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SEBI amends ICDR Regulations to relax certain FPO norms

January 21, 2021/0 Comments/in Corporate Laws, SEBI /by Vinod Kothari Consultants

Amendment of lock in requirements for excess promoter’s contribution seems unclear.

-By Aisha Begum Ansari, Assistant Manager,

Vinod Kothari & Company aisha@vinodkothari.com

Introduction

SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR Regulations”) mandates that the promoters of the issuer company shall maintain ‘Minimum Promoters’ Contribution’ (“MPC”) which shall be locked-in for a stipulated period of time. However, the requirements of MPC and lock-in is not applicable if the funds are raised through following modes:

Rights issue
in case of a IPO/FPO – where the issuer does not have any identifiable promoter;
in case of a FPO – on a condition that the equity shares of the issuer are frequently traded for a period of atleast three years and the issuer is dividend paying company.

SEBI, in its agenda of Board Meeting dated 16^th December, 2020 to discuss amendment in ICDR Regulations[1] proposed to do away with the MPC and lock-in requirements for a listed company making an FPO, where shares are listed for past three years, without linking it to its dividend paying capacity.

The rationale for the proposed amendment was that an issuer raising funds through an FPO, is already a listed company and has fulfilled the obligation of MPC at the IPO stage. Further, all the information/ disclosures about the issuer is available in the public domain and the investors willing to subscribe in the FPO have sufficient knowledge to take an informed decision.

Thus, SEBI vide notification dated 8^th January, 2021[2] issued SEBI (Issue of Capital and Disclosure Requirements) (Amendment) Regulations, 2021 (“Amendment Regulations”).

De-coding the Amendment Regulations:

Non-applicability of MPC requirement

SEBI substituted the existing clause (b) of regulation 112 of the ICDR Regulations, wherein it removed the criterion of dividend paying capacity as a determining factor for MPC and the subsequent lock-in requirements. It further inserted the additional compliance of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (hereinafter referred to as “LODR Regulations”) and that the issuer should have redressed at least 95% of the complaints received from the investors.

The said amendment can be understood with the help of following diagram:

Non-applicability of lock-in requirement

Regulation 115 of ICDR Regulations mandates that the certain portion of specified securities held by the promoters shall be locked-in for the periods stipulated in the said regulation.

SEBI, in its Board meeting, considered that if the MPC is done away with, the lock-in requirements may not arise. Therefore, SEBI deleted the existing proviso after clause (c) of regulation 115 of ICDR Regulations. However, deleting the said proviso has brought ambiguity in compliance with the lock-in requirements which is explained as under:

The existing proviso after regulation 115(c) states that the excess promoters’ contribution as provided in the proviso to regulation 112(b) shall not be subject to lock-in.
Clause (a) of sub-regulation (1) of regulation 113 which deals with MPC states that the promoters shall contribute either

upto 20% of the proposed issue size; or
upto 20% of the post-issue capital

The existing proviso to regulation 112(b) states that if the promoters subscribe in excess of the higher of the two options mentioned above, then the price for such excess subscription shall be determined in terms of pricing guidelines for preferential issue under regulation 164 or the issue price, whichever is higher.

Since, the promoters were contributing in excess of the option given to them, SEBI exempted the lock-in requirements for such excess subscription.

Now suppose, if the promoters subscribe to 5% of the issue size, even if the MPC requirement is not applicable to them, whether such contribution shall be subject to lock-in? And if yes, the lock-in shall be applicable for what period?

Pursuant to the proviso after regulation 115(c) being deleted, following interpretations arise:

Interpretation 1: Such subscription shall not be required to be locked-in at all, since the intention of SEBI, as mentioned in the agenda of Board Meeting, was to do away with the lock-in requirement.

Interpretation 2: Such subscription shall be required to be locked-in for a period of 1 year, because such subscription is in excess of MPC i.e. it is in excess of zero contribution required and as per regulation 115(b), the excess promoters’ contribution shall be under lock-in for a period of 1 year.

This can be understood with the following diagram:

Non-applicability of lock-in requirements in case of equity shares issued on a preferential basis pursuant to any resolution of stressed assets or a resolution plan.

SEBI, in its agenda of Board Meeting dated 16^th December, 2020 to discuss recalibration of threshold for Minimum Public Shareholding norms, enhanced disclosures in Companies which undergo CIRP[3], proposed to do away with the lock-in requirements of equity shares issued on a preferential basis pursuant to any resolution of stressed assets under a framework specified by RBI or a resolution plan approved under IBC, 2016.

The rationale for the proposed amendment was that as per rule 19A(5) of Securities Contracts (Regulations) Rules, 1957[4], if the minimum public shareholding (hereinafter referred to as “MPS”) falls below 10% due to CIRP, such listed companies are required to bring MPS to at least 10% within a period of 18 months and to 25% within 3 years from the date of such fall.

As per regulation 167(4), the equity shares issued on a preferential basis pursuant to any resolution of stressed assets or a resolution plan, shall be locked-in for a period of one year. Thus, any allotment to the Resolution Applicant (RA) is locked in for a period of one year. Such lock-in of shares does not facilitate dilution of promoter shareholding to achieve MPS requirement.

Therefore, SEBI inserted the new proviso after regulation 167(4) whereby it relaxed the lock-in requirement of specified securities to the extent to achieve 10% public shareholding. This can be understood with the following diagram:

Conclusion:

Even though SEBI has tried to relax the MPC and lock-in requirements in case of issue of specified securities pursuant to FPO and resolution of stressed assets or a resolution plan, it has created ambiguity in the relaxation of lock-requirements in case of excess promoters’ contribution in case of FPO. SEBI should review the Amendment Regulations and undo the deletion of existing proviso after regulation 115(c) of ICDR Regulations to retain the exemption.

Table containing the relevant provisions of ICDR Regulations before and after the amendment.

Before Amendment	After Amendment
Chapter IV: Further Public Offer, Part III: Promoters’ Contribution
Regulation 112: Requirement of minimum promoters’ contribution not applicable in certain cases
The requirements of minimum promoters’ contribution shall not apply in case of: a) an issuer which does not have any identifiable promoter; b) where the equity shares of the issuer are frequently traded on a stock exchange for a period of at least three years and the issuer has a track record of dividend payment for at least three immediately preceding years: Provided that where the promoters propose to subscribe to the specified securities offered to the extent greater than higher of the two options available in clause (a) of sub-regulation (1) of regulation 113, the subscription in excess of such percentage shall be made at a price determined in terms of the provisions of regulation 164 or the issue price, whichever is higher. Explanation: The reference date for the purpose of computing the annualised trading turnover referred to in the said Explanation shall be the date of filing the draft offer document with the Board and in case of a fast track issue, the date of filing the offer document with the Registrar of Companies, and before opening of the issue.	The requirements of minimum promoters’ contribution shall not apply in case of: a) an issuer which does not have any identifiable promoter; b) where the equity shares of the issuer are frequently traded on a stock exchange for a period of at least three years immediately preceding the reference date, and the issuer has a track record of dividend payment for at least three immediately preceding years: (i) the issuer has redressed at least ninety five per cent of the complaints received from the investors till the end of the quarter immediately preceding the month of the reference date, and; (ii) the issuer has been in compliance with the SEBI (LODR) Regulations, 2015 for a minimum period of three years immediately preceding the reference date: (iii) Provided that if the issuer has not complied with the provisions of the SEBI (LODR) Regulations, 2015, relating to composition of board of directors, for any quarter during the last three years immediately preceding the date of filing of draft offer document/ offer document, but is compliant with such provisions at the time of filing of draft offer document/ offer document, and adequate disclosures are made in the offer document about such non-compliances during the three years immediately preceding the date of filing the draft offer document/ offer document, it shall be deemed as compliance with the condition: Provided further that where the promoters propose to subscribe to the specified securities offered to the extent greater than higher of the two options available in clause (a) of sub-regulation (1) of regulation 113, the subscription in excess of such percentage shall be made at a price determined in terms of the provisions of regulation 164 or the issue price, whichever is higher. Explanation: The reference date for the purpose of computing the annualised trading turnover referred to in the said Explanation shall be the date of filing the draft offer document with the Board and in case of a fast track issue, the date of filing the offer document with the Registrar of Companies, and before opening of the issue.
Regulation 115: Lock-in of specified securities held by promoters
The specified securities held by the promoters shall not be transferable (hereinafter referred to as “locked-in”) for the periods as stipulated hereunder: a) minimum promoters’ contribution including contribution made by alternative investment funds, or foreign venture capital investors, as applicable, shall be locked-in for a period of three years from the date of commencement of commercial production or from the date of allotment in the further public offer, whichever is later; b) promoters’ holding in excess of minimum promoters’ contribution shall be locked-in for a period of one year: c) The SR equity shares shall be under lock-in until their conversion to equity shares having voting rights same as that of ordinary shares, provided they are in compliance with the other provisions of these regulations. Provided that the excess promoters’ contribution as provided in the proviso to clause (b) of regulation 112 shall not be subject to lock-in.	The specified securities held by the promoters shall not be transferable (hereinafter referred to as “locked-in”) for the periods as stipulated hereunder: a) minimum promoters’ contribution including contribution made by alternative investment funds, or foreign venture capital investors, as applicable, shall be locked-in for a period of three years from the date of commencement of commercial production or from the date of allotment in the further public offer, whichever is later; b) promoters’ holding in excess of minimum promoters’ contribution shall be locked-in for a period of one year: c) The SR equity shares shall be under lock-in until their conversion to equity shares having voting rights same as that of ordinary shares, provided they are in compliance with the other provisions of these regulations. Provided that the excess promoters’ contribution as provided in the proviso to clause (b) of regulation 112 shall not be subject to lock-in.
Chapter V: Preferential issue, Part V: Lock-in and Restrictions on Transferability
Regulation 167: Lock-in
(4) The equity shares issued on a preferential basis pursuant to any resolution of stressed assets under a framework specified by the Reserve Bank of India or a resolution plan approved by the National Company Law Tribunal under the Insolvency and Bankruptcy Code 2016, shall be locked-in for a period of one year from the trading approval	(4) The equity shares issued on a preferential basis pursuant to any resolution of stressed assets under a framework specified by the Reserve Bank of India or a resolution plan approved by the National Company Law Tribunal under the Insolvency and Bankruptcy Code 2016, shall be locked-in for a period of one year from the trading approval. Provided that the lock-in provision shall not be applicable to the specified securities to the extent to achieve 10% public shareholding.

Our other related material:

[1] https://www.sebi.gov.in/web/?file=https://www.sebi.gov.in/sebi_data/meetingfiles/dec-2020/1608617470064_1.pdf#page=1&zoom=page-width,-18,797

[2] https://www.sebi.gov.in/legal/regulations/jan-2021/securities-and-exchange-board-of-india-issue-of-capital-and-disclosure-requirements-amendment-regulations-2021_48704.html

[3] https://www.sebi.gov.in/web/?file=https://www.sebi.gov.in/sebi_data/meetingfiles/dec-2020/1608621922552_1.pdf#page=1&zoom=page-width,-18,801

[4] https://www.sebi.gov.in/legal/rules/feb-1957/securities-contracts-regulations-rules-1957_34671.html

Law relating to collective investment schemes on shared ownership of real assets

January 21, 2021/0 Comments/in Alternative investment Vehicles, Banking Regulations, Capital Markets, Consumer Protection, Corporate Laws, Credit and security interests, Fintech, Fintechs and Payment and Settlement Systems, RBI, SEBI /by Vinod Kothari Consultants

-Vinod Kothari (finserv@vinodkothari.com)

The law relating to collective investment schemes has always been, and perhaps will remain, enigmatic, because these provisions were designed to ensure that enthusiastic operators do not source investors’ money with tall promises of profits or returns, and start running what is loosely referred to as Ponzi schemes of various shades. De facto collective investment schemes or schemes for raising money from investors may be run in elusive forms as well – as multi-level marketing schemes, schemes for shared ownership of property or resources, or in form of cancellable contracts for purchase of goods or services on a future date.

While regulations will always need to chase clever financial fraudsters, who are always a day ahead of the regulator, this article is focused on schemes of shared ownership of properties. Shared economy is the cult of the day; from houses to cars to other indivisible resources, the internet economy is making it possible for users to focus on experience and use rather than ownership and pride of possession. Our colleagues have written on the schemes for shared property ownership[1]. Our colleagues have also written about the law of collective investment schemes in relation to real estate financing[2]. Also, this author, along with a colleague, has written how the confusion among regulators continues to put investors in such schemes to prejudice and allows operators to make a fast buck[3].

