I have a piece with Navneeta Shankar and Rashmi Birmole on several decisions taken by the recent SEBI Board meeting:
The Securities and Exchange Board of India (SEBI), in its board meeting held on June 28, 2023, approved a number of changes to the regulatory regime governing the securities market with a view to improve ease of doing business in India and bolster market efficiency. Some of the key proposals approved in the board meeting have been analyzed below:
Reduction of timeline for listing of shares
Following extensive consultation with all stakeholders, the capital markets regulator has halved the time period for listing of shares in public issue from the existing 6 days to 3 days from the date of issue closure. In order to ensure a smooth and gradual transition, SEBI has permitted companies to adhere to the reduced timelines on a voluntary basis after September 01, 2023, and mandatorily from December 01, 2023. It was observed that this reduction in timeline will allow issuers and allottees to receive their funds and securities in a shorter time period, subscribers who were not allotted shares to receive their refunds quickly, curb out-of-exchange or kerb trading, and ensure that resources of all stakeholders in public issue process will be deployed for a short period.
The reduction of timeline for listing of shares in public issue highlights SEBI’s attempt at streamlining and expediting the public issue process to enhance efficiency and benefit the stakeholders involved. By enabling receipt of funds in a much shorter time period, accelerating the process of refunds and optimizing the deployment of resources during the public issue process, this measure not only allows investors an early access to credit and liquidity but is also a step in the right direction to achieve ease of doing business and reduces risk for all. Yes, it will require higher efficiency from the market players and some leg work.
Listing and voluntary delisting of NCDs
SEBI has approved certain welcome amendments to the regulatory framework governing listed entities. With effect from January 01, 2024, all listed entities having outstanding listed non-convertible debentures (NCDs), as on December 31, 2023, would be required to issue listed NCDs. However, entities which have both listed debt securities and unlisted NCDs, as on December 31, 2023, may choose to list the unlisted NCDs at their discretion. While SEBI has mandated listing of NCDs for listed entities, issuances exempted from this requirement include capital gains tax debt securities, unencumbered non-convertible securities issued pursuant to an agreement entered with multilateral institutions provided that they are locked-in and held till maturity, and non-convertible debt securities issued pursuant to a Court/Tribunal order or regulatory requirement.
Notably, while approval of majority suffices for delisting of equity shares, approval of 100% of the debt security holders will be required for delisting of debt securities since the latter have a finite term to maturity. Entities having privately placed, listed debt securities with less than 200 debt security holders will also be eligible to delist their debt securities under the new framework. These changes are laudable and are expected to aid market efficiency by allowing listed entities to delist NCDs and address financial constraints or tradability concerns. It will also, in all likelihood, crystallize the roles, responsibilities and rights owed to holders.
Direct participation by clients in the LPCC
The Limited Purpose Clearing Corporation (LPCC) was conceptualized with the objective of developing an active repo market as part of SEBI’s larger vision to deepen the corporate bond market in India. A repo transaction, in essence, is an agreement to sell securities to another at a specific price, while committing to repurchase the securities at a later date. By nature, a repo assumes the form of a short-term borrowing with the securities acting as collateral. The repo market, by and large, is used by active traders to fund their holdings in the secondary market and supports overall liquidity in the corporate bond market.
AMC Repo Clearing Limited (ARCL) was recognized as a LPCC in 2021, and proposed to operate on two models, i.e., the proprietary model and the client model. With the former already in place, SEBI has authorized the direct participation of clients in the tri-party repo segment of the LPCC, to enable clients to settle funds directly with the LPCC, without the involvement of a clearing member. This is intended to mitigate delays faced by clients while settling funds through a clearing member and ensure funds are promptly made available.
For the repo market to contribute to secondary market liquidity, it must serve as an effective source of secured short-term funding to investors in the bond market. The direct participation of clients on the LPCC will result in timely settlement of repo transactions and quick availability of funds, which, in turn, may spill over in the form of improved liquidity and momentum in the Indian corporate bond market.
