Corporate Governance & material price sensitive information – Need for listed entities to frame effective materiality policy
– Vinita Nair, Senior Partner | Shaivi Bhamaria, Associate Legal Advisor | corplaw@vinodkothari.com
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Open in new tab SEBI prescribes stricter regime for Proxy advisors
SEBI has on 03rd August, 2020, issued procedural guidelines for Proxy Advisors nearly a year after the Report of the Working Group on Proxy Advisors was published. Read our analysis on the same below. Read more →
Update: PSCs get another year to comply with MPS requirements
Ankit Vashishth, Executive
Vinod Kothari and Company; corplaw@vinodkothari.com
To prevent concentration of shares in the hands of a few market players and to ensure a sound and healthy public float to stave off any manipulation or perpetration of other unethical activities in the securities market, it is imperative that the shareholding of listed companies is not blocked by promoters and certain percentage of free float is available for trading by the public. Regulation 19A of the Securities Contracts (Regulation) Rules, 1957 mandates all listed companies to maintain a Minimum Public Shareholding (‘MPS’) of 25%. Further, to comply with the said requirement, SEBI vide its circulars dated November 30, 2015[1] and February 22, 2018[2] prescribed the manner for achieving MPS.
The timeline for achieving MPS varies for listed public sector companies and listed companies. With regard to the listed public sector companies, the deadline to meet the MPS was 2 years from the commencement of the Securities Contracts (Regulation) (Second Amendment) Rules, 2018[3] which expired on 2nd August, 2020.
Considering the unfavorable market conditions and difficulty in meeting the MPS requirement during the outbreak of the pandemic, the Ministry of Finance has vide its notification dated July 31, 2020[4] has extended the time period by 1 year i.e. till August 2, 2021 for listed public sector companies.
Initiation of MPS for PSCs
MPS requirements for listed public sector companies initiated in the year 2010[5], when these companies were given a timeline of 3 years to comply with 10% MPS requirements.
Later, as per prevalent market conditions the Central Govt. in August, 2014[6] increased this threshold to 25% and these companies were given a timeline of 3 years to comply with MPS requirement which was subsequently increased to 4 years in July, 2017[7]. Considering the difficulty faced by such companies in diluting their shareholding, the Central Govt. in August 2018[8], allowed a fresh timeline of 2 years i.e. upto August 2, 2020 to such companies to comply with such requirements.
Current Scenario
PSUs constitute around 7.22% of the capital market in India and according to the shareholding data provided by bsepsu.com[9] there are a total of 64 listed CPSEs in India out of which 26 of them have less than 25% public shareholding. This list is dominated by companies which include Hindustan Aeronautics Ltd, General Insurance Corporation of India, Indian Railway Catering & Tourism Corporation Ltd, New India Assurance Company Ltd and counting. There are even such companies in which more than 90% of the shareholding is alone held by the government.
Central Government in Dec, 2019[10] gave ‘in-principle’ approval for strategic disinvestment of 33 CPSEs including subsidiaries, units and Joint Ventures with sale of majority stake of Government of India and transfer of management control. Also, companies like Rites Limited[11] and Coal India Limited[12] in recent times have tried to meet MPS requirements via Offer for Sale.
Due to Covid-19 pandemic, the stock market has already crashed and is now showing small signs of revival. Where listed companies are unable to comply with normal regulatory requirements in this current environment which are constant and urgent in nature, the extension in its 4th attempt to the PSCs will save them from the badge of non-compliance.
Read our similar write ups:
http://vinodkothari.com/2017/09/sebis-yet-another-move-to-ensure-minimum-public-shareholding/
http://vinodkothari.com/2018/02/sebi-qualifies-qip-for-achieving-mps/
Read our other articles on Corplaw : http://vinodkothari.com/category/corporate-laws/
Link to our Youtube Channel : https://www.youtube.com/channel/UCgzB-ZviIMcuA_1uv6jATbg
[1] https://www.sebi.gov.in/legal/circulars/nov-2015/manner-of-achieving-minimum-public-shareholding_31141.html
[2] https://www.sebi.gov.in/legal/circulars/feb-2018/manner-of-achieving-minimum-public-shareholding_37953.html
[3] http://www.egazette.nic.in/WriteReadData/2018/188171.pdf
[4] http://egazette.nic.in/WriteReadData/2020/220809.pdf
[5] http://egazette.nic.in/WriteReadData/2010/E_440_2011_011.pdf
[6] https://www.sebi.gov.in/legal/rules/aug-2014/notification-securities-contracts-regulation-second-amendment-rules-2014_28373.html
[7] https://www.sebi.gov.in/legal/rules/jul-2017/securities-contracts-regulation-third-amendment-rules-2017-w-e-f-july-3-2017-_35291.html
[8] http://www.egazette.nic.in/WriteReadData/2018/188171.pdf
[9] http://www.bsepsu.com/gov-policy-hp.asp
[10] https://pib.gov.in/Pressreleaseshare.aspx?PRID=1594731
[11] https://rites.com/upload/misc/Balancesheet/INTIMATION-FOR-RITES-EMPLOYEE-OFS.pdf
[12] https://www.coalindia.in/DesktopModules/DocumentList/documents/10112018182944.pdf
SEBI requires Mutual Funds to carry out 10% trades in Corporate Bonds through RFQ platform
-Mahesh Jethani (finserv@vinodkothari.com)
Background
SEBI on the recommendations of Mutual Fund Advisory Committee (MFAC) on July 22, 2020 has issued a circular with an intent to accelerate the transactions in Corporate Bonds and Commercial Papers and to enhance the transparency and disclosure pertaining to debt schemes. This move from the capital market regulator makes it mandatory for the mutual funds to undertake at least 10% (in value) of their secondary market trades in corporate bonds through the Request for Quote (RFQ) platform of stock exchanges from October. In this write-up we intend to explore the nitty-gritties of Request for Quote (RFQ) platform, how does it operate, how is it different from EBP, what are the requirements and the potential impact of these new requirements.