This article focuses on the shared property devices and the sweep of the law relating to collective investment schemes in relation thereto.

Basis of the law relating to collective investment schemes

The legislative basis for collective investment scheme regulations is sec. 11AA (2) of the SEBI Act. The said section provides:

Any scheme or arrangement made or offered by any company under which,

the contributions, or payments made by the investors, by whatever name called, are pooled and utilized solely for the purposes of the scheme or arrangement;
the contributions or payments are made to such scheme or arrangement by the investors with a view to receive profits, income, produce or property, whether movable or immovable from such scheme or arrangement;
the property, contribution or investment forming part of scheme or arrangement, whether identifiable or not, is managed on behalf of the investors;
the investors do not have day to day control over the management and operation of the scheme or arrangement.

The major features of a CIS may be visible from the definition. These are:

A schematic for the operator to collect investors’ money: There must be a scheme or an arrangement. A scheme implies a well-structured arrangement whereby money is collected under the scheme. Usually, every such scheme provides for the entry as well as exit, and the scheme typically offers some rate of return or profit. Whether the profit is guaranteed or not, does not matter, at least looking at the definition. Since there is a scheme, there must be some operator of the scheme, and there must be some persons who put in their money into the scheme. These are called “investors”.
Pooling of contributions: The next important part of a CIS is the pooling of contributions. Pooling implies the contributions losing their individuality and becoming part of a single fungible hotchpot. If each investor’s money, and the investments therefrom, are identifiable and severable, there is no pooling. The whole stance of CIS is collective investment. If the investment is severable, then the scheme is no more a collective scheme.
Intent of receiving profits, produce, income or property: The intent of the investors contributing money is to receive results of the collective investment. The results may be in form of profits, produce, income or property. The usual feature of CIS is the operator tempting investors with guaranteed rate of return; however, that is not an essential feature of CISs.
Separation of management and investment: The management of the money is in the hands of a person, say, investment manager. If the investors manage their own investments, there is no question of a CIS. Typically, investor is someone who becomes a passive investor and does not have first level control (see next bullet). It does not matter whether the so-called manager is an investor himself, or may be the operator of the scheme as well. However, the essential feature is there being multiple “investors”, and one or some “manager”.
Investors not having regular control over the investments: As discussed above, the hiving off of the ownership and management of funds is the very genesis of the regulatory concern in a CIS, and therefore, that is a key feature.

The definition may be compared with section 235 of the UK Financial Services and Markets Act, which provides as follows:

In this Part “collective investment scheme” means any arrangements with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements (whether by becoming owners of the property or any part of it or otherwise) to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income.
The arrangements must be such that the persons who are to participate (“participants”) do not have day-to-day control over the management of the property, whether or not they have the right to be consulted or to give directions.
The arrangements must also have either or both of the following characteristics—

the contributions of the participants and the profits or income out of which payments are to be made to them are pooled;
the property is managed as a whole by or on behalf of the operator of the scheme.
- If arrangements provide for such pooling as is mentioned in subsection (3)(a) in relation to separate parts of the property, the arrangements are not to be regarded as constituting a single collective investment scheme unless the participants are entitled to exchange rights in one part for rights in another.

It is conspicuous that all the features of the definition in the Indian law are present in the UK law as well.

Hong Kong Securities and Futures Ordinance [Schedule 1] defines a collective investment scheme as follows:

collective investment scheme means—

arrangements in respect of any property—
under which the participating persons do not have day-to-day control over the management of the property, whether or not they have the right to be consulted or to give directions in respect of such management;
under which—
the property is managed as a whole by or on behalf of the person operating the arrangements;
the contributions of the participating persons and the profits or income from which payments are made to them are pooled; or
the property is managed as a whole by or on behalf of the person operating the arrangements, and the contributions of the participating persons and the profits or income from which payments are made to them are pooled; and
the purpose or effect, or pretended purpose or effect, of which is to enable the participating persons, whether by acquiring any right, interest, title or benefit in the property or any part of the property or otherwise, to participate in or receive—
profits, income or other returns represented to arise or to be likely to arise from the acquisition, holding, management or disposal of the property or any part of the property, or sums represented to be paid or to be likely to be paid out of any such profits, income or other returns; or
a payment or other returns arising from the acquisition, holding or disposal of, the exercise of any right in, the redemption of, or the expiry of, any right, interest, title or benefit in the property or any part of the property; or
arrangements which are arrangements, or are of a class or description of arrangements, prescribed by notice under section 393 of this Ordinance as being regarded as collective investment schemes in accordance with the terms of the notice.

One may notice that this definition as well has substantially the same features as the definition in the UK law.

Judicial analysis of the definition

Part (iii) of the definition in Indian law refers to management of the contribution, property or investment on behalf of the investors, and part (iv) lays down that the investors do not have day to day control over the operation or management. The same features, in UK law, are stated in sec. 235 (2) and (3), emphasizing on the management of the contributions as a whole, on behalf of the investors, and investors not doing individual management of their own money or property. The question has been discussed in multiple UK rulings. In Financial Conduct Authority vs Capital Alternatives and others, [2015] EWCA Civ 284, [2015] 2 BCLC 502[4], UK Court of Appeal, on the issue whether any extent of individual management by investors will take the scheme of the definition of CIS, held as follows: “The phrase “the property is managed as a whole” uses words of ordinary language. I do not regard it as appropriate to attach to the words some form of exclusionary test based on whether the elements of individual management were “substantial” – an adjective of some elasticity. The critical question is whether a characteristic feature of the arrangements under the scheme is that the property to which those arrangements relate is managed as a whole. Whether that condition is satisfied requires an overall assessment and evaluation of the relevant facts. For that purpose it is necessary to identify (i) what is “the property”, and (ii) what is the management thereof which is directed towards achieving the contemplated income or profit. It is not necessary that there should be no individual management activity – only that the nature of the scheme is that, in essence, the property is managed as a whole, to which question the amount of individual management of the property will plainly be relevant”.

UK Supreme Court considered a common collective land-related venture, viz., land bank structure, in Asset Land Investment Plc vs Financial Conduct Authority, [2016] UKSC 17[5]. Once again, on the issue of whether the property is collective managed, or managed by respective investors, the following paras from UK Financial Conduct Authority were cited with approval:

The purpose of the ‘day-to-day control’ test is to try to draw an important distinction about the nature of the investment that each investor is making. If the substance is that each investor is investing in a property whose management will be under his control, the arrangements should not be regarded as a collective investment scheme. On the other hand, if the substance is that each investor is getting rights under a scheme that provides for someone else to manage the property, the arrangements would be regarded as a collective investment scheme.

Day-to-day control is not defined and so must be given its ordinary meaning. In our view, this means you have the power, from day-to-day, to decide how the property is managed. You can delegate actual management so long as you still have day-to-day control over it.[6]’

The distancing of control over a real asset, even though owned by the investor, may put him in the position of a financial investor. This is a classic test used by US courts, in a test called Howey Test, coming from a 1946 ruling in SEC vs. Howey[7]. If an investment opportunity is open to many people, and if investors have little to no control or management of investment money or assets, then that investment is probably a security. If, on the other hand, an investment is made available only to a few close friends or associates, and if these investors have significant influence over how the investment is managed, then it is probably not a security.

The financial world and the real world

As is apparent, the definition in sec. 235 of the UK legislation has inspired the draft of the Indian law. It is intriguing to seek as to how the collective ownership or management of real properties has come within the sweep of the law. Evidently, CIS regulation is a part of regulation of financial services, whereas collective ownership or management of real assets is a part of the real world. There are myriad situations in real life where collective business pursuits, or collective ownership or management of properties is done. A condominium is one of the commonest examples of shared residential space and services. People join together to own land, or build houses. In the good old traditional world, one would have expected people to come together based on some sort of “relationship” – families, friends, communities, joint venturers, or so on. In the interweb world, these relationships may be between people who are invisibly connected by technology. So the issue, why would a collective ownership or management of real assets be regarded as a financial instrument, to attract what is admittedly a piece of financial law.

The origins of this lie in a 1984 Report[8] and a 1985 White Paper[9], by Prof LCB Gower, which eventually led to the enactment of the 1986 UK Financial Markets law. Gower has discussed the background as to why contracts for real assets may, in certain circumstances, be regarded as financial contracts. According to Gower, all forms of investment should be regulated “other than those in physical objects over which the investor will have exclusive control. That is to say, if there was investment in physical objects over which the investor had no exclusive control, it would be in the nature of an investment, and hence, ought to be regulated. However, the basis of regulating investment in real assets is the resemblance the same has with a financial instrument, as noted by UK Supreme Court in the Asset Land ruling: “..the draftsman resolved to deal with the regulation of collective investment schemes comprising physical assets as part of the broader system of statutory regulation governing unit trusts and open-ended investment companies, which they largely resembled.”

The wide sweep of the regulatory definition is obviously intended so as not to leave gaps open for hucksters to make the most. However, as the UK Supreme Court in Asset Land remarked: “The consequences of operating a collective investment scheme without authority are sufficiently grave to warrant a cautious approach to the construction of the extraordinarily vague concepts deployed in section 235.”

The intent of CIS regulation is to capture such real property ownership devices which are the functional equivalents of alternative investment funds or mutual funds. In essence, the scheme should be operating as a pooling of money, rather than pooling of physical assets. The following remarks in UK Asset Land ruling aptly capture the intent of CIS regulation: “The fundamental distinction which underlies the whole of section 235 is between (i) cases where the investor retains entire control of the property and simply employs the services of an investment professional (who may or may not be the person from whom he acquired it) to enhance value; and (ii) cases where he and other investors surrender control over their property to the operator of a scheme so that it can be either pooled or managed in common, in return for a share of the profits generated by the collective fund.”

Conclusion

While the intent and purport of CIS regulation world over is quite clear, but the provisions have been described as “extraordinarily vague”. In the shared economy, there are numerous examples of ownership of property being given up for the right of enjoyment. As long as the intent is to enjoy the usufructs of a real property, there is evidently a pooling of resources, but the pooling is not to generate financial returns, but real returns. If the intent is not to create a functional equivalent of an investment fund, normally lure of a financial rate of return, the transaction should not be construed as a collective investment scheme.

[1] Vishes Kothari: Property Share Business Models in India, http://vinodkothari.com/blog/property-share-business-models-in-india/

[2] Nidhi Jain, Collective Investment Schemes for Real Estate Investments in India, at http://vinodkothari.com/blog/collective-investment-schemes-for-real-estate-investment-by-nidhi-jain/

[3] Vinod Kothari and Nidhi Jain article at: https://www.moneylife.in/article/collective-investment-schemes-how-gullible-investors-continue-to-lose-money/18018.html

[4] http://www.bailii.org/ew/cases/EWCA/Civ/2015/284.html

[5] https://www.supremecourt.uk/cases/docs/uksc-2014-0150-judgment.pdf

[6] https://www.handbook.fca.org.uk/handbook/PERG/11/2.html

[7] 328 U.S. 293 (1946), at https://supreme.justia.com/cases/federal/us/328/293/

[8] Review of Investor Protection, Part I, Cmnd 9215 (1984)

[9] Financial Services in the United Kingdom: A New Framework for Investor Protection (Cmnd 9432) 1985

Our Other Related Articles

Property Share Business Models in India,< http://vinodkothari.com/blog/property-share-business-models-in-india/>

Collective Investments Schemes: How gullible investors continue to lose money < https://www.moneylife.in/article/collective-investment-schemes-how-gullible-investors-continue-to-lose-money/18018.html>

Collective Investment Schemes for Real Estate Investments in India, < http://vinodkothari.com/blog/collective-investment-schemes-for-real-estate-investment-by-nidhi-jain/>

Compliance requirement under PIT Regulations

January 8, 2021/0 Comments/in Corporate Laws, SEBI /by Vinod Kothari Consultants

SEBI proposes liberal provisions for promoter reclassification

December 22, 2020/1 Comment/in Corporate Laws, SEBI /by Vinod Kothari Consultants

Shaivi Bhamaria | Vinod Kothari and Company

corplaw@vinodkothari.com

Introduction

Reg. 31A of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘LODR Regulations’) lays down conditions pursuant to which promoters/ person belonging to promoter group of a listed entity can be reclassified as public shareholders. Reg. 31A (5) provides that if a public shareholder seeks to re-classify itself as promoter, it will have to make an open offer as per the provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

SEBI on November 23, 2020 has issued a Consultation Paper on Re-Classification of Promoter/ Promoter Group Entities and Disclosure of the Promoter Group Entities in the Shareholding Pattern[1] (‘Consultation Paper’) for public comments. At present SEBI has been granting relaxations from the requirements under reg. 31A of the LODR regulations on a case to case basis to promoters who have found reclassification difficult under current regulatory regime. The said Paper has been issued on the basis of the recommendations of the Primary Market Advisory Committee (‘PMAC’) of SEBI in order to regularise the provisions relating to reclassification and minimise the need for providing relaxation on case-to-case basis.

