.

3. INCLUSION OF RBI REGISTERED SYSTEMATICALLY IMPORTANT NBFCS IN THE CATEGORY OF QIBS

SEBI Board Decision: Presently institutions such as banks and insurance companies are categorised as Qualified Institutional Buyers (QIBs) by SEBI. They are eligible for participation in IPOs with specifically earmarked allocations.  Hon’ble Union Finance Minister in his Budget Speech for the FY 2017-18, proposed to allow systemically important NBFCs regulated by RBI and above a certain net worth, to be categorised as QIBs since it would strengthen the IPO market and channelize more investments. Accordingly, the Board considered and approved the proposal for inclusion of systemically important NBFCs registered with RBI having a net worth of more than Rs. 500 crore in the category of QIBs. As NBFCs are well regulated entities, classifying such NBFCs under the definition of QIBs will give Issuers access to a larger pool of funds.

Suvan Comment: As mentioned in our piece on the budget, the Finance Minister in his budget speech had announced that “Presently institutions such as banks and insurance companies are categorised as Qualified Institutional Buyers (QIBs) by SEBI. They are eligible for participation in IPOs with specifically earmarked allocations. It is now proposed to allow systemically important NBFCs regulated by RBI and above a certain net worth, to be categorised as QIBs. This will strengthen the IPO market and channelize more investments.”

To implement this decision, amendments to the SEBI (ICDR) Regulations, 2009 would be required. The amendment will have to be made in regulation 2(zd) of the ICDR Regulations, which provides the definition of “qualified institutional buyer”, and already includes mutual funds, certain foreign portfolio investors, alternative investment funds, insurance companies, etc.

4. EXEMPTION UNDER SEBI (ICDR) REGULATIONS, 2009 RELATING TO PREFERENTIAL ALLOTMENTS, TO BE EXTENDED TO SCHEDULED BANKS AND FINANCIAL INSTITUTIONS

SEBI Board Decision: Presently, SEBI (ICDR) Regulations prohibit the issuer from making preferential issue to any person who has sold any equity shares of the issuer during the six months preceding the relevant date. It also provides that the entire pre-preferential allotment shareholding of the allottees, if any, shall be locked-in from the relevant date upto a period of six months from the date of trading approval. Mutual Funds and Insurance Companies are, however, exempted from both the said requirements.

Recently, many instances have been there where it has been observed that the Banking sector is exposed to the risk of significantly high Non-Performing Assets (NPA) and the Banks have been advised by the Reserve Bank of India to reduce the NPA and to initiate stringent actions to recover the dues from the borrowers.

As a result, it is expected that many Banks will go aggressively for recovering their dues and in order to achieve this objective, the Banks may opt for CDR / SDR or bilateral restructuring. In order to carry out actions for recovery from a borrower which may be a listed Company, Banks or Financial Institutions have sold equity shares of the issuer during the preceding six months of the relevant date. Such Banks/Financial Institutions may also be one of the allottees of the specified securities of the company pursuant to CDR approved scheme under preferential issue route.

The Board considered and approved the proposal for extending such relaxation to the Scheduled Banks and Public Financial Institutions as is already being extended to Mutual Funds and Insurance Companies.

Suvan Comment: It is widely known that the banking institutions have significantly high NPAs and government authorities are taking painstaking efforts to bring down this stress on banks’ books as well as nudging the banks to undertake rigorous steps to recover the dues from the borrowers and defaulters. Extending such an exemption to banks and financial institutions is a market friendly step and should be welcomed. Looking at the language, it seems that Regulation 70, 72 and 78 of SEBI (ICDR) Regulations, 2009 will be amended.

5. STRENGTHENING THE MONITORING OF UTILISATION OF ISSUE PROCEEDS

SEBI Board Decision: Presently, the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, require mandatory appointment of ‘Monitoring Agency’ if the issue size of specified securities exceeds Rs. 500 Cr. The purpose for the same is to ensure adequate supervision of the utilization of the funds raised.  SEBI Board considered and approved certain proposals to further strengthen the monitoring of issue proceeds raised in IPOs/FPOs/Rights Issues. Key proposals approved by Board are as under:

  • Mandatory appointment of Monitoring Agency where the issue size (excluding offer for sale component) is more than Rs. 100 crore.
  • Frequency of submission of Monitoring Agency Report has been enhanced from half-yearly to quarterly.
  • Introduction of maximum timeline of 45 days for submission of Monitoring Agency Report from the end of the quarter in conjunction with the submission of the quarterly results.
  • Mandating the disclosure of the Monitoring Agency Report on Company’s website in addition to submitting it to Stock Exchange(s) for wider dissemination.
  • Introduction of new requirement, i.e., comments of Board of Directors and Management on the findings of Monitoring Agency.