Request for Quote (RFQ) Platform of stock exchanges
Request for Quote (RFQ) platform is meant for execution and settlement of trades. It is a renowned mechanism and is used across the globe in premier stock exchanges like London Stock Exchange (LSE) and New York Stock Exchange (NYSE). This platform was launched by BSE and NSE on 4th February 2020, as a part of continuous measures taken for development of an online order matching platform for corporate bonds by exchanges or jointly by regulated institutions.
What is RFQ platform?
Request for Quote’ (RFQ) is a web based online trade execution and settlement platform which allows interaction amongst the market participants who intend to negotiate transactions amongst themselves. It is a part of existing reporting and settlement platform of NSE’s (CBRICS) and BSE’s (NDS-RST) for corporate debt securities. RFQ is a trading mechanism where a quote by participants is provided in response to a request for quote by initiator. The quote will be executable only by requesting member and is based on mutual agreement on deal parameters. It is a participant to participant model which enables dealing and execution in various debt securities such as corporate bonds, securitized debt instruments, municipal debt securities, Government securities, State development loans, treasury bills, commercial papers and certificates of deposit etc.
All regulated entities, listed corporates, Institutional Investors as defined under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, All India Financial Institutions and any other entity as allowed by Exchange from time to time will be eligible to participate on the RFQ platform. The initiators and responders will include any of the aforesaid entities.
How does RFQ operate?
What is Electronic Bidding Platform (EBP) and how is it different from RFQ?
EBP is a mechanism for issuance of debt securities on private placement basis. It helps to reduce the time and cost of new issue of securities. The circular dated January 05, 2018 issued by SEBI has mandated that every new issue of debt securities and non-convertible redeemable preference shares (NCRPS) on private placement basis with an issue size of INR 200 crores and above, inclusive of green shoe option (if any) shall use this platform. Our detailed analysis on the EBP Platform along with various parameters can be read here.
Automated order matching trading platform
EBP varies from RFQ in the sense that, in RFQ the participant-to-participant model is followed wherein the deal parameters are based on mutual consent and is not an automated order matching trading platform. EBP on the other hand is a bidding process which has prescribed requirements that are to be met after that, the auction is carried out and the initial cut-off rate is determined by the system which is computed on the base issue size However, the participants on RFQ platform can deal as per their best interests and the control is with the initiator or respondent.
Secondary market trading and primary market issuance:
It is to be noted that, RFQ is a secondary market trading mechanism and EBP platform is for primary issuance that was launched long back in 2016 and was modified in order to streamline procedures for primary issuance of debt securities on private placement basis. Earlier the new issue size was capped at INR 500 crores and above, which is now reduced to INR 200 crores and above to widen the coverage. However, issue sizes less than INR 200 crores can also utilise this platform voluntarily. On RFQ platform the trades which are to be executed have a requirement which prescribes that is minimum RFQ size should be in multiples of face value with minimum size to be accepted as Rs. 5 lac or face value, whichever is higher.
Compliance requirements:
The requirement of venturing to EBP route is to be complied by entities who have their ‘specified securities’ listed on any recognised stock exchanges as prescribed in SEBI (Issue and Listing of Debt Securities) Regulations, 2008 and SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations 2013. Unlisted entities can follow the procedure specified under the Companies Act, 2013 and relevant rules made thereunder. In the HR Khan Committee Report on Development of Corporate Bonds, it was recommended to extend the applicability of EBP to all the primary market issues.
While RFQ platform is to be utilised by regulated entities, listed corporates, institutional investors as defined under SEBI ICDR Regulations, 2018, All India Financial Institutions, and any other entity as allowed by exchanges from time to time for trading in debt securities.
What are the new requirements?
SEBI in its circular dated July 22, 2020 has introduced some requirements that are some small steps towards enhancing the bandwidth of the debt market. There are two new measures introduced by the capital market regulator with an intent to increase the liquidity on exchange platform- 10% trades by MFs in Corporate Bonds, and to enhance transparency and disclosure pertaining to debt schemes and investments by mutual funds in Corporate Bonds and Commercial Papers- disclosure of debt schemes on fortnightly basis. These are the rules which were introduced and shall come into force with effect from October 1, 2020:
1. Mutual Funds shall undertake at least 10% of their total secondary market trades by value in the Corporate Bonds by placing/seeking quotes through one-to-many mode on the Request for Quote (RFQ) platform of stock exchanges. This will not include Inter Scheme Transfer (IST) which is the process of a mutual fund scheme selling specific securities to another scheme within the fund house. It is an alternative to otherwise selling the assets outside. This would have prevented increase in volume of real transactions.
2. 10% shall be reckoned on the average of secondary trades by value in immediately preceding 3 months on rolling basis. Let us understand this an example-
For instance, in the month of October 2020 to comply with the new requirement, following calculation will have to be done:
In October 2020, Mutual Funds shall undertake 10% (by value) of their average secondary market trades (excluding IST) done in immediately preceding three months i.e. July 2020, August 2020 and September 2020 for Corporate Bonds by placing/ seeking quotes through RFQ platform of stock exchanges.
| Exposure required for the month of October 2020 (Amount in crores) | |||||
| Month | Secondary Market Trades | IST | Trades excluding IST | Average of last 3 months | Deals to be executed using RFQ platform
(10% of preceding 3 months) |
| July | 1314332.71 | 22452.72 | 1291879.99 | 1385871.687 | 138587.1687 |
| August | 1353072 | 21814.93 | 1331257.07 | ||
| September | 1547560 | 13082 | 1534478 | ||
3. It is required to be noted that any transaction entered by mutual fund in Corporate Bonds in one-to-many mode that gets executed with another mutual fund, shall also be counted for another mutual fund for the aforesaid 10% requirement. The intent here is to encourage the participation by mutual funds when the quote is initiated for Corporate Bonds, as it will ensure compliance to the 10% requirement.