Current Framework:

A summary of the present reclassification process is laid down below:

The promoters/person belonging to promoter group seeking reclassification as public shareholders must satisfy the conditions laid down in reg. 31A (3) (b) of the LODR regulations;
The listed entity must be in compliance with the conditions laid down in reg. 31A (3) (c) of LODR regulations;
Promoters/person belonging to promoter group must make a request for re-classification to the board of directors of the listed entity. The request must contain the rationale for seeking re-classification and also a statement on how the conditions specified in reg. 31A (3) (b) are satisfied;
The board after analysing the request must place the same along with its views, for approval of the shareholders in a general meeting. There should be a time gap of at least three months but not exceeding six months between the date of board meeting and the shareholder’s meeting;
The request for re-classification should be approved in the general meeting by an ordinary resolution in which the promoter/ persons belonging to promoter group seeking re-classification cannot not vote to approve such re-classification request;
Not later than 30 days from the date of approval by shareholders in general meeting, an application along with all relevant documents for re-classification must be made to the stock exchanges where the entity is listed. In case the entity is listed on more than one stock exchange, the concerned stock exchanges will jointly decide on the application.

Examples of case-to-case relaxation provided by SEBI

Exemption from obtaining shareholders’ approval

In the informal guidance given to Alembic Pharmaceuticals Limited[2] SEBI had exempted the company from obtaining approval of shareholder for reclassification of 5 promoters as public shareholders inter-alia on the grounds that:

The promoters cumulatively held 1.45% of the equity share capital of the company.
They were senior citizens, leading independent lives and were not directly or indirectly connected with any activity of the company.
They did not exercise any direct or indirect control over the affairs of the company, had never at any time held any position of key managerial personnel in the company.
They did not had any special rights through formal or informal arrangements with the company or any promoter/person of the promoter group.
They undertook that they would never be privy to any price sensitive information of the company

Further, in the informal guidance given to Gujarat Ambuja Exports Limited[3], SEBI had exempted the company from obtaining approval of shareholder for reclassification of one its promoters on the grounds that:

the shareholding of the promoter was insignificant, constituting only 0.23% of the total paid up equity;
Though being the son of a promoter, the said person was neither involved in the operations of the company nor was connected with the company.
He did not exercise any direct or indirect control over the affairs of the company, did not have veto rights or special rights as to voting or control nor has any special information rights.
Further the company had not entered into any shareholder agreement with him and he would never be privy to any price sensitive information of the company.

It is pertinent to note that SEBI in its interpretative letter had stated that the company would not be required to take shareholders’ approval, subject to compliance with the provisions of reg. 31A of LODR regulations. Reg, 31A of LODR regulations provide for shareholders’ approval, hence it was not very clear whether exemption from obtaining shareholders’ approval was granted or not.

Proposed amendments

1. Relaxing the threshold of maximum voting rights allowed to be exercised by an outgoing promoter

At present reg. 31A (3) (b) (i) of LODR regulations provide that promoter/ persons belonging to promoter group seeking re-classification should not together hold more than 10% of the total voting rights in the listed entity.

The Consultation Paper proposes to increase the threshold of 10% to 15%, to enable those promoters who have shareholding of less than 15% but are no longer involved in the day-to-day control of the listed entity to opt-out from being classified as promoters, without having to reduce their share-holding.

2. Suggestions for speeding up the process:

a. Time limit within to place the reclassification request to be placed before the board

At present reg. 31A of LODR Regulations is silent on the time period within which the listed entity must place the reclassification request received from the promoter/ persons belonging to promoter group before the board, consequently as per SEBI’s data, in certain cases reclassification requests from promoter/ persons belonging to promoter group have not been placed before the Board, thereby ceasing the process in its initial phase.

To prevent this and streamline the process of reclassification, SEBI has proposed insertion of a time limit of one month receiving the reclassification request, within which the listed entity must place the same before its board of directors.

b. Reduction in time period between board and shareholders meeting

As mentioned above, reg. 31A (3) (a) (ii) provides that the time gap between the meeting of the board at which the proposal for reclassification was accepted and the meeting of the shareholders, seeking approval for the same should be at least 3 months. The rationale behind the same was to give adequate time to the shareholders for considering the request of the promoter.

However, time gap 3 months resulted in an increase in the total time taken in the process. In order to increase both cost and time efficiency, the Consultation Paper proposes to reduce the minimum time gap from 3 months to 1 month.

3. Extending the ambit of exemption from the procedure

a. In case of reclassification is pursuant to an order/ direction of Government/ regulator

At present reg. 31A (9) provides exemption from the provisions of reg. 31A (3), (4) and (8)(a), (b) of LODR regulations in cases where re-classification of promoter/ persons belonging to promoter group is as per the resolution plan approved under s. 31 of the IBC, subject to the condition that the promoter seeking re-classification do not remain in control of the listed entity.

It is proposed to extend the said exemption to re-classification pursuant to an order/ direction of the Government/ regulator and/or as a consequence of operation of law since the re-classification is a natural consequence of the order/direction of the Government/ regulator.

b. In case of reclassification of existing promoter pursuant to open offer

It is proposed to extend the exemption from procedure for re-classification to cases where the re-classification is pursuant to an open offer made in accordance with the provisions of SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 (‘SAST regulations’), subject to the satisfaction of following conditions:

The intent of the existing promoters to re-classify has been disclosed in the letter of offer
The promoter/ persons belonging to promoter group being reclassified fulfil the conditions mentioned in reg. 31A(3)(b) and the listed entity fulfils the conditions stipulated at reg. 31A(3)(c) of LODR regulations.

The rationale behind the exemption being that in cases where intent of reclassification has already been mentioned in the Letter of Offer, the requirement of promoter making an application is a mere procedural formality since the fact of re-classification is already present in the public domain.

c. Cases where the outgoing promoter is absconding / non-cooperating

Exemption from the procedure for re-classification, is also proposed to be granted in cases where, pursuant to an open offer, a listed entity intends to re-classify erstwhile promoter/ persons belonging to promoter group but the promoter/ persons belonging to promoter group are not traceable or are not co-operative, but the same can be done after the fulfillment of the following conditions:

The listed entity should demonstrate that efforts have been taken to contact the promoters through issuance of notices in newspapers, stock Exchange websites etc.
Such promoters seeking re-classification should not remain in control of the listed entity

4. Disclosure of names of promoter group entities in the shareholding pattern

Reg. 31 of LODR Regulations mandates that all entities falling under promoter/ promoter group are to be disclosed separately in the shareholding pattern.

As a matter of practice, several companies do not disclose names of persons in promoter/ promoter group who do not hold any shares.

It is to be noted that pursuant to the SEBI (Listing Obligations and Disclosures Requirements) (Sixth Amendment) Regulations, 2018[4] SEBI had, by virtue of by insertion of reg. 31(4) required that all entities falling under promoter and promoter group be disclosed separately in the shareholding pattern of listed entities appearing on the website of the stock exchanges in accordance with the formats specified by the SEBI . However, since the provisions of the Regulations still did not explicitly require entities to disclose the entire list of promoter/ promoter group irrespective of their shareholding, companies continued the practice of disclosing only those promoter/ promoter group entities that held shares in the company. A detailed write-up on this insertion in Reg 31(4) can be read here.

To fill this gap, it has been proposed that all entities falling under promoter and promoter group be disclosed separately even if they do not hold shares in entity. Further it is proposed that listed entities obtain a declaration on a quarterly basis, from their promoters on the entities/ persons that form part of the ‘promoter group’.

Disclosures of all entities falling under promoter/ promoter group irrespective of the fact whether they hold shares in the listed entity hold all the more importance in light of the recent SEBI circular on Automation of Continual Disclosures under reg. 7(2) of SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘PIT regulations’). In order to facilitate System Driven Disclosures (‘SDD’)[5] pursuant to the said circular, the listed entities are required to disclose to the designated depository the PAN number/ Demat account number (for PAN exempt entities) of all Promoters and promoter group so that the system can capture any trade in securities made by such entities.

Conclusion

Exemptions provided in the consultation paper in cases of open offer and order/ direction of Government/ regulator lead to reduction in compliance burden on the listed entity, further the proposed amendments w.r.t reduction in time gap between the board meeting and general meeting and the setting of time limit for placing the application before the board will lead to streamlining the entire process and bring efficiency in the same.

The clarification w.r.t to disclosure of names of promoter group entities holding ‘Nil’ shareholding and obtaining quarterly declarations from promoter may add to the compliance burden of listed entities at once, but in our view, should be effective in the long run.

Specific comments/suggestions on the Consultation Paper can be made to SEBI on or before December 24, 2020.

[1] For full text of the consultation paper see:

https://www.sebi.gov.in/web/?file=https://www.sebi.gov.in/sebi_data/attachdocs/nov-2020/1606126221923.pdf#page=4&zoom=page-width,-15,71

[2] For full text of the informal guidance see:

https://www.sebi.gov.in/sebi_data/commondocs/Alembic-sebiletter_p.pdf

[3] For full text of the informal guidance see:

https://www.sebi.gov.in/sebi_data/commondocs/oct-2017/gujaratsebi_p.pdf

[4] See: https://www.sebi.gov.in/legal/regulations/nov-2018/securities-and-exchange-board-of-india-listing-obligations-and-disclosure-requirements-sixth-amendment-regulations-2018_41051.html

[5] Circular no. SEBI/HO/ISD/ISD/CIR/P/2020/168 dated September 09, 2020 available at:

https://www.sebi.gov.in/web/?file=https://www.sebi.gov.in/sebi_data/attachdocs/sep-2020/1599654391917.pdf#page=1&zoom=page-width,-16,559

Benevolent move of SEBI for a more democratic shareholder participation

December 14, 2020/0 Comments/in Corporate Laws, SEBI /by Vinod Kothari Consultants

-Effectiveness however doubtful!

Abhishek Saraf | Vinod Kothari and Company

corplaw@vinodkothari.com

Background

SEBI observed that under the current remote e-voting framework, the participation of the public non institutional shareholders/ retail shareholders (shareholders) is at negligible level. One of the reasons behind such low participation may be due to reluctance of the shareholders to register with multiple e-voting service providers (ESPs) which provide the e-voting facility to the listed entities. Shareholders may be finding it a tedious task to register with multiple ESPs for casting their vote and maintain multiple user IDs and passwords for the said purpose.

In view of the same and with the intent to increase the optimum utilization of the remote e-voting process by shareholders, SEBI came out with consultative paper[1] on 5^th March 2020 to review the e-voting mechanism as provided by various ESPs.

Based on the public comments on consultative paper, SEBI vide its circular[2] dated 09^th December 2020 decided to enable the facility of a singly log in credential for the purpose of e-voting for all demat account holders.

This article covers the circular along with our analysis on the probable impact which SEBI intends to achieve by way of easing and at the same time securing the remote-e-voting process for shareholders.

Existing Mechanism

The existing mechanism requires shareholders to register themselves with ESPs and have a separate login credential for each ESP to be able to cast their vote on resolutions proposed to be passed at the general meetings. The same can be explained better with the help of the following example:

Suppose a shareholder Mr. S holds shares in 3 companies and these companies appoint different ESPs for providing remote e-voting facility to vote on the resolutions proposed to be passed at their respective general meeting.