Suvan Comment: Submission of Monitoring Agency Report (MAR) within 45 days from quarter end will align with regulation 32 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. While appointment of Monitoring Agency will be a cost to issuers, it will lead to better disclosures and assist in detecting and preventing the misappropriation of issue proceeds. Such a close watch and spotlight on use of issue proceeds will keep a check on rising cases of abuse. It is a confidence booster to investors, specially to retail investors. “Sunlight is said to be the best of disinfectants” ~ American Judge Louis Brandeis

6. FRAMEWORK FOR CONSOLIDATION AND RE-ISSUANCE OF DEBT SECURITIES ISSUED UNDER SEBI (ISSUE AND LISTING OF DEBT SECURITIES) REGULATIONS, 2008

SEBI Board Decision: The Board considered and approved the following proposals contained in the agenda for laying down a framework for consolidation and re-issuance of debt securities, one of the ways to increase liquidity in the secondary market.

  1. a) Maximum of 12 ISINs maturing per financial year may be allowed for debt securities and within the bucket of these 12 ISINs, the issuer can issue both secured and unsecured Non-Convertible Debentures (NCDs)/bonds and no separate category of ISINs may be provided to them. Additionally, the issuer may issue five ISINs per financial year for structured debt instruments of a particular category (say bonds with call option or bonds with both call and put option);
  2. b) The above restrictions will not be applicable on debt instruments which are used for raising regulatory capital such as Tier I, Tier II bonds, bonds for affordable housing and the capital gains tax bonds issued under section 54EC of the Income Tax Act, 1961;
  3. c) In order to resolve the issue of bunching of liabilities, the issuer can as a one-time exercise make a choice of having bullet maturity payment or the issuer can make staggered payment of the maturity proceeds within that financial year;
  4. d) Active consolidation, i.e consolidation, of existing outstanding debt securities may be made recommendatory at present, which may be reviewed at a later stage. Such active consolidation can be done through switches and conversion; and
  5. e) There should not be any clause prohibiting consolidation and re-issuance in the Articles of Association of the issuer/company.

Suvan Comment: While the Companies Act, 1956 had specific provisions on consolidation and re-issuance, the Companies Act, 2013 is silent on this issue. The Ministry of Corporate Affairs had clarified that reissuance is possible if there is enabling provision in this behalf in the articles of the company. To provide an enabling framework, SEBI has amended the SEBI (Issue and Listing of Debt Securities) Regulations, 2008 (“ILDS Regulations”) in 2015. Despite this amendment, there was almost no reissue of bonds by any corporate.

Coincidentally, the current Chairman of SEBI, Mr. Tyagi, was a member of the Working Group on Development of Corporate Bond Market in India which had also identified non-availability of sufficient floating stock for each International Securities Identification Number (ISIN) as one of the reasons for the lack of trading volume. The Working Group had also noted that though SEBI has allowed reissuances by the corporates, there has not been any reissue of bonds by any corporate due to problems related to bunching of liabilities. Subsequently, SEBI had released a consultation paper in February, 2017 for public comments.

Traditionally, the liquidity in the secondary market has not been as high as the primary market. Each issuance from the same issuer receives a separate ISIN; hence, older bonds in the same maturity become illiquid. To deal with this problem of fragmentation of ISIN, the SEBI Board has approved this amendment. Regulation 20A of the ILDS Regulations, which was inserted in 2015, is likely to be amended to bring about these changes. This amendment will go a long way in building secondary market liquidity in corporate bonds.