4. Also, SEBI has partially modified the circular dated September 13, 2012 which now makes it essential for debt schemes that the disclosures shall be done on fortnightly basis within 5 days of every fortnight. In addition to the current portfolio disclosure, yield of the instrument shall also be disclosed. Earlier, the part of circular which is modified, required disclosures monthly and no specific requirement was there to disclose yield of instrument. This move will ensure enhanced transparency.
Potential impact of the new requirements
It is well recognised now, that sophisticated corporate bond market accelerates the growth of economy by complementing the banking system to provide an alternative source of finance for investment needs. This is among one of the many initiatives such as EBP, information repositories that provide consolidated data, tri-party repo trading on exchanges etc. are taken by regulators that are crucial in building a vibrant Corporate Bond market.
This will enhance the liquidity to a certain extent in Corporate Debt securities. A mere 10% of total value of secondary market trades is an optimistic number as earlier there was no mandatory requirement at all. The recent statistics on SEBI website show that the total fund deployment of all Mutual Funds towards Corporate Debt securities was roughly around 30.32% in March 2020 and has in June 2020 reduced to 24.15%.
The RFQ platform provides users a range of options to seek a quote and to respond to a quote, while keeping an audit trail of all the interactions i.e. quoted yield, mutually agreed price, deal terms etc. This will bring pre-trade transparency and disclosures for over the counter transactions in Corporate Debt securities. The requirement of disclosure of schemes at a fortnightly basis will enable the investors to react as quickly as possible. Disclosure of reliable, timely information is a factor that contributes to liquid and efficient markets by enabling investors to make investment decisions based on all the available information that would be material to their decisions.
Concluding Remarks
The overall market of the corporate debt market in India is yet to evolve in terms of enabling vibrancy and depth as almost 90% of the issuances are privately placed. The new requirements are just another addition to the measures which regulators are constantly coming up which vary from introduction of Electronic Book Mechanism, we have separately covered this in a detailed write-up that can be found here to introducing the framework by SEBI which mandated Large Corporates to raise 25 per cent of their funding need from the bond market in Budget 2018-19, detailed write-up can be found here. The combined effect of all the untiring efforts of SEBI will go a long way for developing a vibrant and liquid corporate bond market in India.
SEBI extends deadline for June quarter results amid COVID-19
Companies to manage the dual requirement of holding board meetings and submission of financial results
Shaifali Sharma
Vinod Kothari & Company
corplaw@vinodkothari.com
In the wake of the continuing impact of COVID-19 pandemic, SEBI vide circular[1] dated June 24, 2020, granted relaxation to listed entities and extended the timeline for submission of financial results for quarter / half year / financial year ended March 31, 2020 to July 31, 2020.
Since, now the first quarter of the FY 2020-21 has come to an end, companies are expected to finalize, approve and submit their financials to the respective stock exchange(s) within 45 days from the quarter ended June 30, 2020 as per Regulation 33 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘Listing Regulations’) i.e. on or before August 14, 2020.
Considering the shortened time gap of 14 days between the two due dates stated above i.e. July 31 and August 14, SEBI vide its circular[2] dated July 29, 2020, has extended the deadline to submit financial results for the first quarter from August 14 to September 15, 2020 thereby allowing additional 32 days to the listed companies which will in turn provide extra time to companies and its auditors working on reporting the quarterly financial results.
It is pertinent to note here that the board of directors, as per Regulation 17(2) of the Listing Regulations, must meet at least four times a year, with a maximum time gap of 120 days between any two meetings. In this regard, the SEBI vide circular[3] date June 26, 2020 had exempted the listed entities from observing the stipulated time gap between two board meetings for the meetings held/proposed to be held between the period December 01, 2019 and July 31, 2020.
Considering no further extension has been granted by SEBI yet, the board meeting for approving the financial results should be scheduled keeping in mind the maximum time gap of 120 days prescribed under the Listing Regulations. For example, if we take a case of a listed company which held its last board meeting on May 02, 2020, the next board meeting shall be scheduled on or before August 31, 2020 instead of the extended due date of September 14, 2020.
As regards for unlisted companies, the maximum time gap for conducting board meetings had been relaxed vide MCA circular[4] dated March 24, 2020 to 180 days from present 120 days for the first two quarters of FY 2020-2021.
[1] https://www.sebi.gov.in/legal/circulars/jun-2020/further-extension-of-time-for-submission-of-financial-results-for-the-quarter-half-year-financial-year-ending-31st-march-2020-due-to-the-continuing-impact-of-the-covid-19-pandemic_46924.html
[2] https://www.sebi.gov.in/legal/regulations/jun-2009/securities-and-exchange-board-of-india-delisting-of-equity-shares-regulations-2009-last-amended-on-april-17-2020-_34625.html
[3] https://www.sebi.gov.in/legal/circulars/jun-2020/relaxation-of-time-gap-between-two-board-audit-committee-meetings-of-listed-entities-owing-to-the-covid-19-pandemic_46945.html
[4] http://www.mca.gov.in/Ministry/pdf/Circular_25032020.pdf
Other reading materials on the similar topic:
- ‘COVID-19 – Incorporated Responses | Regulatory measures in view of COVID-19’ can be viewed here
- ‘Resources on virtual AGMs’ can be viewed here
- Our other articles on various topics can be read at: http://vinodkothari.com/
Email id for further queries: corplaw@vinodkotahri.com
Our website: www.vinodkothari.com
Our YouTube Channel: https://www.youtube.com/channel/UCgzB-ZviIMcuA_1uv6jATbg
Amendments in SEBI (PIT) Regulations, 2015: From April, 2019 to July, 2020
Shareholder scrutiny for payout under Listing Regulations to directors
– Understanding the capping rationale
Pammy Jaiswal | Partner
Shaifali Sharma | Assistant Manager
Vinod Kothari and Company; corplaw@vinodkothari.com
Background
The remuneration payable to the directors of a public company is regulated by the provisions of Section 197 read with Schedule V of the Companies Act, 2013 (Act). It provides a ceiling on the maximum remuneration that can be paid to the directors both in aggregate as well categorically, including Whole-time Director, Managing Director and the Manager.