Now the shareholder shall register himself with all the 3 ESPs and have a separate login credential for each ESP to be able to cast his vote. Under the given situation, the shareholder may find it tedious and therefore, skip the whole process itself. The notice calling the general meeting contains the instruction for logging in the portal of the Depository in the following manner:

SEBI’s move to increase remote-e-voting

With an intent to address the issue of negligible voting by the shareholders, SEBI has introduced a mechanism to make e-voting process more secure, convenient and simple for shareholders under which the shareholder will be allowed to cast their vote directly through their demat accounts/ Depositories/ Depositories Participants without having to go through the hassle of registering with various ESPs and maintaining a list of multiple user IDs and passwords. In the process, only a single login credential will be enough for the shareholders to participate in remote e-voting and register their vote in respect of any item.

The existing process as envisaged above will be replaced with a single doorstep which will be accessed by a single login credential under which the shareholder shall be allowed to vote without any further authentication by ESPs.

By taking the help of the above example, the new facility can be explained in the following manner-

Under the new facility, Mr. S does will not have to maintain login credentials for all the 3 ESPs but only have to register with the Depository either directly or through his demat accounts with Depsoitory Participants to have access to all the ESPs through a single log in without additional authentication with ESPs. This has been explained in detail below.

The facility shall be implemented in 2 phases.

Under Phase -1:

SEBI has instructed to implement the process as provided in Phase-1 within 6 months of the date of the circular (i.e. within 9^th June 2021).

Shareholders with demat accounts have been provided the option to either directly register with Depositories to access the e-voting page of various ESPs through websites of the Depositories or accessing various ESP portals directly from their demat accounts, through the facility provided by the depository without any further authentication by ESPs, for participation in the e-voting process.

Under Phase-2:

SEBI has instructed to implement Phase 2 within 12 months from the completion of the process in Phase 1.

Under the 2^nd phase, it has been proposed to further enhance the convenience and security of the system with the help of One Time Password (OTP) verification mechanism wherein the shareholders will be allowed to login through registered mobile number or E-mail based OTP verification as an alternate in place of logging through username and password for cases where shareholders have directly registered with the Depository

Further for logging in through demat account with the DPs, a second factor authentication using mobile or e-mail based OTP shall also be introduced after logging in.

While the SEBI circular requires implementation in two phases, the consultative paper was different on the following fronts:-

Consultative paper did not provide for implementation of the mechanism in a phased manner;
It was proposed that only the Depositories will be required to establish a dedicated helpline unlike the SEBI circular where both Depositories and ESPs are required to have a dedicated helpline;
The consultative paper proposed that the ESPs shall send details of the votes cast, to the shareholders, via SMS/ Email whereas the circular places the responsibility of sending a confirmatory SMS on the Depository based on the confirmation received from ESPs.
Sharing of necessary details and logs by Depositories with ESPs and sharing of electronic logs and other related information with respect to e-voting transactions with Depositories by ESPs as proposed in the consultative paper has been done away with in the circular.

To dos for Depositories and ESPs

Depositories

Accountable for authentication – The Depository has been made responsible to carry out the authentication of the shareholders and voting will be allowed by ESPs based on the Depository’s authentication.
Flash messages/ reminders – Another step taken to increase participation is SMS/ email alerts by the Depository to the demat account holders atleast 2 days prior to the date of the commencement of e-voting. The listed entity shall provide the details of its upcoming AGMs requiring voting to Depository who shall then send a SMS/ email alerts.
Dedicated helpline – Depositories to establish a dedicated helpline to resolve technical difficulties faced by shareholders relating to the e-voting facility

ESPs

Dedicated helpline- listed companies shall ensure that the ESPs engaged by them also provide a dedicated helpline in this regard.
Better Disclosure- To enable shareholders to take informed decisions while voting on any proposed resolution of a Company, ESPs has been instructed to provide web-link to the disclosures made by the Company on the stock exchange website and report on the website of the proxy advisors.

Conclusion

This framework for one stop log-in has only been made mandatory in respect of public non-institutional shareholders/ retail shareholders and the existing process may continue for all physical shareholders and shareholders other than individuals viz. institutions/ corporate shareholders. Further, SEBI’s perception on the current shareholder participation is based on its public consultation and is probably because, the shareholders are not taking the trouble of registering themselves with the various ESPs.

The step taken by SEBI towards a more democratic participation of the shareholders may be effective in the long run. However, its current effectiveness seems to be doubtful unless the shareholders for whom the same has been made, find it useful and be ready to implement the same.

Our other relevant resources on similar topic can be read here –

[1] https://www.sebi.gov.in/reports-and-statistics/reports/mar-2020/consultative-paper-on-e-voting-facility-provided-by-listed-entities_46213.html

[2]https://www.sebi.gov.in/legal/circulars/dec-2020/e-voting-facility-provided-by-listed-entities_48390.html

SEBI proposes enhanced disclosures for meetings with analyst, investors, etc.

November 26, 2020/0 Comments/in Corporate Laws, SEBI, Uncategorized /by Vinod Kothari Consultants

– To curb information asymmetry and risk of divulging UPSI

Shaifali Sharma | Vinod Kothari and Company

corplaw@vinodkothari.com

Introduction

Analyst and investor meets are one of the many ways of communicating and sharing information. Conducting periodical meetings, conferences, one-to-one meetings or con-calls with analysts or investors who wish to know more about the company, its historic performance, financial details, future prospects, etc. is a common practice for the listed entities. The most common amongst these meetings are the earning calls which is called immediately following the release of the quarterly or annual financial results. Whereas, one-to-one meets or conference calls with selective investors/ analysts are also conducted in the normal course of business of the companies.

With the intent to rule out any information asymmetry in the market, the schedule, presentations or any information material used during such analyst or institutional investor meetings are required to be disclosed by companies to stock exchange(s) and also hosted on the company’s website as required under the SEBI (Listing Obligations and Disclosure Requirements), Regulations, 2015 (‘Listing Regulations’).

Moreover, the SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘PIT Regulations’) requires fair disclosure of material events and therefore, provides principles for fair disclosure which includes

publication of transcripts or recordings of analyst/ investor meetings on company’s website; and
ensuring information shared with analysts and research personnel is not an unpublished price sensitive information (‘UPSI’).

The governing Regulations are discussed in this article.

However, looking at the practice of most of the listed companies, it has been observed that such disclosures are simply box ticking exercise where disclosure of mere PowerPoint slides of presentation are given instead of what is discussed in the meeting to give an example.

The concerns relating to disclosures in respect of analyst meets/ institutional investors meet/ conference calls were discussed by Primary Market Advisory Committee (‘PMAC’) constituted by SEBI in July, 2020 which then formulated a Sub-Group to recommend specific disclosure requirements to strengthen analyst/ investor meets. In this regard, a ‘Report on disclosures pertaining to analyst meets, investor meets and conference calls[1]’ (‘Report’) has been issued on November 20, 2020 seeking public comments on or before December 21, 2020. The Sub-Group has recommended to make the disclosure requirements optional for the initial one year and mandatory thereafter for all the listed companies. This article attempts to analyse the recommendations and their probable impact on the current regime under the Listing Regulations and PIT Regulations.

Further, on perusing the Report it has been observed that it explicitly distinguishes between scheduled meeting with the analysts and investors and unscheduled one-to-one calls with them. This article discusses the intention behind such distinction recognised by SEBI itself.

Current Regulatory Framework in India governing Analyst/ Institutional Meets

Listing Regulations

Regulation 46(2)(o) of the Listing Regulations requires the listed entity to disseminate the schedule of analyst or institutional investor meet and presentations made by the listed entity to analysts or institutional investors simultaneously with submitting the same to the stock exchange. The aforesaid Regulation is reproduced below:

“46(2) The listed entity shall disseminate the following information under a separate section on its website:

xxx

(o) schedule of analyst or institutional investor meet and presentations made by the listed entity to analysts or institutional investors simultaneously with submission to stock exchange;”

Further, Part A(A)(15) of Schedule III of the Listing Regulations read with SEBI circular[2] dated September 09, 2015, requires the listed entity to disclose the schedule of analyst or institutional investor meet and presentations on financial results made to such analysts or institutional investors without any application of the guidelines for materiality as specified u/r 30(4) of the Listing Regulations.

Furthermore, Part C(8)(e) of Schedule V of the Listing Regulations requires the listed entity to disclose the presentations made to the institutional investors or analysts in the section on the Corporate Governance of the Annual Report under the head ‘Means of Communication’.

Apart from above requirements, principles governing disclosures and obligations of listed entity shall be simultaneously conformed viz. to provide adequate and timely information to recognised stock exchange(s) and investors, provide adequate and timely information to shareholders, to ensure timely and accurate disclosure on all material matters including the financial situation, performance, ownership, and governance of the listed entity, etc.

PIT Regulations

Pursuant to Regulation 8 of PIT Regulations, every listed company is required to formulate a Code of Fair Disclosure and Conduct for fair and timely disclosure of UPSI in compliance with the principles set out in Schedule A to the PIT Regulations. The principles of fair disclosure w.r.t analyst meet is as follows

to ensure that information shared with analysts and research personnel is not UPSI; and
to develop best practices to make transcripts or records of proceedings of meetings with analysts and other investor relations conferences on the official website to ensure official confirmation and documentation of disclosures made.

Regulatory Regime in other Countries

Country Name	Disclosure Requirement
USA	The Regulation FD[3] (for “Fair Disclosure”) issued by the Securities and Exchange Commission provides that an issuer or his official while entering into a private discussion with an analyst who is seeking guidance about earnings estimates, shall not communicate any material non-public information (MNPI). It does not prohibit from communicating material non-public information to an analyst, the company may do so after making public disclosure of such information. No practice of recording or transcribing the investor meetings
UK	Market Abuse Regulations[4] prevents companies from making selective disclosure of MNPI. If the company do so, an immediate announcement would be required but it would still be a breach of the regulations No practice of recording or transcribing these investor meetings
Singapore	Rule 703(4)[5] of the Singapore Exchange Listing Rules requires the issuer to observe the Corporate Disclosure Policy[6] as provided under Appendix 7.1. of the Rules. Para 23 under PART VIII of the Policy recommends the issuer to observe an “open door” policy in dealing with analysts, journalists, stockholders and others. Issuer is required to abstain from disseminating material information which has not been disclosed to the public before. However, if such material information is inadvertently disclosed at meetings with analysts or others, it must be publicly disseminated as promptly as possible by the means described in Part VIII.
Canada	The Canadian Securities Exchange specifies prescribes Policy on ‘Timely Disclosures’[7] to be complied by the issuer. Para 7.1 provides that disclosure of information shall not be on selective basis. The policy classifies private meetings with analysts, brokers and investors as a good corporate governance activity. However, the policy provides that no material unpublished information is disseminated in such meetings.

Extant gaps in disclosure requirements

Information Asymmetry

As discussed above, the Listing Regulations require the listed entities to disclose the schedules and presentations for analyst or institutional investor meetings on its website and to the stock exchange(s) with 24 hours of the event taking place. However, except for few top companies, majority of the listed companies treat this as a mere formality. They disclose only the occurrence of analyst/ investor meets and circumvent disclosure of significant details of the said event.

As per the Report, it has been observed that the reports shared by the listed entities have information that does not have its source from quarterly results or investor presentation and thereby lead to selective sharing of information. Therefore, it is seen that there exists information asymmetry due to following the Regulations in letter and not in spirit.

Selective disclosure and Risk of divulging UPSI

Selective disclosure occurs when a company releases UPSI about the company to an individual or selective group of persons (e.g., analysts or institutional investors) before disclosing the information to the general public. It creates an adverse impact on market integrity similar to that of insider trading. Selective disclosure lead to asymmetry information.

For example, analyst/ investors during a one-to-one meet are provided with such price sensitive information which may not be disclosed in presentation or the financial results and is not available in public domain.

Therefore, issues concerning selective sharing of information, disclosure of incomplete information, inconsistency in the disclosures made by different listed companies have made it essential for SEBI to review the current regulatory requirements and further strengthen the disclosure regime.

Conflicting views of Kotak Committee on Investor/ Analyst meets

The Committee on Corporate Governance constituted under the Chairmanship of Mr. Uday Kotak Committee (‘Kotak Committee’) by SEBI issued its ‘Report on Corporate Governance[8]’ in October, 2017 wherein it took a contrary view and stated that disclosure of schedule of investor/ analyst meetings does not serve any practical purpose and therefore may not be required. Relevant extract provided below:

“The Committee was of the view that the disclosure of schedules of analyst/institutional investor meetings does not serve any practical purpose, and there have been instances of its misuse. Hence, the Committee recommended that the disclosure of schedules of analyst/institutional investor meetings may not be required. To clarify, the information to be shared at such meetings has to be strictly in compliance with the SEBI PIT Regulations.”