7. AMENDMENT TO SEBI (FOREIGN PORTFOLIO INVESTORS) REGULATIONS, 2014

SEBI Board Decision: The SEBI (Foreign Portfolio Investor) Regulations, 2014 shall be amended as follows:

  1. a) An express provision shall be inserted in the regulations to prevent Resident Indians/NRIs or the entities which are beneficially owned by Resident Indians/NRIs from subscribing to Offshore Derivative Instruments.

Suvan Comment: Resident Indians and Non-Resident Indians (NRIs) are barred by SEBI from being Beneficial Owners (BOs) of Offshore Derivative Instruments (ODI). However, this restriction is imposed by way of Frequently Asked Questions (FAQs) rather than any legislative instrument such as a circular or amendment to regulations.  

Therefore, it seems that SEBI Board has decided to bring amendment to SEBI (Foreign portfolio Investors) Regulations, 2014 (“FPI Regulations”) that would provide greater legal sanctity. In our view, this will require amendment to Regulation 22 and is the need of the hour.

8. AMENDMENTS TO THE SEBI (DEBENTURE TRUSTEE) REGULATIONS, 1993

SEBI Board Decision: A Consultative Paper was placed on the SEBI website on proposed amendments to SEBI (Debenture Trustee) Regulations, 1993 (DT Regulations) for comments.  The Board approved the amendments to the DT Regulations, 1993 after taking into consideration the public comments.  The amendments are aimed to achieve the following objectives:

  1. To streamline the existing provisions in the DT Regulations with the provisions as mentioned in the Companies Act 2013, Companies (Share Capital and Debentures) Rules, 2014 and on account of amendment to the other SEBI Regulations.
  2. To fortify the existing provisions in the DT Regulations to enable the debenture trustees to perform the task of securing the interest of the investors.

Suvan Comment: These amendments seem to be to align existing provisions with that of Companies Act, 2013 and rules made thereunder. SEBI should take this opportunity to also harmonize definition of ‘change in control’ with that of Takeover Code, 2011. If amendments are going to be made on the lines of consultation paper in public domain, it seems there will be fundamental changes in rights, liabilities as well as maintenance of records by a DT.

9. INTEGRATION OF BROKERS IN EQUITY MARKETS AND COMMODITY DERIVATIVES MARKETS UNDER SINGLE ENTITY

SEBI Board Decision: Consequent to merger of FMC with SEBI, commodity derivatives brokers are also being regulated by SEBI. However, as per extant Securities Contracts (Regulation) Rules, 1957 (SCR Rules) and SEBI (Stock Brokers and Sub-brokers) Regulations, 1992 (Stock Brokers Regulations), a stock broker / clearing member dealing in commodity derivatives cannot deal in other securities or vice versa, except by setting up of a separate entity.

In this regard, the Board approved the proposal to remove this restriction by amending Stock Brokers Regulations and also to recommend to Government of India for amending SCR Rules accordingly. The integration of the stock brokers in equity and commodity derivative markets while having many synergies in terms of trading and settlement mechanism, risk management, redressal of investor grievances, etc. would benefit the investors, brokers, Stock Exchanges and SEBI as the same would help to:

  • enhance the economic efficiency in terms of meeting the operational as well as compliance obligations at a Member level resulting in ease of doing business
  • provide for efficient use of capital for the investors
  • widen the market penetration leading to greater financial inclusion for participants across all market segments.
  • facilitate effective regulatory oversight by Stock Exchanges and SEBI

Suvan Comment: Finance Minister in his budget speech while presenting the Budget for FY 2017-18 on February 01, 2017, announced that the commodities and securities derivatives markets will be further integrated by integrating the participants, brokers, and operational frameworks.  

At present, under SEBI norms a single entity can hold memberships of equity cash, equity derivatives, currency derivatives and debt segments across exchanges, but can hold membership of commodity derivatives exchange only by setting up a separate entity. This prohibition is prescribed under Rule 8(1)(f) and 8(3)(f) of Securities Contracts (Regulation) Rules, 1957 as well as Regulation 18C of SEBI (Stock Brokers and Sub-brokers) Regulations, 1992.

Integration of the brokers in equity and commodity derivative markets shall benefit in various ways and will be a step towards ease of doing business.

[Sumit & Vaneesa Agrawal are Partners at Suvan Law Advisors and can be reached at info@suvanlaw.com]

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