Any payment to such directors within the said limits has to be approved by the shareholders by way of an ordinary resolution. Payment of remuneration in excess of the limits requires approval of the shareholders by way of a special resolution.
There were no specific provisions prescribed under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘Listing Regulations’) on maximum remuneration payable to directors of listed entities until SEBI, on the basis of recommendation of Kotak Committee on Corporate Governance, amended the Listing Regulations to put a ceiling on remuneration payable to executive promoter directors and non-executive directors.
This article tries to critically analyze the intent and deduce the interpretation of the aforesaid capping under the Listing Regulations.
Absolute versus relative limits- reading between the lines
Regulation 17 (6) (e) of the Listing Regulations reads as under:
“The fees or compensation payable to executive directors who are promoters or members of the promoter group, shall be subject to the approval of the shareholders by special resolution in general meeting, if-
(i) the annual remuneration payable to such executive director exceeds rupees 5 crore or 2.5 per cent of the net profits of the listed entity, whichever is higher; or
(ii) where there is more than one such director, the aggregate annual remuneration to such directors exceeds 5 per cent of the net profits of the listed entity:
Provided that the approval of the shareholders under this provision shall be valid only till the expiry of the term of such director.
Explanation: For the purposes of this clause, net profits shall be calculated as per section 198 of the Companies Act, 2013.
On the very first reading of Regulation 17 (6) (e), we understand that in case the listed company has one executive promoter director, it can pay upto 2.5% of the net profits or INR 5 crore, whichever is higher, without passing a special resolution.
In case of more than one such director in the company, the relative limit of 2.5% is doubled to 5% of the net profits, however, the absolute limit of INR 5 crore has not been mentioned under sub-clause (ii) of the said sub-regulation.
This makes it all the more important for us to read between the lines and interpret the meaning as intended by the law-makers. As mentioned, the first sub-clause provides both a relative and an absolute limit for the purpose of securing shareholder scrutiny. In fact, the said clause clearly mentions that higher of the relative or absolute limit has to be considered while determining the need to approach the shareholders.
Accordingly, it may seem to be an incorrect reading if companies consider only the relative limit for the second sub-clause. In such a scenario, companies may end up considering a far lower limit than INR 5 crores which the law makers have already fixed for one promoter executive director in the first sub clause.
Approval requirements under the Act viz-a-viz requirements under Listing Regulations
A. Payment of remuneration to executive promoter directors of a listed public company
As per the Report[1] of the Kotak Committee constituted by SEBI, several cases of disproportionate payments made to executive promoter directors as compared to other executive directors were noted and therefore, the Committee with the view to improve the standards on Corporate Governance, suggested that this issue should be subjected to greater shareholder scrutiny. Accordingly, the amendment carved a parallel way for obtaining shareholder’s approval if the total remuneration paid to executive promoter director exceeds the prescribed limits.
The above recommendation has already come into effect from April 01, 2019 and therefore the listed entities, in addition to the threshold limits prescribed u/s 197 of the Act, have to adhere to the ceiling laid down u/r 17(6)(e) of the Listing Regulations.
Below is the comparison of the threshold limits prescribed under Act and Listing Regulations for payment of remuneration to executive promoter director, in excess of which shareholders’ approval by special resolution shall be required:
| Special Resolution required if: | Under the Companies Act, 2013 | Under SEBI Listing Regulations |
| Remuneration payable to a single executive director* | Exceeds 5% of the net profits of the company | Exceeds Rs. 5 crore (absolute limit) or 2.5% of the net profit (relative limit), whichever is higher |
| Remuneration payable to all executive director* | Exceeds 10% of the net profits of the company | Exceeds 5% of the net profits of the company |
* Listing Regulations caps the limit for executive directors who are promoters or members of promoter group
From above, it is evident that the Act allows public listed companies to pay remuneration to its executive directors upto 5% or 10% of its net profits, as the case may be, (without passing special resolution) which is double the relative thresholds prescribed under Listing Regulations i.e. 2.5% or 5% of the net profits.
Illustrations:
Illustration 1 –Payment within the limits laid down under the Act and also Listing Regulations
Type of shareholder approval required – Ordinary resolution under the Act
Illustration 2-Payment exceeds Listing Regulations limits but is within limits of the Act
Let us take a numerical example for this case:
| Situation | Permissible remuneration to a single executive promoter director | Permissible aggregate remuneration to more than 1 executive promoter directors | ||
| Act | LISTING REGULATIONS | Act | LISTING REGULATIONS | |
| Company has profits of 10 crore
|
· 5% of NP
0.5 crore |
Higher of
· 2.5% of NP; or · 5 crore
5 crores |
· 10% of NP
1 crore |
· 5% of NP
0.5 crore
|
| Remarks:
In case of single executive promoter director:
In case of more than 1 executive promoter director:
|
||||
Illustration 3 – Payment exceeds the limits under the Act and automatically exceeds the limits under Listing Regulations (not considering the absolute limit)
Here the case is simple, SR is required to be passed.