On the other hand, the present Report has considered institutional investors meet or conference call with analysts/ shareholders as a material event and emphasis has been placed on strengthening the disclosure framework. It is significant to note that while the Kotak Committee was of the view that putting up the schedule for investors meeting have the potential of being misused, the Sub-Group constituted by the PMAC holds a completely contrary view and has not recommended to do away with the said practice.

The Recommendations: Enhanced disclosures w.r.t analyst / investor meets/ conference calls

New disclosure requirements pertaining to post-earnings conference calls/quarterly calls

Listed companies generally organise analyst / investor meetings or conference calls after the release of quarterly financial results. To curb any information asymmetry among different class of stakeholders, the following recommendations are proposed:

audio/video recordings
- host on the website and share with the stock exchange(s)
- immediately after the earnings call/ con-call/ analysts meeting before the next trading day or within 24 hours from the occurrence of event or information, whichever is earlier;
written transcripts
- host on the website of the listed entity and respective stock exchanges within 5 working days after the event;
make available audio/video recordings and the written transcripts on the website
- for a period of atleast 8 years in addition to the details disseminated on respective stock exchanges.

The idea is to immediately disclose any UPSI shared at such conference calls. Some of the top listed companies like Tata Steel[9], Reliance Industries[10], Infosys[11], Pricol Ltd[12], Power Finance Corporation Ltd[13], have already adopted the above practices and upload the audio/video recordings, transcripts of analysts / investor conference calls on their respective websites. The recommendations will now require the other listed companies to put in place an effective disclosure mechanism in this regard.

Discretion of companies to limit attendees of conference calls

Unlike in US, Indian listed companies generally restrict the conference calls to their respective analysts / investors only to avoid any unnecessary disruption of call, presence of competitors, etc.

However, genuine institutional investor or analyst may get excluded from participating in the meeting and thus, Sub-Group suggested that companies should make the provision of inclusion of certain individuals based on their request and on verification of their credentials.

Accordingly, Sub-Group has recommended to leave the discretion with the listed companies for deciding the participants for such meetings.

One-to-one meetings – Selective or effective disclosures?

Listed companies in their course of business are often seen conducting one-to-one meetings/ con-calls with investors / analysts (‘private meets’). Such private discussions are more risky due to the following:

unscheduled and unplanned;
company officials not prepared;
no presentation/ information statement for discussion;
greater risk of disclosing UPSI

Even if a company wishes to make public the proceeding of such meeting/ call, the investor may not agree to share private call records in public domain.

However, by disclosing one-to-one affairs, chances of information asymmetry will reduce. Also, other investors, particularly the minority investors, who are generally not a part of such meets may be benefitted from effective price discovery. Besides investors, regulatory authorities and stock exchanges will also be able to track such meets for any future references.

In view of the above, Sub-Group has made following recommendations:

listed companies to provide number of one-to-one meetings with select investors as part of corporate governance report submitted by them to stock exchanges on a quarterly basis;
an affirmation that no UPSI was shared by any official of the company in such meetings shall also be provided along with the corporate governance report;
company shall maintain a record of all such one-to-one meetings. The data should be preserved for a period of atleast 8 years.

Unlike in case of post-earning calls, it seems recording and disclosure of private meets is not required. It is always better to look before you leap, hence companies must consider recording such private meets (written or audio) and making it public to avert possibility of selective disclosure and leak of material information.

Further, in addition to the affirmation by official of company involved, a confirmation from the concerned party (investor/ analyst) shall also be obtained confirming that no material public information was shared with the concerned analyst during such meeting, and that the information shared in the meeting was only clarification of facts/information already available in public domain.

Concluding Remarks

After the recommendations of Kotak Committee in the year 2017 to discard the requirements of disclosing the schedule of analyst / institutional investor, a new approach of SEBI to enhance transparency and strength disclosure framework of analyst/ investor meets is evident from the recommendations of the Sub-Group.

An effective disclosure mechanism will be required to be put in place by companies for adequate and timely disclosures. A measure of ‘silent or quiet period’ may be adopted where companies for a specified period (generally prior to release of financial results) refrain from interaction with the analyst/ investor/ media in order to avoid inadvertent disclosures of UPSI on selective basis. To conclude, the recommendations seems to promote a culture of corporate governance encouraging companies to follow the compliance in spirit of law.

Other reading materials on the similar topic:

‘A date to remember: Ad-hoc Analyst/Investor meets become a passé affair’ can be viewed here
SEBI eliminates one-to-one analyst meets from the purview of LODR can be read here
SEBI’S STEWARDSHIP CODE FOR INSTITUTIONAL INVESTORS can be read here
Our other articles on various topics can be read at: http://vinodkothari.com/

Our Youtube Channel: https://www.youtube.com/channel/UCgzB-ZviIMcuA_1uv6jATbg

[1] https://www.sebi.gov.in/reports-and-statistics/reports/nov-2020/report-on-disclosures-pertaining-to-analyst-meets-investor-meets-and-conference-calls_48208.html

[2] https://www.sebi.gov.in/legal/circulars/sep-2015/continuous-disclosure-requirements-for-listed-entities-regulation-30-of-securities-and-exchange-board-of-india-listing-obligations-and-disclosure-requirements-regulations-2015_30634.html

[3] https://www.sec.gov/rules/final/33-7881.htm

[4] https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32014R0596

[5] http://rulebook.sgx.com/rulebook/703-0

[6] http://rulebook.sgx.com/rulebook/appendix-71-corporate-disclosure-policy

[7]https://webfiles.thecse.com/resource/CSE%20Policy%205%20%E2%80%93%20Timely%20Disclosure,%20Trading%20Halts%20and%20Posting%20Requirements.pdf

[8] https://www.sebi.gov.in/reports/reports/oct-2017/report-of-the-committee-on-corporate-governance_36177.html

[9] https://www.tatasteel.com/investors/financial-performance/analyst-call-recording/

[10] https://www.ril.com/InvestorRelations/FinancialReporting.aspx

[11] https://www.infosys.com/investors/news-events/analyst-meet/2020/india/main.html

[12] https://www.pricol.com/investor-call-transcripts.aspx

[13] https://www.pfcindia.com/Home/VS/109

SEBI revisits mode of bidding in public issue of debt securities

November 26, 2020/0 Comments/in Corporate Laws, SEBI /by Vinod Kothari Consultants

Permits submission through UPI mechanism and online interface

-CS Henil Shah & CS Burhanuddin Dohadwala

corplaw@vinodkothari.com

Introduction

In order to streamline the process in case of public issue of debt securities and to add an addition to the current Application Supported by Blocked Amount (‘ASBA’) facility. Securities and Exchange Board of India (‘SEBI’) vide its circular dated November 23, 2020[1] (‘November 23 Circular’) has introduction Unified Payments Interface (‘UPI’) mechanism for the process of public issues of securities under:

SEBI (Issue and Listing of Debt Securities) Regulations, 2008 (‘ILDS Regulations’);
SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013 (‘NCRPS Regulations’);
SEBI (Issue and Listing of Securitised Debt Instruments and Security Receipts) Regulations, 2008 (‘SDI Regulations’) and
SEBI (Issue and Listing of Municipal Debt Securities) Regulations, 2015 (‘ILDM Regulations’).

The said circular shall be effective to a public issue of securities for the aforesaid captioned regulations which opens on or after January 01, 2021 (‘effective date’). Earlier, SEBI Circular dated July 27, 2012[2] (‘Erstwhile Circular’) provided the system for making application to public issue of debt securities. The Erstwhile Circular will stand repealed from the effective date. However, SEBI Circular dated October 29, 2013[3] w.r.t allotment of debt securities shall continue to remain in force.

Earlier in November, 2018[4] SEBI had introduced use of UPI as a payment mechanism with ASBA, to streamline the process of public issue of equity shares and convertibles and implemented the same in 3 phases.

The article below covers the role required to be done by the issuer in case of public issue of debt securities.

Background

UPI[5] is an instant payment system developed by the National Payments Corporation of India (‘NPCI’), an RBI regulated entity. UPI is built over the IMPS (‘Immediate Payment Service’) infrastructure and allows you to instantly transfer money between any two parties’ bank accounts.

The facility to block funds through UPI mechanism whether applying through intermediaries (viz syndicate members, registered stock brokers, register and transfer agent and depository participants) or directly via Stock Exchange (‘SE’) app/ interface is set for upto and amount of Rs. 2 lakhs, which is the maximum limit approved by NPCI for capital markets vide its circular dated March 03, 2020[6].

Appointment of Sponsor Bank

Sponsor Bank as a term was introduced under the SEBI circular dated November 01, 2018 meaning a self-certified syndicate bank appointed by issuer to conduit/act as a channel with SE and NCPI to facilitate mandate collect requests and/or payment instructions of retail investors.

Comparison of mode of application under November 23 Circular and Erstwhile Circular

November 23 Circular	Erstwhile Circular	Remarks
Direct application through SE app/web-interface along with amount blocked via UPI mechanism.	Direct application over the SE interface with online payment facility;	Online payment facility stands replaced with UPI mechanism. However, it is not clear as to how the application to be submitted where amount to be invested is above 2 lac rupees.
Application through intermediaries along with details of his/her bank accounts for blocking funds	Application through lead manager/syndicate member/sub-syndicate members/ trading members of SE using ASBA facility	No change
Application through SCSBs with ASBA.	Applications through banks using ASBA facility;	No change
Application through SCSBs/intermediaries along with his/her bank account linked UPI ID for the purpose of blocking of funds, if the application value is Rs.2 lac or less.	–	New insertion.
–	Application through lead manager/syndicate member/sub-syndicate members/ trading members of SE without use of ASBA facility	This was discontinued for all public issue of debt securities made on or after October 01, 2018 vide SEBI Circular dated August 16, 2018[7].
–	Application through lead manager/syndicate member/sub-syndicate members/ trading members of SE for applicants who intended to hold debt securities in physical form.	No reference made in the present circular

Modes of submitting application as per November 23 Circular

Process of the applying utilizing UPI mechanism is produced in a diagrammatic form as below:

* Application made on SE App/web interface shall automatically get updated on SE biding platform

# Upon bid being entered under the bidding platform SE shall undertake validation process of PAN and Demat account along with Depository.

## In case of any discrepancies the same are reported by depositories to SE which in turn relays the same to intermediaries for corrections.

Roles of issuer in case of public issue of debt securities

Apart from appointing a sponsor bank by the issuer the roles of issuer remain same as those already required under the SEBI circular dated July 27, 2012 i.e.:

Use of SE platform;
Entering to agreement with SE with respect to use of same;
Dispute resolution mechanism between the issuer and SE and maintenance of escrow account remain the same.

Only the aforesaid roles are aligned with newly introduced with UPI Mechanism.

Allotment of securities within 6 days

SEBI vide its circular dated November 10, 2015 had, in order to stream line the process of public issue of equity shares and convertibles issued a circular to reduce the timeline for issue from 12 working days to 6 working days and same was introduced for public issue of debt securities, NCRPS and SDI vide circular dated August 16, 2018[8]. The same has been re-iterated/repeated under the November 23 Circular. Indicative timelines for various activities are re-produced under Annexure-A.

Additional data details required to be mentioned under the Application and biding form relating to UPI

Under Main Application form

Payment details –UPI ID with maximum length of 45 characters
Acknowledgement slip for SCSB/broker/RTA/DP
- Payment details to include UPI
Acknowledgement slip for bidder
- Payment details to include UPI ID

Overleaf of Main Application form

UPI Mechanism for Blocking Fund would be available for Application value upto Rs. 2 Lakhs;
Bidder’s Undertaking and confirmation to include blocking of funds through UPI mode;
Instructions with respect to payment / payment instrument to include instructions for blocking of funds through UPI mode.

Conclusion

Public issue application using UPI is a step towards digitizing the offline processes involved in the application process by moving the same online. UPI mechanism in public issue process shall essentially bring in comfort, ease of use and reduce the listing time for public issues.

