Disparity gazes out in reporting utilisation

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-Format indicates mandatory reporting by all listed entities

Pammy Jaiswal | corplaw@vinodkothari.com

Background

Listed entities raise funds by way of public issue, rights issue, preferential issue and qualified institutional placement of specified securities or by way of public issue or private placement of debt securities. In each of the case, there is an offer document wherein objects of the issue are required to be specified.  There may be a categorised allocation that may be stated in the offer document with respect to objects of the issue. It is likely that a company may either end up using certain amounts for objects not stated in the offer document or beyond category wise limit specified. Utilisation of proceeds is monitored by the Audit Committee and also by the monitoring agency appointed in terms of SEBI ICDR Regulations, where required.

Reg. 32 (2) as well as Reg. 52 (7) of the SEBI Listing Regulations requires the listed entities to report the deviation and material deviation, respectively, in utilisation of the proceeds raised through corporate actions specified above.  Under Reg 32, the statement of deviation is required to be submitted on a quarterly basis; while Reg. 52 (7) mandates submission of along with half yearly financial results.

While the reporting requirement was there under clause 43A of the Equity Listing Agreement, there was no format for such reporting till December, 2019.

The format of the reporting was issued by SEBI under Reg. 32 (2) on 24th December, 2019[1] and thereafter under Reg. 52 (7) on 17th January, 2020[2]. This article highlights the deviation in the provisions and format and the practical issue faced by listed entities.

Contradiction in the provisions

Relevant extracts of Reg. 32 (applicable to companies with specified securities listed):

“(1) The listed entity shall submit to the stock exchange the following statement(s) on a quarterly basis for public issue, rights issue, preferential issue etc. ,-

(a) indicating deviations, if any, in the use of proceeds from the objects stated in the offer document or explanatory statement to the notice for the general meeting, as applicable;

(b) indicating category wise variation (capital expenditure, sales and marketing, working capital etc.) between projected utilisation of funds made by it in its offer document or explanatory statement to the notice for the general meeting, as applicable and the actual utilisation of funds.“

 

Relevant extracts from Reg. 52 (applicable to companies with debt securities or NCRPS[3] listed):

“ (7) The listed entity shall submit to the stock exchange on a half yearly basis along with the half yearly financial results, a statement indicating material deviations, if any, in the use of proceeds of issue of non-convertible debt securities and non-convertible redeemable preference shares from the objects stated in the offer document.”

Chapter VI of the Listing Regulations is applicable on entities which have listed their specified securities as well as NCDs or NCRPSs or both.

Relevant extracts from Reg. 63 (2) (applicable to companies having specified securities and either debt securities or NCRPS[4] or both listed):

“(2) The listed entity described in sub-regulation (1) shall additionally comply with the following regulations in Chapter V:

(a)  xxx

(b) xxx

(c) regulation 52(3), (4), (5) and (6);”

As evident above, Reg 52 (7) is not applicable to equity listed entities as it is required to comply with Reg, 32.

Disparity requiring clarification from SEBI 
1. Reporting of deviation in utilisation of proceeds in relation to debt securities/ NCRPS by equity listed entities

Reg. 52(7) is not applicable to companies that have listed i.e., specified securities as well as NCDs or NCRPs or both. Further, Reg, 32 only covers issuances relating to specified securities i.e. public issue, rights issue, preferential issue, QIP etc.

Pursuant to the aforesaid provisions, an equity listed entity is not required to submit details of deviation in utilisation of proceeds arising out of public issue or private placement of debt securities or NCRPS.

2. Requirement of NIL reporting

Reg 32 as well as Reg. 52(7) mandates reporting if there is any deviation. Requirement to submit a NIL report every quarter or half year respectively has not been expressly provided.

The format, on the contrary, provides as under:

Is there a Deviation / Variation in use of funds raised?                 Yes / No

While SEBI Circular does not provide any clear guidance on the said issue, ‘Guidance and FAQ on Regulation 32 of SEBI LODR, 2015 – Statement of deviation(s) or variation(s) issued by NSE states the following:

“Since the Regulation only mentions about Statement of Deviation or Variation not about utilisation, is it mandatory for the Companies to give utilisation if there is no deviation or variation?

Reply: Companies need to give statement of utilisation as Regulation 32 (2) states that “The statement(s) specified in sub-regulation (1), shall be continued to be given till such time the issue proceeds have been fully utilised or the purpose for which these proceeds were raised has been achieved”. If companies do not give utilisation Exchange and Investors won’t know when the fund are fully utilised or the purpose for which these proceeds were raised has been achieved.”