Illustration 4 – Company has inadequate profits for the purpose of section 197 read with Schedule V of the Act
In case the minimum remuneration approved falls within the limits provided against the effective capital – OR is sufficient, however, for the purpose of Listing Regulations, SR will be required. In this case, Listing Regulations are stricter as it does not envisage inadequacy of profits and amounts that can be paid in case inadequacy.
However, if the minimum remuneration approved exceeds the limits provided against the effective capital, SR is required under the Act and such payment can be made only for three financial years with certain other disclosure requirements.
Having said that, it is important to note that once SR under the Act has been passed for payment of remuneration either in cases of adequate or inadequateprofits, there does not seem to be any need to pass another SR under Listing Regulations for breach of the limits set therein.
B. Payment of remuneration to non-executive directors of a listed public company
The Kotak Committee on corporate governance further observed that certain non-executive directors (NEDs) (generally promoter directors) are receiving disproportionate remuneration from the total pool available for all other NEDs and recommended that if remuneration of a single NED exceeds 50% of the pool being distributed to the NEDs as a whole, shareholder approval should be required.
SEBI, in line with the above proposal and the requirement for special resolution for executive promoter directors, amended Listing Regulations and inserted following clause (ca) to Regulation 17(6):
“The approval of shareholders by special resolution shall be obtained every year, in which the annual remuneration payable to a single non-executive director exceeds fifty per cent of the total annual remuneration payable to all non-executive directors, giving details of the remuneration thereof”
The above amendment has also come into effect from April 01, 2019 and therefore, requires an action on the part of the listed entities to pass SR for such disproportionate payment to any one of its NED.
Some companies have already passed an SR in the AGM held for the financial year 2018-19 while other companies are preparing to pass the same in this year. The reason behind such two school of thoughts is based on the following reasons:
- Remuneration to a single NED for the FY 2018-19, which is basically profit linked commission, has been paid after 1st April, 2019. Some companies which have already taken the SR in the AGM held for the FY 2018-2019 have done so considering the payment being done post the advent of the aforesaid amendment.
- Remuneration to a single NED for the FY 2019- 2020 will be taken to the shareholders if it exceeds the limits. Here the companies which did not approach its shareholders in the AGM held for the FY 2018-2019 is based on the understanding that this amendment has come into force from 1st April, 2019 which means the same is to be complied with for the remuneration payable for FY 2019-2020. Therefore, according to the second school of thought, no SR is required for the disproportionate payment made in FY 2019-2020 for the FY 2018-2019[2].
Concluding Remarks
While the amendment of capping the limits for payout to executive promoter directors does not seem to meet the intent of the law makers, the amendment for passing SR for disproportionate payout to a single NED seems to be much more justified.
It was rightly mentioned in the Kotak Committee report that in future SEBI could review the status of the amendment relating to payout to executive promoter directors based on experience gained. As per the discussions above, it is imperative to draw attention firstly to the absence of the absolute limits in the second sub-clause of this sub-Regulation and even though the same is read with by inserting the same, it may seem to be futile for sole reason of SRs already passed by the companies under the Act. Further, clarity is needed for requirement to seek approval for payment of minimum remuneration in case of inadequacy of profits.
Since, MCA had already prescribed the limits and procedures under the Act for managerial remuneration, SEBI may relook at the capping scrutinylaid down for executive promoter directors and possible could align the same with the provisions of the Act. The intent is not to simply seek special resolution for every item of managerial remuneration as abundant caution.
Other reading materials on the similar topic:
- ‘FAQs on SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2018’ can be viewed here
- Presentation on ‘Appointment & Remuneration of Managerial Personnel & KMPs’ can be viewed here
- ‘Managerial Remuneration: A five decades old control cedes’ can be viewed here
- ‘Remunerating NEDs and IDs in low-profit or no-profit years’ can be viewed here
- Our other articles on various topics can be read at: http://vinodkothari.com/
Email id for further queries: corplaw@vinodkotahri.com
Our website: www.vinodkothari.com
Our Youtube Channel: https://www.youtube.com/channel/UCgzB-ZviIMcuA_1uv6jATbg
[1]https://www.sebi.gov.in/reports/reports/oct-2017/report-of-the-committee-on-corporate-governance_36177.html
SEBI prescribes norms for structured digital database, system driven disclosures & CoC violations
CS Vinita Nair, Senior Partner | Vinod Kothari & Company
July 23, 2020
Link to gazette notification: http://egazette.nic.in/WriteReadData/2020/220574.pdf
Effective date: July 17, 2020
Background
SEBI in the Board meeting held on June 25, 2020 (‘SEBI BM’) discussed amendments in PIT Regulations on Structured Digital Database, continual disclosures and amendments in the Code of Conduct (CoC).
This article discusses the position prior to amendment, relevant discussion at SEBI BM and actionable post amendment.
Structured Digital Database (SDD-1)
Prior to the amendment
Reg 3(5) of the regulations provided maintenance of SDD-1 with names of persons with whom UPSI was shared and PAN/ any other identifier of the person (where PAN was not available). SDD was required to be maintained with adequate internal controls and checks such as time stamping and audit trails to ensure non-tampering of the database.
The regulation indicated that just the listed entity is required to maintain the same. However, SEBI clarified in the guidance note, pursuant to an insertion made on July 5, 2019, that the requirement to maintain SDD-1 was applicable to listed companies, and intermediaries and fiduciaries who handle UPSI of a listed company in the course of business operations.
Discussion in SEBI BM
As per the agenda of the SEBI BM It was proposed to specify following in relation to SDD:
- Nature of UPSI;
- Details of persons or entities who have shared;
- Period of preservation of SDD-1;
- Prohibiting entities from outsourcing the same.
Post amendment
- SDD-1 is required to be maintained by the Board of directors or heads of organization of every person required to handle UPSI;
- SDD-1 shall additionally contain the name of the person sharing the UPSI.
