This update has been prepared to set out the key takeaways from the SEBI press release [PR No. 20/2019 dated 21 August 2019] which records decision of the SEBI board meeting held on August 21, 2019 (“SEBI Press Release”). The effective amendments are expected to be issued shortly.
It may be noted that there was a recent SEBI press conference in relation to this board meeting.
The key take-aways from the SEBI Press Release are as follows:
A. Review of SEBI (Foreign Portfolio Investors) Regulations
SEBI has decided to overhaul the SEBI (Foreign Portfolio Investors) Regulations (“FPI Regulations”).
The FPI Regulations currently classify foreign portfolio investors (“FPIs”) into 3 categories [Reg.5]. The SEBI Press Release states that the new regime will not have 3 categories of FPIs- instead it will have only 2 categories based on “risk-profiling” of the investors. Further, due to a low risk profile, central banks that are non-members of the Bank for International Settlement are also eligible for FPI registration. Similarly, entities set up in the International Finance Services Centre are deemed to have met the jurisdictional criteria for FPI registration.
KYC documentation requirements will be simplified- the press release does not detail how.
FPIs will be permitted to transfer unlisted, suspended or illiquid “securities” off-market, to a domestic or foreign investor. “Securities” are defined in Sec. 2(h) Securities Contracts (Regulation) Act, 1956. At present, Reg. 21 of the FPI Regulations permits a more restricted pool of securities notably listed shares and debentures, rupee-denominated bonds, and listed and unlisted NCDs/bonds in the infrastructure sector.
B. Migration from Innovators Growth Platform
SEBI has approved migration of companies listed on the Innovators Growth Platform (“IGP”) to the main board subject to fulfillment of certain requirements including: a. Listing on IGP for minimum one year; b. Profitability/net worth track record of 3 years or 75% of its capital held by qualified institutional buyers [as defined in SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 ] as on the date of application, in accordance with Regulation 6(1) and 6(2) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, for main board listings; and c. Minimum contribution of 20% by promoters locked-in for 3 years (including the time locked in during IGP listing).
The SEBI Press Release note carves out an exception to Reg. 4(ii) of SEBI (Buy-back of Securities) Regulations, 2018. Reg. 4 currently provides that buy-back of securities by a listed company is allowed only when the ratio of the aggregate of secured and unsecured debts owed by the company (“Debt”) to paid up capital and free reserves (“Equity”) post buy-back is not more than 2:1, on both consolidated and standalone basis.
The exception will allow listed parent companies, having non-banking finance companies (“NBFC”) or housing finance companies (“HFC”) as subsidiaries, to buy-back its own securities even if the Debt to Equity ratio of the company post buy-back is more than 2:1 on consolidated basis, but not more than 2:1 on standalone basis. The requirement is that (i) the Debt to Equity ratio of the parent company which is buying back securities post buy-back is not more than 2:1 on consolidated basis, after excluding the subsidiaries that are NBFCs and HFCs from consideration; and (ii) the NBFC and HFC subsidiaries excluded from consideration on consolidated basis, are required to have Debt to Equity ratio of not more than 6:1 on standalone basis. The exception had been proposed in SEBI discussion paper on review of buy-back of securities dated May 22, 2019.
The financial statements will continue to be considered on both standalone and consolidated basis for purposes related to buy-back size.
D. SEBI (Prohibition of Insider Trading) Regulations, 2015
SEBI will introduce a reward-based informant mechanism for reporting of insider trading [as defined in SEBI (Prohibition of Insider Trading) Regulations, 2015]. As background, on June 10, 2019, SEBI had floated a discussion paper on amendment to the SEBI (Prohibition of Insider Trading) Regulations, 2015 to provision for an informant mechanism for public comments.
This is a significant change as there is currently no voluntary information disclosure mechanism.
Incentives to informants
SEBI has further proposed that (i) an informant will get 10% of the disgorged amount up to INR 1,00,00,000 (the information must lead to disgorgement of at least INR 1,00,00,000 for the informant to be eligible for the reward); (ii) a hotline for facilitating informants in submitting information; and (iii) a possible amnesty or settlement for their wrongdoings in return for co-operation in the probe. The reward will be paid out of Investor Protection and Education Fund, which is set up for promotion of investors‟ awareness and protection of the interests of investors. At the same time, SEBI will also act against those submitting frivolous or vexatious information under this mechanism.
An ‘informant’ will mean a person voluntarily submitting a “voluntary information disclosure form”, (“VIDF”) detailing “credible, complete and original” information relating to an act of insider trading.
Code of Conduct
Further, entities associated with the securities markets will have to incorporate suitable provisions in their Code of Conduct to protect informants (if employees), from harassment, including by way of demotion, suspension or termination.
Confidentiality, Anonymity and Role of “practicing advocate”
Anonymous reporting is an option. SEBI will protect the identity of the informant (in cases where the informant wants to remain anonymous) by putting a protection system in place where an informant can submit information on insider trading through a practicing advocate. The informant will be mandatorily required to disclose the source of the information to SEBI (and to undertake that the source is not an employee SEBI or of a regulator).
Confidentiality of the informant regarding his identity and information will be maintained except in cases where the evidence of the informant is required during insider trading proceedings initiated by SEBI. The original information may also be shared with an appropriate agency or law enforcement authority within or outside India or a self-regulatory organisation. The provisions of Right to Information Act, 2005 will not be applicable on the information provided for the purpose of law enforcement.
Office of Informant Protection
SEBI will also set up Office of Informant Protection (“OIP”), which will be an independent office to devise policy relating to receipt and registration of the complaint i.e. the VIDF. OIP will also process the original information submitted after establishing its materiality and subsequently transfer the case to the operational department. The OIP will be required to submit an annual report regarding its functioning and working of the informant mechanism to SEBI which will then be made public.
At present, there is no whistle-blower mechanism to obtain information on market abuse such as market manipulation and insider trading in place.
As per Sec. 24B of the SEBI Act, 1992, the Central Government can grant immunity to any person from prosecution for any offence under SEBI Act (or the rules or the regulations made thereunder) on recommendation of SEBI. In a SEBI report of “Committee on Fair Market Conduct” dated August 9, 2018, it was noted that neither Central Government has used the power to grant immunity, nor SEBI has made any recommendation for granting immunity to any person to the Central Government under this provision.
Informants, whistle-blowers and self-disclosure
An informant is defined in the press release as a person who submits a complete and original “voluntary information disclosure form”. While the press release does not expressly make a distinction between informants who are outsiders as opposed to insiders (whistle-blowers) and self-disclosures, it is apparent that informants can be all of these entities. There is a mention of possible amnesty while “bringing an action against an informant”. There is also a structure for a “reward” which it can be assumed cannot apply to a self-disclosure situation.
E. SEBI (Credit Rating Agencies) Regulations, 1999
SEBI will amend SEBI (Credit Rating Agencies) Regulations, 1999, making it mandatory to include an enabling provision in rating agreements between credit rating agencies (“CRAs”) and clients (listed or unlisted entities), under which the CRA gets an explicit consent from the client to obtain full details about the entity‟s existing and future borrowings, their repayment, delay and default in servicing of such borrowing, from their lenders and other entities maintaining any such information.
Currently, CRAs are required to continuously monitor the rating of securities during their lifetime. If the client does not co-operate with the CRA by not sharing information in this regard, the CRA has to carry out the review on the basis of the best available information. If the rating is based on best available information, the CRA is required to disclose it to the investors.
Apart from this, there are other amendments such as liberalizing processes under the (Issue and Listing of Debt securities by Municipalities) Regulations, 2015.