Annexure A:

Indicative timelines for various activities

Sr. No.	Particulars	Due Date (working day)
1.	Issue Closes	T (Issue closing date)
2.	SE(s) shall allow modification of selected fields (till 01:00 PM) in the bid details already uploaded. Registrar to get the electronic bid details from the SE by end of the day. SCSBs to continue / begin blocking of funds. Designated branches of SCSBs may not accept schedule and applications after T+1 day. Registrar to give bid file received from SE containing the application number and amount to all the SCSBs who may use this file for validation/ reconciliation at their end.	T+1
3.	Issuer, merchant banker and registrar to submit relevant documents to the SE(s) except listing application, allotment details and demat credit and refund details for the purpose of listing permission. SCSBs to send confirmation of funds blocked (Final Certificate) to the registrar by end of the day. Registrar shall reconcile the compiled data received from the SE(s) and all SCSBs (hereinafter referred to as the “reconciled data”). Registrar to undertake “Technical Rejection” test based on electronic bid details and prepare list of technical rejection cases.	T+2
4.	Finalization of technical rejection and minutes of the meeting between issuer, lead manager, registrar. Registrar shall finalise the basis of allotment and submit it to the designated SE for approval. Designated SE to approve the basis of allotment. Registrar to prepare funds transfer schedule based on approved basis of allotment. Registrar and merchant banker to issue funds transfer instructions to SCSBs.	T+3
5.	SCSBs to credit the funds in public issue account of the issuer and confirm the same. Issuer shall make the allotment. Registrar/Issuer to initiate corporate action for credit of debt securities, NCRPS, SDI to successful allottees. Issuer and registrar to file allotment details with designated stock exchange(s) and confirm all formalities are complete except demat credit. Registrar to send bank-wise data of allottees, amount due on debt securities, NCRPS, SDI allotted, if any, and balance amount to be unblocked to SCSBs.	T+4
6.	Registrar to receive confirmation of demat credit from depositories. Issuer and registrar to file confirmation of demat credit and issuance of instructions to unblock ASBA funds, as applicable, with SE(s). The lead manager(s) shall ensure that the allotment, credit of dematerialised debt securities, NCRPS, SDI and refund or unblocking of application monies, as may be applicable, are done electronically. Issuer to make a listing application to SE(s) and SE(s) to give listing and trading permission. SE(s) to issue commencement of trading notice.	T+5
7.	Trading commences;	T+6

Our other materials on the topic can be read here –

SEBI requires Mutual Funds to carry out 10% trades in Corporate Bonds through RFQ platform

SEBI’s stringent norms for secured debentures

SEBI revisits EBP mechanism for issuance of debt securities

[1] https://www.sebi.gov.in/legal/circulars/aug-2018/streamlining-the-process-of-public-issue-under-the-sebi-issue-and-listing-of-debt-securities-regulations-2008-sebi-issue-and-listing-of-non-convertible-redeemable-preference-shares-regulations-_40004.html

[2]https://www.sebi.gov.in/legal/circulars/jul-2012/system-for-making-application-to-public-issue-of-debt-securities_23166.html

[3]https://www.sebi.gov.in/legal/circulars/oct-2013/issues-pertaining-to-primary-issuance-of-debt-securities-amendment-to-simplified-debt-listing-agreement_25622.html

[4] https://www.sebi.gov.in/sebi_data/attachdocs/nov-2018/1541067380564.pdf

[5] https://www.sebi.gov.in/sebi_data/commondocs/mar-2019/useofunifiedpaymentinterfacefaq_p.pdf

[6] https://www.npci.org.in/PDF/npci/upi/circular/2020/UPI%20OC%2082%20-%20Implementation%20of%20Rs%20%202%20Lakh%20limit%20per%20transaction%20for%20specific%20categories%20in%20UPI.pdf

[7] https://www.sebi.gov.in/legal/circulars/aug-2018/streamlining-the-process-of-public-issue-under-the-sebi-issue-and-listing-of-debt-securities-regulations-2008-sebi-issue-and-listing-of-non-convertible-redeemable-preference-shares-regulations-_40004.html

[8]https://www.sebi.gov.in/legal/circulars/nov-2020/introduction-of-unified-payments-interface-upi-mechanism-and-application-through-online-interface-and-streamlining-the-process-of-public-issues-of-securities-under-sebi-issue-and-listing-of-debt-_48235.html

2020 – Year of changes for AIFs

November 23, 2020/0 Comments/in Alternative investment Vehicles, Capital Markets, Corporate Laws, SEBI /by Vinod Kothari Consultants

Timothy Lopes – Senior Executive CS Harshil Matalia – Assistant Manager

finserv@vinodkothari.com

The year 2020 – ‘Year of pandemic’, rather we can say the year of astonishing events for everyone over the globe. Without any doubt, this year has also been a roller coaster ride for Alternative Investment Funds (‘AIFs’) with several changes in the regulatory framework governing AIFs in India.

Recent Regulatory Changes for AIFs

In continuation to the stream of changes, Securities Exchange Board of India (‘SEBI’), in its board meeting dated September 29, 2020, has approved certain amendments to the SEBI (Alternative Investment Funds) Regulations, 2012 (‘AIF Regulations’). The said amendments have been notified by the SEBI vide notification dated October 19, 2020. The following article throws some light on SEBI (AIFs) Amendment Regulations, 2020 (‘Amendment Regulations’) and tries to analyse its impact on AIFs.

Clarification on Eligibility Criteria

Regulation 4 of AIF Regulations prescribes eligibility criteria for obtaining registration as AIF with SEBI. Prior to the amendment, Regulation 4(g), provided as follows:

“4 (g) the key investment team of the Manager of Alternative Investment Fund has adequate experience, with at least one key personnel having not less than five years experience in advising or managing pools of capital or in fund or asset or wealth or portfolio management or in the business of buying, selling and dealing of securities or other financial assets and has relevant professional qualification;”

The amended provision to 4 (g) extends the meaning of relevant professional qualification, the effect of which seems to add more qualitative criteria to the management team of the AIF, to be evaluated at the time of grant of certification. The newly amended section 4(g) of the AIF Regulations reads as follow:

“(g) The key investment team of the Manager of Alternative Investment Fund has –

adequate experience, with at least one key personnel having not less than five years of experience in advising or managing pools of capital or in fund or asset or wealth or portfolio management or in the business of buying, selling and dealing of securities or other financial assets; and
at least one key personnel with professional qualification in finance, accountancy, business management, commerce, economics, capital market or banking from a university or an institution recognized by the Central Government or any State Government or a foreign university, or a CFA charter from the CFA institute or any other qualification as may be specified by the Board:

Provided that the requirements of experience and professional qualification as specified in regulation 4(g)(i) and 4(g)(ii) may also be fulfilled by the same key personnel.”

It is apparent from the prima facie comparison of language that the key investment team of the Manager may have one key person with five years of experience (quantitative) as well as a personnel holding professional qualification (qualitative) from institutions recognised under the regulation. Further, clarity has been appended in form of proviso to the section that quantitative and qualitative requirements could be met by either one person, or it could be achieved collectively by more than one person in the fund.

With this elaboration, SEBI has harmonized the qualification requirements as that with the requirement specified for other intermediaries such as Investment Advisers, Research Analysts etc. in their respective regulations. Detailed prescription on degrees and qualifications for AIF registration by SEBI is a conferring move and is expected to aid as a clear pre-requisite on expectations of SEBI from prospective applications for registration of the fund.

Formation of Investment Committee

Regulation 20 of AIF Regulations specifies general obligations of AIFs. Erstwhile, the responsibility of making investment decisions was upon the manager of AIFs. It has been noticed by the SEBI from the disclosures made in draft Private Placement Memorandums (‘PPMs’) filed by AIFs for launch of new schemes, that generally Managers prefer to constitute an Investment Committee to be involved in the process of taking investment decisions for the AIF. However, there was no corresponding obligation in the AIF Regulations explicitly recognizing the ‘Investment Committee’ to take investment decisions for AIFs. Such Investment Committees may comprise of internal or external members such as employees/directors/partners of the Manager, nominees of the Sponsor, employees of Group Companies of the Sponsor/ Manager, domain experts, investors or their nominees etc.

These amendments are based on the recommendations to SEBI to recognize the practice followed by AIFs to delegate decision making to the Investment Committee.[1] The rationale behind amendments to AIF Regulations is based on the following merits as proposed in the recommendations::

Presence of investors or Sponsors or their nominees in an Investment Committee which may serve to improve the due diligence carried out by the Manager, as they are stakeholders in the AIF’s investments.
Presence of functional resources from affiliate/group companies of the Manager (legal advisor, compliance advisor, financial advisor etc.) in the Investment Committee may be useful to ensure compliance with all applicable laws.
Presence of domain experts in the committee may provide comfort to the investors regarding suitability of the investment decisions, as the investment team of the Manager may not have domain expertise in all industries/ sectors where the fund proposes to invest.

Thus, the insertion was made, giving the option to the Manager to constitute an investment committee subject to the following conditions laid down in the newly inserted sub-regulation, i.e. Regulation 20(6) of the AIF Regulations given below –

The members of the Investment Committee shall be equally responsible as the Manager for investment decisions of the AIF.
The Manager and members of the Investment Committee shall jointly and severally ensure that the investments of the AIF comply with the provisions of AIF Regulations, the terms of the placement memorandum, agreement made with the investor, any other fund documents and any other applicable law.
External members whose names are not disclosed in the placement memorandum or agreement made with the investor or any other fund documents at the time of on-boarding investors shall be appointed to the Investment Committee only with the consent of at least seventy five percent of the investors by value of their investment in the Alternative Investment Fund or scheme.
Any other conditions as specified by the SEBI from time to time.

The constitution of investment committee is a global standard practice followed by the Funds. However, funds structure in India might be altered with the new defining role of investment committee under the AIF Regulations. The investment committee generally comprises of nominees of large investors in the fund and at times other external independent professional bodies that act as a consenting body towards prospective deals of the fund. The amendment will alter the role of investors holding positions at investment committee as the new defining role might deter them from taking underlying obligations. From the funds perspective seeking external independent professionals might get costly as there is an obligation introduced by way of this amendment regulation. Further, it casts an onus on the investment committee to be involved in day to day functioning of the fund, which used to be otherwise (where members were usually involved in mere finalising the deals). Lateral entry of the members to investment committee post placement of memorandum with the consent of investors is aimed at greater transparency in funds functioning.

Test for indirect foreign investment by an AIF

As per Clause 4 of Schedule VIII of FEMA (Non-Debt Instrument) Rules, 2019 (‘NDI Rules’) any investment made by an Investment Vehicle into an Indian entity shall be reckoned as indirect foreign investment for the investee Indian entity if the Sponsor or the Manager or the Investment Manager –

(i) is not owned and not controlled by resident Indian citizens or;

(ii) is owned or controlled by persons resident outside India.

Therefore, in order to determine whether the investment made by AIFs in Indian entity is indirect foreign investment, it is essential to identify the nature of the Manager/Sponsor/investment manager, whether he is owned or controlled by a resident Indian citizen or person resident outside India.

RBI in its reply to SEBI’s query on downstream investment had clarified that since investment decisions of an AIF are taken by its Manager or Sponsor, the downstream investment guidelines for AIFs were focused on ownership and control of Manager or Sponsor. Thus, if the Manager or Sponsor is owned or controlled by a non-resident Indian citizen or by person resident outside India then investment made by such AIF shall be considered as indirect foreign investment.

Whether an investment decision made by the Investment Committee of AIF consisting of external members who are not Indian resident citizens would amount to indirect foreign investment?

In light of the above provisions of the NDI Rules and with the introduction of the concept of an “Investment Committee”, SEBI has sought clarification from the Government and RBI vide its letter dated September 07, 2020[2].

Conclusion

With the enhancement in eligibility criteria, SEBI has ensured that the investment management team of the AIF would have relevant expertise and required skill sets.

Further, giving recognition to the concept of an investment committee will cast an obligation on investment committee fiduciary like obligations towards all the investors in the fund. . However, there exists certain ambiguity under the NDI Rules, for applications wherein external members of investment committee who are not ‘resident Indian citizens’, which is currently on hold and pending receipt of clarification.