3. Object of the issue

If disclosure under Reg. 32 as well as Reg. 52 gets triggered reporting only when there is a deviation or variation in the use of the proceeds from the objects mentioned in the offer document, it is important to clarify what events would amount to deviation.

One must understand that while the law uses the term objects of the issue, a company can raise funds for both general as well as specific purpose. For companies engaged in financing activities, the raising of funds is normally for general corporate purpose or working capital purpose unlike other classes of companies where the object for raising funds is specific.

Referring to the information memorandum of some of the NBFCs issuing debt securities, we find that the objects of the issue are generic in nature as follows:

  • Shriram Transport Finance Company Limited[5]

The Proceeds of the issue will be utilized for onlending to grow the asset book, financing of commercial vehicles.

  • Tata Capital Financial Services Limited[6]

For the purpose of onward lending, financing, and for repayment /prepayment of interest and principal of existing borrowings of TCFS.

General Corporate Purposes*

*The Net Proceeds will be first utilized towards the Objects mentioned above. The balance is proposed to be utilized for general corporate purposes, subject to such utilization not exceeding 25% of the amount raised in the Issue, in compliance with the SEBI Debt Regulations.

  • Fullerton India Credit Capital Limited[7]

The issuer shall use the proceeds from the issue  of the Debentures to finance business growth and general business purpose.

Further, some NBFCs and banking companies as mentioned below, have provided the following objects in their placement documents/ information memorandum:

  • L&T Finance Holdings Limited[8]

Subject to compliance with Applicable Laws and regulations, the Company intends to use the proceeds for redemption of preference shares, and funding the operations of the Company, including but not limited to, repayment of loans of the Company or to invest in its Subsidiaries in the form of Tier I and Tier II capital to enhance their capital adequacy.

  • HDFC Bank Limited[9]

Subject to compliance with applicable laws and regulations, we intend to use the Net Proceeds of the Issue, together with the proceeds of the ADR Offering and the Preferential Allotment, to strengthen our capital structure and ensuring adequate capital to support growth and expansion, including enhancing our solvency and capital adequacy ratio.

Whereas an infrastructure company like National Highways Authority of India Limited[10] provides a specific object in its offer document:

To part finance various projects being implemented by NHAI under the NHDP/Bharatmala Pariyojana and other national highway projects as approved by the Government of India.

When do we say amount is fully utilised?

In case of amounts raised for general purpose:

  • For NBFCs, the funds are raised to be deployed immediately either for refilling the working capital or direct investment or lending activities. Accordingly, one time intimation should suffice. The amount is said to be utilised for general purpose the moment the amount is transferred from separate bank account (opened under Section 42) to the regular bank account.
  • For other companies, where the funds are raised for a specific project or activity, then the reporting has to be made till the proceeds are fully utilised as per the specific object.

4. Review by the audit committee

The requirement of reporting under Reg. 32 is on a quarterly basis which means for the first three quarters, within 45 days from the end of the quarter and for the last quarter, within a period of 60 days from the end of the said last quarter.

However, the requirement of reporting under Reg. 52 is on a half yearly basis. The time period is 45 days from the half year end.

In both the cases, the audit committee has to review the said report and provide its comments, if any.

Disparity requiring clarification from SEBI

In view of aforesaid guidance from NSE, if ‘NIL’ reporting is mandatory, whether the ‘Nil’ report is also required to be placed before Audit Committee or the Board, as the case may be, and thereafter submitted to Stock Exchanges?

5. Timelines for submission under COVID situation

Normally, the companies are required to submit the certificate under Reg. 32 (2) within 45 days from the end of the quarter (for the first three quarters) and within 60 days from the end of the last quarter.  However, the time period allowed under Reg. 52 (7) is 45 days from the end of the half-year.

While SEBI has relaxed the timelines for submission of various returns/ intimations/ certificates and financial statements, however, the specific relaxation under Reg. 32 (2) as well as Reg. 52 (7) is still awaited.

In our view, considering the current situation, getting the comments of the audit committee within 45 days is not required in such cases and the same can be reviewed within the a period of 60 days or such extended time period as permitted by SEBI. Hence, there is no question for calling the meeting within such earlier time frame. Also, since this matter requires due discussion between the audit committee members, a circular resolution is surely not suggested.