- So the names of person sharing and the one with whom the same is shared will be recorded along with PAN/ any other identifier of the person (where PAN was not available).
- SDD-1 shall be maintained internally and not be outsourced.
- SDD-1 to be preserved for a period of 8 years after completion of relevant transactions or even longer in case of pending proceedings.
System Driven Disclosures (SDD-2)
Prior to the amendment
Continual disclosures under Reg 7 (2) (b) was required to be made by the promoters, member of promoter group and designated persons to the stock exchanges within two trading days of receipt of the disclosure or becoming aware of such information. System driven disclosure was implemented vide SEBI Circular dated May 28, 2018 only for The CEO and upto two levels below CEO of a company and all directors. The database was submitted to the depositories along with PAN of the individuals.
Discussion in SEBI BM
Investigation of delay or non-compliance due to manual submissions takes up considerable time and effort and clogs the system. In order to eliminate it was proposed to automate the process of filing such disclosures by way of SDD-2 thereby enabling timely and fair disclosure without intervention of entities involved. SEBI will be issued detailed circular on the same to the market participants.
Post amendment
Reg 7 (2) (c) inserted to provide enabling power for issue of format and manner of submitting SDD-2.
Exemption from trading window restrictions
Prior to the amendment
Trading window restriction was not applicable on transactions specified in proviso to Reg 4 (1), in respect of pledge for a bonafide purpose and transactions undertaken in accordance with respective SEBI Regulations such as acquisition by conversion of warrants or debentures, subscribing to rights issue, further public issue, preferential allotment or tendering of shares in a buy-back offer, open offer, delisting offer.
Discussion in SEBI BM
Offer for sale was not included in the said list despite SEBI having laid detailed procedure for the same.
Post amendment
Enabling clause inserted to include the transactions which are undertaken through such other mechanism as may be specified by the Board from time to time. SEBI vide Circular dated July 23, 2020 provided that trading window restriction shall not apply in case of rights entitlement and Offer for Sale.
Crediting the amount for CoC non-compliance to IPEF
Prior to the amendment
Only profits from contra trade were disgorged and credited to Investor Protection and Education Fund (IPEF) administered by SEBI. The listed entity had the option to take disciplinary action including by way of recovery, clawback.
Discussion in SEBI BM
The listed entity could take action against person violating the CoC by way of disciplinary actions viz. wage cut, collecting of certain amount etc. There was no uniform approach w.r.t. utilization of amounts levied by the listed entities/ intermediaries/ fiduciaries for other violations of CoC viz. trades during window closure, trade without pre-clearance etc.
Also, a clawback is generally a contractual agreement between the employee and the employer in which the employee agrees to return previously paid or vested remuneration to the employer under certain circumstances. However, every employment agreement may not have a “clawback” clause or provision. Whereas, disgorgement as an equitable remedy, aimed at depriving the wrongdoer of his ill-gotten gains. It was suggested to substitute ‘clawback’ with ‘disgorgement’.
Post amendment
Any amount collected for violation of CoC shall also be remitted to SEBI for credit to the IPEF. The word ‘clawback’ has been deleted in Schedule B and Schedule C. SEBI vide Circular dated July 23, 2020 has provided that such amounts shall be credited to the IPEF through the online mode or by way of a demand draft (DD) in favour of the Board (i.e. SEBI – IPEF) payable at Mumbai. The bank account details of SEBI – IPEF for online transfer is given below:
Informing violation of PIT Regulations to Stock Exchange
Prior to the amendment
Violation of PIT Regulations was required to be informed to SEBI. SEBI vide Circular dated July 19, 2019 prescribed format for standardized reporting of violations under CoC.
Discussion in SEBI BM
The intimations received from listed companies/ intermediaries/fiduciaries were maintained in non IT based environment. To ensure that such intimations were captured electronically in an IT based environment to create a data repository, which could be used for conducting examination of cases or for any other data analysis, in future, it was recommended to file intimations with the stock exchanges.
Post amendment
The violations will be required to be reported to the stock exchanges in the form and manner as may be prescribed by SEBI. SEBI vide Circular dated July 23, 2020 prescribed the format in supersession of July, 2019 circular.
Whether the intimations filed with the stock exchanges will be publicly available, is not clear.
Comparison of formats
The format is broadly similar to that prescribed in July, 2019, however, has following modifications:
|
Particulars |
July, 2020 Circular | July, 2019 Circular |
Remarks |
| Details of DP | Whether the DP is promoter or belongs to promoter group | Whether the DP is promoter /promoter group/ holding CXO level position (e.g. CEO, CFO, CTO etc). | The details highlighted is anyways provided under Designation of DP and Functional role of DP. This seemed repetition. |
| Details of transaction | No of shares traded and value (Rs.) (Date- wise) | No of shares traded (which includes pledge) and value (Rs.) (Date- wise). | The legislative note under definition of ‘trading’ in the Regulations clarify that trade includes pledge. |
| Details of violations | Details of violations observed under Code of Conduct. | Details of violations observed under SEBI (PIT) Regulations, 2015. | Reference aligned with Para 12 of Schedule B of the Regulations. |
| Amount collected for CoC violation | · Mode of transfer to IPEF (Online/ DD)
· Details of the transfer. |
No such field. | It seems that the amount is to be first transferred and thereafter, reporting is to be done as payment details is required to be furnished. |
Actionables for the listed entities/ intermediaries/fiduciaries
SDD-1
Maintenance of SDD-1 to be ensured with details of persons sharing the UPSI. SDD to be preserved for minimum 8 years from completion of relevant transactions. Internal control manual/ SOP, if any, will be required to be updated to capture the amendment.