[1] https://www.sebi.gov.in/sebi_data/meetingfiles/oct-2020/1602830063415_1.pdf

[2] https://www.sebi.gov.in/sebiweb/about/AboutAction.do?doBoardMeeting=yes

SEBI’s stringent norms for secured debentures

November 17, 2020/0 Comments/in Bond Market, Capital Markets, Corporate Laws, Covered Bonds, SEBI /by Vinod Kothari Consultants

Will it lead to a paradigm shift to unsecured debentures?

Shaifali Sharma | Vinod Kothari and Company

corplaw@vinodkothari.com

Introduction

The debt market in India has seen significant growth over the years. Amongst the various debt instruments, debentures are one of the most widely used instruments for raising funds. In India, the regulatory framework for debt instruments is governed by multiple regulators through multiple regulations. As far as secured debentures are concerned, more stringent provisions have been prescribed by the respective regulators to protect the interest of investors. In theory, it seems that hard earned money invested by the investors in secured debentures are safe and secured against the assets of the company. However, some major defaults witnessed by debt market in the recent years depict a different reality.

Absence of identified security, delay in payment due to debenture holders and other increased events of defaults witnessed in recent years, has encouraged SEBI to revise the regulatory framework in relation to secured debentures and Debenture Trustees and thereby SEBI vide its circular[1] dated November 03, 2020 (‘November 03 Circular’), has issued norms with respect to the security creation and due diligence of asset cover in furtherance to the recent amendment made in ILDS Regulations[2] and DT Regulations[3] w.e.f. October 8, 2020. Subsequently, on November 13, 2020, SEBI issued circular on Monitoring and Disclosures by Debenture Trustee[4], effective from quarter ended on December 31, 2020 for listed debt securities dealing with various issues namely monitoring of ‘security created’ / ‘assets on which charge is created’, action to be taken in case of breach of covenants or terms of issue, disclosure on website by Debenture Trustee and reporting of regulatory compliance.

The revised framework may pose challenges for corporates to raise fund through secured debentures and may leave them relying on unsecured debentures. In this article we shall discuss and analyse the impact and consequences of these stricter norms on companies and the way forward.

Current Scenario of Corporate Bond Market in India

The RBI Bulletin January, 2019[5] provides that the “total resource mobilisation by Indian corporates through public/private/rights issues is dominated by debt while equity accounts for close to 38%”.

In India, the corporate bond market is dominated by private placements, a graphical trend comparing corporate debt issuance under two routes i.e. public issue and private placement has been given below (‘table 1’). As per the latest data available with SEBI, the total amount raised through corporate bonds by way of private placement has increased from 4,58,073 crores to 6,74,702 crores in the last 5 years.

Table on amount raised through public and private placement issuances of Corporate Bonds in Indian Debt Market (Listed Securities)

Financial Year	No. of Public Issues	Total amount raised through Public Issue (in crores)	No. of Private Placement (in crores)	Total amount raised through Private Placement (in crores)
2015-16	20	33811.92	2975	458073.48
2016-17	16	29547.15	3377	640715.51
2017-18	7	4953.05	2706	599147.08
2018-19	25	36679.36	2358	610317.61
2019-20	34	14984.02	1787	674702.88
2020-21 (till Oct)	5	881.82	1157	442526

Source: Compiled from data available at SEBI’s website[6]

Table 1: Corporate Debt Issuance under Private Placement and Public Issue

As regards the concentration of secured borrowing in comparison to the unsecured borrowing in private placement market, the RBI Bulletin January 2019 further provides that ‘secured lending accounted for close to half of the total amount raised even in the private placement market of corporate debt’. The same may be understood from a graphical presentation below:

Source: RBI Bulletin January 2019

This includes secured and unsecured borrowing raised in the private placement market of corporate debt

As also noted by SEBI in its consolidation paper[7] dated February 25, 2020, in last 5 Financial Years the bond issuances were largely secured (approximately 76%).

Therefore, the above figures indicate that the volume of corporate bonds, particularly in private placement market, is higher in secured borrowings.

Regulatory Framework for issuing Secured Debentures

SEBI’s stringent norms for issuance of secured debentures

A company may issue secured debentures after complying with the extensive provisions as prescribed under the Companies Act, 2013 and SEBI Regulations. Further SEBI, in view of the increased events of defaults, challenges in relation to creation of charge, enforcement of security, Inter-Creditor Agreement process and other related issues, has reviewed the regulatory framework for Corporate Bond and Debenture Trustee and revisited the manner of issue of secured debentures by introducing amendments in DT Regulations[8], ILDS Regulations[9] and Listing Regulations[10] w.e.f October 08, 2020.

In furtherance to the above amendments made in ILDS Regulations and DT Regulations, SEBI vide November 03 Circular issued norms applicable to secured debentures intended to be issued and listed on or after January 01, 2021.

While the amended provisions aim to secure the interest of debenture holders, the same has raised compliance burden on issuer of secured debentures and thereby corporates may be inclined towards unsecured borrowing facilities due to following reasons:

Creation of Recovery Expense Fund (REF)

Issuers shall create a Recovery Expense Fund (‘REF’) towards the recovery of proceeding expenses in case of default. The manner of creation, operation and utilization of Fund is prescribed by SEBI vide circular[11] dated October 22, 2020. It requires the Issuer to deposit 0.1% of the issue subject to a maximum of 25 lakhs per issuer. This means that all issuers with an issue size above of 250 crores will be required to deposit 25 lakhs to the REF irrespective of the amount.

All the applications for listing of debt securities made on or after January 01, 2021 shall comply with the condition of creation of REF and the existing issuers whose debt securities are already listed on Stock Exchange(s) shall be given additional time period of 90 days to comply with creation of REF.

This fund is in addition to the requirement of creation of Debenture Redemption Reserve and Debenture Redemption Fund and therefore would entails additional compliance cost to the issuer.

Due diligence by Debenture Trustee for creation of security

The Debenture Trustee is required to assess that the assets for creation of security are adequate for the proposed issue of debt securities. However, there is no clarity on who is to bear the cost of due diligence. In case the same is to be borne by the issuer, the issue expense will unnecessarily increase.

In case of creation of further charge on assets, the Debenture Trustee shall intimate the existing charge holders via email about the proposal to create further charge on assets by issuer seeking their comments/ objections, if any, to be communicated to the Debenture Trustee within next 5 working days.

In cases where issuers have common Debenture Trustee for all issuances and the charge is created in favour of Debenture Trustee, the requirement seems impracticable.

Creation of security and strict time frame of listing debentures through private placement

The November 03 Circular mandates creation of charge and execution of Debenture Trust Deed with the Debenture Trustee before making the application for listing of debentures.

SEBI vide its circular[12] dated October 5, 2020, effective for issuance made on or after December 1, 2020, requires the listing of private placement to be completed within 4 trading days from the closure of the issue. Where the issuer fails to do so, he will not be able to utilize issue proceeds of its subsequent two privately placed issuance until final listing approval is received from stock exchanges and will also be liable to penalty as may be prescribed.

In such scenario, it would be arduous for issuers and Debenture Trustee to comply with the procedural requirements in such stringent timelines.

Entering into Inter-Creditor Agreement (ICA)

An ICA is an agreement between all lenders of a borrower through which lenders collectively initiate the process of implementing a Resolution Plan as per RBI guidelines in case of default. These provisions are applicable to Scheduled Commercial Banks, All India Term Financial Institutions like NABARD, SIDBI etc., small finance banks and NBFC-D. Trustees may join the ICA subject to the approval of debenture holders and conditions prescribed. Debenture Trustee may subject to the approval of debenture holders enter into ICA as per the RBI framework.

While the ICA is entered with the approval of debenture holders, however, the debenture holders may not be familiar of the concept of ICA and consequences, positive / negative, of joining ICA resulting into uninformed decision.
RBI guidelines on ICA applies to institutional entities and it does not provide any rights for debenture holders.
While the Debenture Trustee is free to exit the ICA, it will be challenging to exit ICA and enforce security in case of pari-passu charge.

In addition to the reasons stated above, other stringent compliances as introduced by the SEBI may impose burden and encourage corporates to give a second thought on shifting to unsecured debentures.

Should issuers move towards unsecured debt raising?

While the amendments focus on secured debentures, yet one of the major points in the SEBI Consultation Paper was creation of an ‘identified charge’ on assets. The proposal was in the light of the fact that in case of issuers like NBFCs, the debentures are secured by way of floating charge on receivables. Now, as is known, floating charges are enterprise-wide charges hovering on general assets of the company, unlike fixed charges. Floating charges are subservient to fixed charges. Further, the extant provisions of the Insolvency and Bankruptcy Code are not clear on the treatment of floating charges vis-à-vis unsecured debt. Hence, the prevalence of floating charges on receivables is not of much relevance in the case of issuers like NBFCs. Therefore, ‘secured’ debentures, might actually be an illusion and may have no concrete effect. Hence, with more stringent conditions coming in, it might actually be a motivation to the issuers to move to unsecured debentures.

Fund raising via unsecured debentures and applicability of Deposit Rules

Given the stringent regulatory framework for issuance and listing of secured debentures as discussed above, corporates may start looking for other sources of raising funds, including unsecured debt issuances. In case of issue of unsecured debentures, one has to see the applicability of the Companies (Acceptance of Deposits) Rules, 2014 (‘Deposits Rules’) or Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016[13] (‘NBFC Deposit Directions’), in case of NBFCs, in this regard.

Applicability of Deposit Rules / NBFC Deposit Directions for issuance of unsecured debentures

Applicability	Whether deposits?
For Companies (on which Deposits Rules apply)	Secured debentures shall not be considered as deposits Explanation: Definition of ‘deposit’ under Rule 2 (1)(c)(ix) of the Companies (Acceptance of Deposits) Rules, 2014 excludes debentures which are secured by first charge or a charge ranking pari passu with the first charge on any assets referred to in Schedule III of the Companies Act, 2013 excluding intangible assets of the company or bonds or debentures compulsorily convertible into shares of the company within ten years. Further, if such bonds or debentures are secured by the charge of any assets referred to in Schedule III of the Act, excluding intangible assets, the amount of such bonds or debentures cannot exceed the market value of such assets as assessed by a registered valuer.	Unsecured debentures shall be considered as deposits, unless listed on any recognized Stock Exchange. Explanation: Amount raised by issue of unsecured non-convertible debentures listed on a recognised stock exchange as per applicable regulations made by SEBI shall not be considered as deposits since exempted under Rule 2(1)(c)(ixa) of the Companies (Acceptance of Deposits) Rules, 2014.
For NBFCs (on which NBFC Deposits Directions apply)	Secured debentures shall not be considered as public deposits Explanation: As per the definition of ‘public deposit’ under para 3(xiii)(f) of the Master Direction – Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016, any amount raised by the issue of bonds or debentures secured by the mortgage of any immovable property of the company; or by any other asset or which would be compulsorily convertible into equity in the company provided that in the case of such bonds or debentures secured by the mortgage of any immovable property or secured by other assets, the amount of such bonds or debentures shall not exceed the market value of such immovable property/other assets;	Unsecured debentures shall be considered as public deposits, except in case of issuance of non-convertible debentures with a maturity more than one year and having the minimum subscription per investor at Rs.1 crore and above Explanation: As per para 3(xiii)(fa) of said Master Directions, any amount raised by issuance of non-convertible debentures with a maturity more than one year and having the minimum subscription per investor at Rs.1 crore and above, provided that such debentures have been issued in accordance with the guidelines issued by the Bank as in force from time to time in respect of such non-convertible debentures shall not be treated as public deposits.

Applicability

Whether deposits?

Secured debentures

Unsecured debentures

For Companies

(on which Deposits Rules apply)

Secured debentures shall not be considered as deposits

Explanation:

Definition of ‘deposit’ under Rule 2 (1)(c)(ix) of the Companies (Acceptance of Deposits) Rules, 2014 excludes debentures which are secured by first charge or a charge ranking pari passu with the first charge on any assets referred to in Schedule III of the Companies Act, 2013 excluding intangible assets of the company or bonds or debentures compulsorily convertible into shares of the company within ten years.

Further, if such bonds or debentures are secured by the charge of any assets referred to in Schedule III of the Act, excluding intangible assets, the amount of such bonds or debentures cannot exceed the market value of such assets as assessed by a registered valuer.

Unsecured debentures shall be considered as deposits, unless listed on any recognized Stock Exchange.