Minimum unitholding by sponsors in InvITs and REITs
The sponsor of an Infrastructure Investment Trust (InvIT) or Real Estate Investment Trust (REIT), which is responsible for setting up the trust and transferring assets into the InvIT/ REIT, tends to exercise significant control over the decisions taken in respect of the InvIT / REIT, through shares held in the investment manager. Such decisions, particularly financing related, are generally long-term considering the nature of the underlying assets, i.e., real estate or infrastructure projects, and directly impact returns generated for investors.
In the above context, SEBI has made it compulsory for sponsors to hold certain units in InvITs / REITs, on a reducing scale, for the entire duration of the InvIT / REIT, to ensure continued alignment of interest between the sponsor and the InvIT / REIT. The minimum units shall be locked-in and unencumbered. This is a considerable step up from the existing requirement to hold a minimum of 15% units for a minimum period of 3 years from the date of listing. This requirement appears to have been introduced to prevent sponsors from abandoning ship after the 3-year period, after having taken on long-lasting financial obligations in respect of the InvIT / REIT. However, sponsors would now be permitted to exit the InvIT / REIT by converting the investment manager to a ‘self-sponsored investment manager’, who will take on the role of a sponsor, in addition to managing the InvIT/ REIT.
While this decision is certainly expected to increase investor confidence and strengthen governance standards in InvITs / REITs, mandatory unitholding for the entire term of the InvIT / REIT may deprive sponsors of the opportunity to leverage their investment, potentially discouraging them from setting up InvITs / REITs in the near future.
Board nomination rights for unitholders of InvITs and REITs
SEBI has decided to grant unitholders of InvITs/REITs the right to nominate directors on the board of the investment manager, to enhance retail participation in the decision-making process. Unitholders holding 10% or more of the outstanding units of the InvIT/REIT, individually or collectively, would be allowed to exercise the above nomination rights. SEBI has also decided to extend stewardship responsibilities to such unitholders.
The need to ensure unitholders’ participation arose in view of the lasting impact of the decisions taken by the investment manager. Considering the absence of provisions providing for such nomination rights, and exclusive nomination rights granted to specific unitholders by certain InvITs / REITs, unitholders’ participation in the decision-making process was considered imperative for unitholders to monitor and safeguard their investment in the InvIT / REIT.
This decision is likely to promote accountability and equitable participation in the decision-making process of InvITs / REITs. Moreover, by assigning stewardship responsibilities to unitholders, it appears that SEBI has attempted to inject a sense of ownership and objectivity in the exercise of nomination rights by unitholders of InvITs / REITs.
Additional disclosures by FPIs
SEBI has also mandated several granular level disclosure requirements pertaining to ownership, economic interest and control for Foreign Portfolio Investors (FPIs) holding more than 50% of their Indian equity assets under management in a single Indian corporate group or FPIs that either individually or along with their investor group hold more than INR 25,000 crore of equity AUM in the Indian markets. Government and Government related investors, Pension Funds and Public Retail Funds, certain listed ETFs, corporate entities and verified pooled investment vehicles have been exempted from making such disclosures.
This move aims to address the plausible circumvention of minimum public shareholding norms by FPIs, which have concentrated holdings in single or group companies. The enhanced disclosures will also aid identification of investors in high-risk FPIs, which hold substantial shareholding in an Indian company and are based out of a non-land bordering country, while the investors in such FPIs may be based out of land-bordering countries. This measure is aimed at curbing potential misuse of the FPI route to bypass the extant law as per which investments by entities situated in land bordering countries can only be made under the government route.
SEBI has also approved changes to the eligibility criteria for FPIs, which currently bars applicants whose 25% or more of its corpus is contributed by UNSC-sanctioned investors, in order to align with the recently amended Prevention of Money Laundering Rules, under which the threshold requirements for identification of beneficial owner currently stands at 10% for companies and trusts and 15% for partnerships and unincorporated association or body of individuals.
The measure to mandate granular level disclosures for select FPIs will undoubtedly promote greater transparency, compliance and trust in Indian capital markets by guarding against diversion of funds, however, it is yet to be seen how SEBI plans to tackle the enforcement challenges given the lack of materiality thresholds as well as concerns surrounding privacy and feasibility of enforcement in foreign jurisdictions.
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