SDD-1 may be maintained by Compliance Officer or may be maintained by various functional heads who are in possession of UPSI and share the same for legitimate purpose. The Compliance Officer should have access to the same as that is required for deciding of pre-clearance for the trades by DPs.
SDD-2
Reporting continual disclosure in SDD-2 after the format is prescribed by SEBI. In case SEBI decides to implement SDD-2 in the manner it implemented in 2018, the listed entity will be required to furnish name and PAN details of promoter, member of promoter group and all designated persons to the depository.
CoC
The CoC will be required to be amended to capture the amendments by removing reference of clawback provision and specifying to deposit amounts collected for violation to IPEF.
Violation of the regulations and of CoC to be reported to the stock exchange instead of SEBI by listed entity/ intermediary/ fiduciary in the format provided by SEBI vide circulated dated July 23, 2020.
Partitioning of advisory services from distribution activities
– Harshil Matalia (finserv@vinodkothari.com)
Updated as on July 04, 2020
The Securities and Exchange Board of India (SEBI) had notified SEBI (Investment Advisers) Regulations, 2013 (IA Regulations)[1] in 2013, to regulate activities of Investment Adviser (IA). IA is a person who provides investment advices with respect to financial and investment products to its clients for a consideration. Regulation 3 (1) of the IA Regulations mandates every person which acts as an IA or holds itself out as an IA to register itself unless the person is exempted from registration under regulation 4 of IA Regulations.
A series of consultation papers were issued in 2016, 2017 and 2018, which was followed by another consultation paper[2] proposing amendments in the IA regulations released by SEBI on January 15, 2020. Subsequently, SEBI in its meeting held on February 17, 2020[3] approved the proposals on regulatory changes based on comments received on consultation paper. On July 03, 2020, SEBI has amended IA regulations by introducing SEBI (IA)(Amendment) Regulations, 2020[4] (Amendment Regulations) which shall come into force on September 30, 2020. The main objective to bring such regulatory amendments is to protect the interest of investors and prioritize investors’ interest over the interest of IA.
This write-up provides a brief note on amendments brought by SEBI and its implications on the sector.
Segregation of Advisory & Distribution Activities
As per regulation 15(5) of the IA Regulations, there is an obligation on IA to disclose all conflicts of interest that arises while serving its clients. There is a possibility that IA would advise to invest in products which shall fetch maximum commission or products that may be risky and less sellable in the market. To overcome such a situation, IA must disclose potential conflict of interest to the client.
An IA may be engaged in activities other than investment advisory and hence it is necessary to ensure an arms-length relationship between its activities as an IA and other activities as prescribed under regulation 15(3). Individuals registered as IAs are not allowed to provide distribution or execution services under amended IA Regulations. However, corporate entities registered as IAs can offer execution or distribution services provided that the investment advisory services are offered through separate identifiable division or department.
Further as per recent amendments in Regulation 22 of IA Regulations, “family of IA” shall not provide distribution services to the same client advised by IA. SEBI has inserted a definition of ‘Family of IA’ which shall include individual IA, spouse, children and parents. SEBI has also prescribed the requirement for non-individual IAs to have client level segregation at a group level which means that client can either take advisory or distribution services from the IA and the same client cannot avail any other service, as the case may be, by the same IA or its group entities. Group for this purpose shall mean:
- For Company- an entity which is a holding, subsidiary, fellow subsidiary, associate or an investing company or venturer of the company as per the provisions of Companies Act, 2013 or;
- In any other case- an entity which has controlling interest or which is subject to controlling interest of a non-individual investment adviser.
Implementation of Advice (Execution)
IAs also offer implementation services to its clients i.e. execution of advice provided to the client by charging some reasonable consideration. Thus, the client finds ‘all in one shop’ by availing such services. It has been suggested that IA should clearly declare to the client that it will not seek any power of attorney or authorisations from its clients for auto implementation of investment advice. However, SEBI in Amendment Regulations emphasis that whether to avail implementation services would be sole choice of client and the IA cannot force its client to avail implementation services. Further, IA shall provide implementation services to its advisory clients only through direct schemes/products in the securities market. IA or group or family of IA shall not charge directly or indirectly any consideration including commission or referral fees for providing implementation services. SEBI has also mandated IAs to provide declaration that no consideration shall be received by IA for implementation of advice or execution services. The said declaration has been inserted under item 5 of the First schedule of IA Regulations.
Terms and Conditions of Investment Advisory Services
As per regulation 19, an IA shall maintain copy of agreement with the client, if any, along with other records specified under the said regulation. Since the requirement of advisory agreement is not mandatory under the erstwhile IA Regulations, most of the clients always remain unaware about the terms and conditions of the advisory services that they are going to obtain from IAs.
SEBI has been receiving numerous investor complaints against IAs that they charge exorbitant advisory fees, promising false returns, non-disclosure of detailed fees structure etc. In absence of written agreement between adviser and client, client may not be able to prove his claim.
Therefore, SEBI has mandated an execution of agreement between IA and client which shall specify key terms and conditions, as may be prescribed by SEBI, regarding investment advisory services and this would in turn facilitate transparency.
Advisory Fees
As per the Code of Conduct for IAs prescribed under third schedule of IA Regulations, IAs shall charge fair and reasonable fees to the clients in lieu of providing advisory services. There have been several complaints received by SEBI regarding unreasonable fees being charged by IAs. To restrain such instances and unfair practices, SEBI has inserted Regulation 15A regarding advisory fees that can be charged by IAs to its clients.