Explanation:

Amount raised by issue of unsecured non-convertible debentures listed on a recognised stock exchange as per applicable regulations made by SEBI shall not be considered as deposits since exempted under Rule 2(1)(c)(ixa) of the Companies (Acceptance of Deposits) Rules, 2014.

For NBFCs

(on which NBFC Deposits Directions apply)

Secured debentures shall not be considered as public deposits

Explanation:

As per the definition of ‘public deposit’ under para 3(xiii)(f) of the Master Direction – Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016, any amount raised by the issue of bonds or debentures secured by the mortgage of any immovable property of the company; or by any other asset or which would be compulsorily convertible into equity in the company provided that in the case of such bonds or debentures secured by the mortgage of any immovable property or secured by other assets, the amount of such bonds or debentures shall not exceed the market value of such immovable property/other assets;

Unsecured debentures shall be considered as public deposits, except in case of issuance of non-convertible debentures with a maturity more than one year and having the minimum subscription per investor at Rs.1 crore and above

Explanation:

As per para 3(xiii)(fa) of said Master Directions, any amount raised by issuance of non-convertible debentures with a maturity more than one year and having the minimum subscription per investor at Rs.1 crore and above, provided that such debentures have been issued in accordance with the guidelines issued by the Bank as in force from time to time in respect of such non-convertible debentures shall not be treated as public deposits.

Thus, the debentures will either have to be secured, or will have to be listed in order to avail exemption from the Deposit Rules/ NBFC Deposit Directions.

Compliance Corner: How different is unsecured from secured debentures?

A brief comparison of the requirements of issuance of secured and unsecured debentures is summarized below:

Sr. No.	Basis of Comparison	Section/ Rule	Secured Debentures	Unsecured Debentures
1.	Creation of security	Section 71(3) of the Companies Act, 2013 read with Rule 18 of Companies (Share Capital and Debentures) Rules, 2014 (‘Debenture Rules, 2014’)	Secured by the creation of a charge on the properties or assets of the company or its subsidiaries or its holding company or its associates companies, having a value which is sufficient for the due repayment of the amount of debentures and interest thereon. Charge or mortgage shall be created in favour of the debenture trustee on: any specific movable property of the company or its holding company or subsidiaries or associate companies or otherwise; or any specific immovable property wherever situate, or any interest therein; in case of a NBFCs, the charge or mortgage may be created on any movable property	No security created.
2.	Registration of charge	Section 77 of the Companies Act, 2013	Issuer shall register the charge within 30 days of its creation/ modification or such additional period as may be prescribed.	Not Applicable
3.	Redemption Period	Rule 18(1)(a) of Debentures Rules, 2014	To be redeem within 10 years from the date of issue Companies engaged in setting up infrastructure projects, infrastructure finance companies, infrastructure debt fund NBFCs and companies permitted by the CG, RBI or any other statutory authority may issue for a period exceeding 10 years but not exceeding 30 years.	No redemption time frame prescribed for unsecured debentures.
4.	Voting Rights	Section 71(2) the Companies Act, 2013	Does not carry voting rights	Does not carry voting rights
5.	Creation of Debenture Redemption Reserve (DRR)	Section 71(4) read with Rule 18(7) of Debentures Rules, 2014	DRR/DRF requirement does not depend whether debentures are secured or unsecured, rather it depends on the type of company and the mode of issue i.e. public issue or private placement.	Subject to same provisions
6.	Appointment of Debenture Trustee	Section 71(5) read with Rule 18(1)(c), (2) of Debenture Rules, 2014	Required in case the offer or invitation is made to the public or if the total number of members exceeds 500 for the subscription of debentures [Section 71(5)]. ILDS requires appointment of DT in case of every listed debentures.	Subject to same provisions
7.	Duties of Debenture Trustee	Section 71(6) read with Rule 18(3) & (4) of the Debenture Rules, 2014, SEBI (ILDS) Regulations, 2008 and SEBI (DT) Regulations, 1993	In accordance with provisions of Section 71(6) read with Rule 18(3) & (4) of the Debenture Rules, 2014 Other obligations as prescribed under SEBI (ILDS) Regulations, 2008 and SEBI (DT) Regulations, 1993	Subject to same provisions
8.	Failure to redeem or pay interest on debentures	Section 71(10), 164(2) of the Companies Act, 2013	In case of failure by the company to redeem the debentures on the date of their maturity or pay interest on the debentures when it is due, an application may be made by any or all of the debenture-holders, or debenture trustee to the Tribunal. The Tribunal can direct the company to redeem the debentures forthwith on payment of principal and interest due thereon. If a company fails to pay interest on debentures, or redeem the same, and the failure continues for one year or more, all the directors of such delinquent company become disqualified.	Subject to same provisions
9.	Listing of Debentures	SEBI (ILDS) Regulations, 2008, SEBI (LODR) Regulations, 2015	Issuer to comply with the provisions of SEBI (ILDS) Regulations, 2008. Post listing, the issuer, in addition to SEBI (ILDS) Regulations, 2008, shall also comply with provisions of SEBI (LODR) Regulations, 2015 and SEBI (Prohibition of Insider Trading) Regulations, 2015.	Subject to same provisions

Neither the Companies Act, 2013 nor the Debenture Rules, 2014 elaborate the manner of issue of unsecured debentures. However, the provisions for issue of unsecured debentures are almost the same as that for secured debentures except certain conditions such as redemption period, requirement of creation of charge on the assets of the issuer and filing charge with the Registrar of Companies.

Investors perspective may also prove the same stand –the unsecured debentures don’t carry securities against any assets of the company unlike in case of secured debenture, however the debenture-holder(s) or the Debenture Trustee may approach the Tribunal which may then direct the company to honour its debt obligations.

Concluding Remarks

From the issuer’s perspective, the debentures have to be secured so as to escape from the Deposit Rules. This is one of the main reasons why companies issue secured debentures. While the issuer may be able to avoid the rigorous compliances of Deposits Rules, issuing secured debentures have apparently become very stringent.

From investor’s viewpoint, it may seem that the investment in secured debentures is safe as company has created charge on its assets sufficient to discharge the principle and interest amount. Yet some major defaults in past have made the investors more hesitant to invest in the secured debentures.

While at this stage it was important for SEBI to make the norms more stringent to safeguard the interest of the debenture holders, however, it will be challenging for the issuers to comply with such norms, failing which they may be inclined towards issuance of unsecured debt issuances.

Although unsecured debentures do not provide any security against investment, issuer may still rewards investors with higher yields which is a pay-off for increased risk taken by the investor.

Given the new compliance burden and their stringencies for issuance and listing of secured debentures, it will be interesting to see how the ratio of secured and unsecured borrowings changes in the coming years. For the sake of it, the upcoming trends, preferences and acceptability of stringencies by the corporates will be very vital for observation.

Other reading materials on the similar topic:

‘This New Year brings more complexity to bond issuance as SEBI makes it cumbersome’ can be viewed here
‘SEBI responds to payment defaults by empowering Debenture Trustees’ can be read here
Our other articles on various topics can be read at: http://vinodkothari.com/

Email id for further queries: corplaw@vinodkothari.com

Our website: www.vinodkothari.com

Our Youtube Channel: https://www.youtube.com/channel/UCgzB-ZviIMcuA_1uv6jATbg

Our presentation on structures of debt securities can be viewed here – https://vinodkothari.com/2021/09/structuring-of-debt-instruments/

[1] https://www.sebi.gov.in/legal/circulars/nov-2020/creation-of-security-in-issuance-of-listed-debt-securities-and-due-diligence-by-debenture-trustee-s-_48074.html

[2] SEBI (Issue and Listing of Debt Securities) Regulations, 2008

[3] SEBI (Debenture Trustees) Regulations, 1993

[4] https://www.sebi.gov.in/legal/circulars/nov-2020/monitoring-and-disclosures-by-debenture-trustee-s-_48159.html

[5] https://rbidocs.rbi.org.in/rdocs/Bulletin/PDFs/2ICBMIMM141CFFF458BB4B3A9F4C006F4AE4897F.PDF

[6] https://www.sebi.gov.in/statistics/corporate-bonds/privateplacementdata.html

[7] https://www.sebi.gov.in/reports-and-statistics/reports/feb-2020/consultation-paper-on-review-of-the-regulatory-framework-for-corporate-bonds-and-debenture-trustees_46079.html

[8] http://egazette.nic.in/WriteReadData/2020/222323.pdf

[9] http://egazette.nic.in/WriteReadData/2020/222324.pdf

[10] SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

[11] https://www.sebi.gov.in/legal/circulars/oct-2020/contribution-by-issuers-of-listed-or-proposed-to-be-listed-debt-securities-towards-creation-of-recovery-expense-fund-_47939.html

[12] https://www.sebi.gov.in/legal/circulars/oct-2020/standardization-of-timeline-for-listing-of-securities-issued-on-a-private-placement-basis_47790.html

[13] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10563&Mode=0#C2

Corporate Restructuring- Corporate Law, Accounting and Tax Perspective

November 9, 2020/0 Comments/in Accounting and Taxation, Companies Act 2013, Corporate Laws, Direct Taxes, Indian Accounting Standards (Ind AS), Schemes and Arrangements, SEBI /by Vinod Kothari Consultants

–Resolution Division

(resolution@vinodkothari.com)

Restructuring is the process of redesigning one or more aspects of a company, and is considered as a key driver of corporate existence. Depending upon the ultimate objective, a company may choose to restructure by several modes, viz. mergers, de-mergers, buy-backs and/ or other forms of internal reorganisation, or a combination of two or more such methods.

However, while drafting a restructuring plan, it is important to take into consideration several aspects viz. requirements under the Companies Act, SEBI Regulations, Competition Act, Stamp duty implications, Accounting methods (AS/ Ind-AS), and last but not the least, taxation provisions.

In this presentation, we bring to you a compilation of the various modes of restructuring and the applicable corporate law provisions, accounting standards and taxation provisions.

http://vinodkothari.com/wp-content/uploads/2020/11/Corprorate-Restructuring-Corporate-Law-Accounting-Taxation-Perspective.pdf

Introduction

De-coding the Amendment Regulations:

Non-applicability of MPC requirement

Non-applicability of lock-in requirement

Non-applicability of lock-in requirements in case of equity shares issued on a preferential basis pursuant to any resolution of stressed assets or a resolution plan.

Conclusion:

Table containing the relevant provisions of ICDR Regulations before and after the amendment.

Basis of the law relating to collective investment schemes

Judicial analysis of the definition

The financial world and the real world

Conclusion

Introduction

Current Framework:

Examples of case-to-case relaxation provided by SEBI

Proposed amendments

1. Relaxing the threshold of maximum voting rights allowed to be exercised by an outgoing promoter

2. Suggestions for speeding up the process:

a. Time limit within to place the reclassification request to be placed before the board

b. Reduction in time period between board and shareholders meeting

3. Extending the ambit of exemption from the procedure

a. In case of reclassification is pursuant to an order/ direction of Government/ regulator

b. In case of reclassification of existing promoter pursuant to open offer

c. Cases where the outgoing promoter is absconding / non-cooperating

4. Disclosure of names of promoter group entities in the shareholding pattern

Conclusion

Background

Existing Mechanism

SEBI’s move to increase remote-e-voting

To dos for Depositories and ESPs

Conclusion

– To curb information asymmetry and risk of divulging UPSI

Introduction

Current Regulatory Framework in India governing Analyst/ Institutional Meets

Regulatory Regime in other Countries

Extant gaps in disclosure requirements

The Recommendations: Enhanced disclosures w.r.t analyst / investor meets/ conference calls

Concluding Remarks

Permits submission through UPI mechanism and online interface

Introduction

Background

Appointment of Sponsor Bank

Comparison of mode of application under November 23 Circular and Erstwhile Circular

Modes of submitting application as per November 23 Circular

Roles of issuer in case of public issue of debt securities

Allotment of securities within 6 days

Additional data details required to be mentioned under the Application and biding form relating to UPI

Clarification on Eligibility Criteria

Formation of Investment Committee

Test for indirect foreign investment by an AIF

Conclusion

Introduction

Current Scenario of Corporate Bond Market in India

Regulatory Framework for issuing Secured Debentures

SEBI’s stringent norms for issuance of secured debentures

Should issuers move towards unsecured debt raising?

Fund raising via unsecured debentures and applicability of Deposit Rules

Compliance Corner: How different is unsecured from secured debentures?

Concluding Remarks

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