By Sandeep Parekh
The Securities and Exchange Board of India board, on June 28, approved many changes to the regulatory regime for the securities market, to improve ease of doing business in India and bolster market efficiency. Some of the key proposals approved in the board meeting have been analysed below:
Reduction of timeline for listing of shares
After consulting stakeholders, Sebi has halved the time period for listing of shares in public issue, to 3 days from the date of issue closure. It has permitted companies to comply on a voluntary basis after September 1, and mandatorily from December 1. This reduction will allow issuers and allottees to receive their funds and securities faster, let 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 the public issue process will be deployed for a short period.
This highlights Sebi’s attempt at 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 optimising the deployment of resources during public issue , the measure not only allows investors an early access to credit and liquidity but also reduces risk for all.
Listing and delisting of NCDs
With effect from January 1, 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. Issuances exempted 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 order or regulatory requirement.
Notably, while the approval of majority suffices for delisting of equity shares, approval of all holders will be required in the case 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. These changes will aid market efficiency by allowing listed entities to address financial constraints or tradability concerns. It will very likely crystallise the roles, responsibilities, and rights owed to holders.
Client participation in the LPCC
The Limited Purpose Clearing Corporation (LPCC) was conceptualised for developing an active repo market and thereby deepening the corporate bond market in India. 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 recognised as an LPCC in 2021, and proposed to operate on two models—the proprietary and the client models. With the former already in place, Sebi has authorised the direct participation of clients in the tri-party repo segment to enable clients to settle funds directly with the LPCC without needing a clearing member. This can mitigate delays faced by clients while settling funds through a clearing member .
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 as improved liquidity and momentum in the Indian corporate bond market.
Minimum unit-holding by sponsors in InvITs and REITs
The sponsor of an Infrastructure Investment Trust (InvIT) or Real Estate Investment Trust (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 are generally long-term, considering the nature of the underlying assets and directly impact returns generated for investors.
Sebi has made it compulsory for sponsors to hold certain units in InvITs/REITs on a reducing scale for the entire duration of the trust to ensure continued alignment of interest. The minimum units shall be locked-in and unencumbered. This is a 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 can prevent sponsors 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 be a sponsor in addition to managing the trust. This decision will boost investor confidence and strengthen governance standards in InvITs / REITs; the new holding norm could prevent sponsors from leveraging their investment, potentially discouraging them from setting up such trusts in the future.
Board nomination rights for unit-holders of InvITs and REITs
Sebi has granted InvIT/REIT unit holders the right to nominate directors to the board. Unitholders with 10% or more of the outstanding units of an InvIT/REIT, individually or collectively, would be allowed to exercise such rights. The regulator has also decided to extend stewardship responsibilities to such unit holders.
Considering the absence of such nomination-rights provisions , and exclusive nomination rights granted to specific unitholders by certain InvITs / REITs, unit holders’ participation in the decision-making process was imperative for monitoring and safeguard their investment.
This will promote accountability and equitable participation in decision-making. Moreover, by assigning stewardship responsibilities to unit holders, Sebi has seemingly attempted to inject a sense of ownership and objectivity in the exercise of nomination rights.
Additional disclosures by FPIs
Sebi has also mandated several granular level disclosure requirements on 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 Rs 25,000 crore of equity AUM in the Indian markets, with certain exemptions.
This aims to address circumvention of minimum public shareholding norms by FPIs with concentrated holdings in single company/ 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, per which investments by entities 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 25% or more of whose corpus is contributed by UNSC-sanctioned investors 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 promote greater transparency and trust in Indian capital markets. However, it is yet to be seen how Sebi plans to tackle the enforcement challenges for the same.
The writer is Managing partner, Finsec Law Advisors
Co-authored with Navneeta Shankar and Rashmi Birmole, associates, Finsec Law Advisors