The discussion paper has provided two modes of charging fees to clients. IAs can either charge fees by opting Assets under Advice (AUA) mechanism or they can charge fixed fees. SEBI inserted the definition of AUA in Regulation 2(aa) of IA Regulations which shall mean aggregate net asset value of securities and investment products for which IA has rendered investment advice irrespective of whether the implementation services are provided by investment adviser or concluded by the client directly or through other service providers. Under AUA mechanism, fees shall be charged on the basis of underlying assets under advice subject to maximum 2.5 percent of AUA per annum per family across all schemes/ products/ services provided. On other hand, as per fixed fees terms, IA can charge maximum Rs. 75,000 p.a. per family across all schemes/ products/ services provided. The option of choosing mode for charging fees is available with IA, however, change of mode can be effected only after 12 months of on boarding/last change of mode.
In practice, it would be difficult to implement maximum ceiling limit proposed by SEBI. There are certain portfolios that contain high risk products which requires effective skills and essential time to provide any investment advice. In such cases, maximum ceiling would be discouraging for IAs to charge a particular fees to compensate for their efforts. Therefore, in Board memorandum, SEBI has proposed to reconsider and enhance fixed fees from Rs. 75,000 to Rs. 1,25,000 p.a. per ‘family of client’ and fees under AUA mechanism shall be 2.5 percent of AUA per annum per ‘family of client’ across all schemes/ products/ services offered by IA. SEBI inserted a definition of ‘Family of client’ which constitutes individual, dependent spouse, dependent children and dependent parents. IAs would also be required to mention detailed fees structure along with adequate calculations under terms and conditions of advisory agreement. The above-mentioned proposed fees structure is not yet finalised; and is expected to be specified by the SEBI at the earliest. Also, SEBI is expected to bring more clarity that whether IA can charge fees using different fees structure to different categories of customers.
Eligibility Criteria for IAs
The eligibility criteria for IA includes qualification and net worth requirement. Under the erstwhile IA Regulations, regulation 7 and 8 deals with the qualification and net worth requirements respectively. IAs or a principal officer of non-individual IAs shall have minimum qualification as prescribed under the regulation 7.
SEBI has amended the qualification and net worth requirement. SEBI has introduced the definition of “persons associated with investment advice” and “principal officer” in Amendment Regulations. All client facing persons such as sale staff, service relationship managers, client relationship managers, etc. shall be deemed to be persons associated with investment advice, whereas principal officer shall mean managing director/managing partner, designated director etc. who is responsible for overall business operations of non-individual IAs. In terms of the erstwhile IA Regulations, IA shall have either professional qualification/post-graduation or graduation along with five year experience of advisory as mentioned in regulation 7(1). However, as per recent amendments, an individual IA and principal officer in case of non-individual IA shall be required to meet both the criteria that is to have professional qualification/post-graduation along with 5 years experience at all times. The requirement of certification on financial planning (NISM) remains unchanged.
In terms of the erstwhile IA Regulations, IAs which are body corporate shall have a net worth of not less than twenty-five lakh rupees and for IAs who are individuals or partnership firms shall have net tangible assets of value not less than rupees one lakh. However, SEBI has increased minimum net worth criteria to rupees fifty lakhs and rupees five lakhs for non-individual and individual IAs respectively. However, all persons associated with investment advice shall comply with the qualification requirements with minimum two years of experience. The existing IAs shall comply with new eligibility norms within 3 years from the date of commencement of Amendment Regulations. The summary of erstwhile eligibility criteria along with recent amendments is given below:
|
For Individual IAs |
|||
|
Requirement |
Erstwhile |
Amended |
Persons associated with Investment Advice including representatives |
|
Education |
Professional qualification/post-graduation | Professional qualification/post-graduation with 5 years of experience | Professional qualification/post-graduation with 2 years of experience |
| Graduation with 5 years of experience | |||
|
Certification |
NISM | NISM | NISM |
|
Net Worth |
Rs. 1 lakh | Rs. 5 lakhs |
Not applicable |
|
For Non-individual IAs |
|||
|
Requirement |
Erstwhile for representatives |
Amended for principal officer |
Persons associated with Investment Advice including representatives |
|
Education |
Professional qualification/post-graduation | Professional qualification/post-graduation with 5 years of experience | Professional qualification/post-graduation with 2 years of experience |
| Graduation with 5 years of experience | |||
|
Certification |
NISM | NISM | NISM |
|
Net Worth |
Rs. 25 lakhs | Rs. 50 lakhs |
Not applicable |
Use of Nomenclature
In order to obviate misunderstanding and confusion amongst investors regarding the roles and responsibilities of distributors including mutual fund distributors who refer to themselves as ‘independent financial adviser’ or ‘wealth adviser’, it is relevant that the nomenclature should not mislead the investors. Therefore, SEBI has inserted Regulation 3(3) which specifies that any person other than IA registered with SEBI, dealing in distribution of securities shall not use the nomenclature “Independent Financial Adviser (IFA) or Wealth Adviser or any other similar name.
Conversion of Individual IAs to Non-individual IAs
SEBI has inserted additional criteria under regulation 13 which directs individual IA to apply for registration as non-individual IA, in case number of clients of such individual IA exceeds 150 in total.
Conclusion
With these amendments, SEBI took efforts to make robust regulation for investment advisers. Some of the changes would definitely pick up the slacks, however, SEBI should reassess the proposal for ceiling limit on advisory fees and bring more clarity.
[1]https://www.sebi.gov.in/web/?file=https://www.sebi.gov.in/sebi_data/attachdocs/jun-2020/1591597643206.pdf#page=1&zoom=page-width,-15,842
[2]https://www.sebi.gov.in/reports-and-statistics/reports/jan-2020/consultation-paper-on-review-of-regulatory-framework-for-investment-advisers-ia-_45685.html
[3] https://www.sebi.gov.in/media/press-releases/feb-2020/sebi-board-meeting_46013.html
[4] http://egazette.nic.in/WriteReadData/2020/220363.pdf and https://www.sebi.gov.in/media/press-releases/jul-2020/sebi-notifies-amendments-to-sebi-investment-advisers-regulations-2013_47006.html