ASBA-like facility for secondary trades

Periodic shareholders’ approval will be required for any special rights granted to a shareholder and shareholders’ approval for any director serving on the board of a listed entity to do away with the practice of permanent board seats.

Periodic shareholders’ approval will be required for any special rights granted to a shareholder and shareholders’ approval for any director serving on the board of a listed entity to do away with the practice of permanent board seats. (File)

The Securities and Exchange Board of India (Sebi) on Wednesday approved key proposals with regard to introducing an ASBA-like mechanism for secondary trades, listing obligations, material disclosures, mutual fund sponsors and ESG norms.

The Sebi board accepted the proposal to introduce a settlement mechanism for stock trades that will result in investors’ funds effectively leaving their bank accounts only after trades are completed. Under this framework, Unified Payments Interface (UPI) mandates will be integrated with the secondary market to provide a block mechanism. Clients will be able to block funds in their bank accounts for trading in the secondary market, instead of transferring them upfront to the broker. This would be similar to the Application Supported by Blocked Amount (ASBA) facility for IPOs and would be optional for investors as well as stock brokers. 

Bypassing the broker in the trade settlement process will protect investors’ monies from being misappropriated by stock brokers, said experts. “Introduction and utilisation of ASBA facility is aimed at bringing efficiency in the secondary market ecosystem by allowing the margin between settlement obligations,” Suvigya Awasthy, associate partner, PSL Advocates & Solicitors, said. 

She added: “It is likely benefit the investors who can earn interest on the blocked funds in their savings account till the time the amount is debited.” 

The Sebi board has cleared a framework to provide for an institutional mechanism for prevention and detection of fraud or market abuse by stock brokers. Sebi expressed its displeasure about mule accounts used by brokers for fraudulent trades.

Amendments to the SEBI (Listing Obligations and Disclosure Requirements) Regulations to facilitate comprehensive and timely disclosures were also approved. Disclosure of material events by listed entities will involve the introduction of a quantitative threshold for determining ‘materiality’ of events/ information and stricter timelines for disclosing such material events along with the verification of market rumours.

Periodic shareholders’ approval will be required for any special rights granted to a shareholder and shareholders’ approval for any director serving on the board of a listed entity to do away with the practice of permanent board seats.

The Sebi board also gave its nod to the amendments to strengthen the existing eligibility criteria for sponsors and introduced an alternative route to enable a diverse set of entities to become sponsors of MFs. This will enable private equity funds to become eligible to become a sponsor of the mutual funds. “PEs are seen as a major source of capital for private companies driving entrepreneurship, jobs and economic growth, therefore this is expected that the PE with significant capital can invest in technology, bring in strategic guidance and good talent to fuel growth and innovation and expand the presence of mutual funds,” said Nihal Bhardwaj, associate, SKV Law Offices.

The board also in-principle approved a proposal to regulate Index Providers with the objective of fostering transparency and accountability in governance and administration of financial benchmarks in the securities market.

To enhance the reliability of ESG disclosures, Sebi has introduced the BRSR Core that will contain a limited set of key performance indicators for which listed entities will be mandatorily required to obtain reasonable assurance. Additionally, to move towards a regime of transparency, ESG disclosures and assurances will be introduced for value chain of listed entities wherein the thresholds will be specified moving forward.

Sebi has also formulated a separate category of ESG rating termed as ‘Core ESG Rating’ that will be premised on assured parameters under the BRSR Core. This is likely to increase regulatory oversight and prevent misleading ratings being provided to listed entities in the sphere of ESG. Further, Sebi cleared the regulatory framework for ESG rating providers and proposals relating to enhanced transparency in ESG rating rationales and measures to mitigate conflict of interest by ESG rating providers.

“The Sebi decisions on ESG logically connects disclosure, rating, and investing. The new value chain disclosure will be a challenge to reporting companies, but it will bring unlisted companies into the ESG fold. The dual rating scheme may prove to be distractive for investment decisions,” said Varghese Bose, senior director – ESG, Cyril Amarchand Mangaldas.

As per the prevalent practice, the methodology of reporting ESG-related information was under the aegis of the Business Responsibility and Sustainability Reporting framework that was made mandatory for the top 1000 listed companies in India by the market regulator.

“Since the data provided by the listed entities was not required to be mandatorily audited, the reporting by entities could have been susceptible to review that would eventually diminish the faith of investors. Thus, to restore the faith of investors and alleviate concerns of greenwashing, Sebi has approved the novel framework that will enhance the methodology for verification of such data reported by the entities,” said Awasthy.

A Corporate Debt Market Development Fund in the form of an Alternative Investment Fund (AIF) has been given Sebi nod. This fund will serve as a “backstop” facility to buy investment grade corporate debt instruments during the time of stress. Amendments to the current regulations that will allow specified debt mutual fund schemes and asset management companies to contribute to the initial corpus of the backstop fund also received clearance.

“This will increase secondary market liquidity and help investors have more faith in the corporate bond market. Based on a guarantee that will be given by the National Credit Guarantee Trust Company (NCGTC), the fund may raise money to buy corporate debt instruments when the market is unstable,” Bhardwaj said.

To provide flexibility to AIFs to deal with investments which are not sold due to lack of liquidity during the winding up process, the board approved a proposal to allow AIFs to either sell such investments to a new scheme of the same AIF (liquidation scheme) or distribute such unliquidated investments in-specie, in the prescribed manner and subject to approval of 75% investors by value.

There will be a requirement to obtain nod of 75% of investors by value, for buying or selling of investments potentially involving conflict of interest. The provision would cover transactions by an AIF, from or to, associates of AIF, or schemes of AIFs managed or sponsored by the manager or sponsor or their associates, or an investor who has commitment to the extent of more than 50% of the corpus of the scheme of AIF.

All new schemes going forward and existing schemes of AIFs with a corpus of more than `500 crore are required to dematerialise their units by October 31, 2023. Existing schemes of AIFs with a corpus of less than `500 crore will dematerialise their units by April 30, 2024.

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First published on: 30-03-2023 at 06:15 IST