6. Cases in which the monitoring agency has been appointed under ICDR

SEBI ICDR Regulations provide for appointment of a monitoring agency by the issuer in case the issue size exceeds INR 100 cr.

The monitoring agency is required to submit its report to the issuer in the specified format on a quarterly basis, till at least ninety five per cent. of the proceeds of the issue, excluding the proceeds raised for general corporate purposes, have been utilised.

Further, the format issued by SEBI under Reg. 32 also requires the issuer to mention about such monitoring agency along with its report/ comments.

Monitoring agencies have no relevance for bond issuances, therefore, the format under Reg. 52(7) does not require reporting on the same.

Conclusion

Pending clarification, in our view, a ‘NIL’ report may be filed by the companies. Further, as discussed above, SEBI should clarify on the applicability position for companies having both the specified securities and NCDs/ NCRPs or both listed.

Also, in view of the current pandemic surrounded situation, a clarification with respect to the timelines for reporting should also be given.

[1] SEBI Circular dated 24th December, 2019

[2] SEBI Circular dated 17th January, 2020

[3] Non Convertible Redeemable Preference Shares

[4] Non Convertible Redeemable Preference Shares

[5] https://www.bseindia.com/downloads/ipo/20204518228STFC%20IM%2003042020.pdf

[6]https://www.tatacapital.com/content/dam/tata-capitalpdf/Tata%20Capital%20Financial%20Services%20Limited%20-%20Tranche%20II%20Prospectus%20dated%20Au….pdf

[7] https://drupalbucketficc.s3.amazonaws.com/sites/default/files/2019-08/Signed-IM-Series-81.pdf

[8] https://www.ltfs.com/content/dam/lnt-financial-services/home-page/investors/documents/announcement/2019/Information%20Memorandum%20for%20issue%20of%20up%20to%20195,00,000%20NCRPS.pdf

[9] https://v1.hdfcbank.com/htdocs/common/pdf/Preliminary_Placement_Document2018.pdf

[10] https://www.bseindia.com/downloads/ipo/202045181841NHAI%20IM%2003042020.pdf

Consensual restructuring of debt obligations, due to COVID disruption, not to be taken as default, clarifies SEBI

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Vinod Kothari

finserv@vinodkothari.com

The global economy, as also that of India, is passing through a systemic disruption due to the COVID crisis. The Reserve Bank of India in its Seventh Bi-monthly Monetary Policy Statement 2019-20 dated March 27, 2020[1] has permitted banks and non-banking financial institutions to provide a moratorium to borrowers for a period of 3 months.

As a result, cashflows of banks and financial institutions from underlying loans will be disrupted, at least for the period of the moratorium. It is a different thing that the disruption may actually prolong, but 3 months as of now is what is explicitly regarded by the RBI has COVID-driven.

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Relaxations by SEBI and MCA under disruption scenario: Some FAQs

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SEBI relaxes timelines at the time of disruption caused by COVID-19

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Vinod Kothari & Company

corplaw@vinodkothari.com

Below is a short snippet of the relaxed timelines issued by the securities market regulator in the wake of the disruption caused by COVID-19.

Majority of minority to ensure economic interest in transactions with related parties

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SEBI’s proposal–came late, came correct

-CS Nitu Poddar, Tanvi Rastogi

corplaw@vinodkothari.com

Financial assistance to related entities is a quite a regular transaction. Considering the transfer of obligations, such transactions are subject to certain regulation under the Companies Act, 2013 (Act, 2013) and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR). However, despite the prohibitions and restrictions, there are several areas within the periphery of transactions with related parties which remain out of the ambit of law and therefore is beyond required checks. Following the proposal of changes in the provisions of RPT vide the report of the working group[1], SEBI has floated a consultative paper[2] on 06-03-2020 proposing certain changes to corporate guarantees being provided by a listed party on behalf of its promoter / promoter related entities, without deriving any economic benefit from such transaction.

In this article, we discuss the coverage of the current provisions, gap therein, need for the proposal and the proposed regime to bridge such gap.

Unrelated-related parties – remains unregulated

As compared to the Act, 2013, LODR has a wider definition of related party where it additionally covers related parties under AS-18 / IND AS-24 and also such member of promoter and promoter group which holds 20% of the total shareholding of the listed entity. Despite such wide definition, practically speaking, there may be several interested entities of the promoter which gets excluded from the technical criteria of being a related party due to absence of required shareholding and consequently transactions with them can easily sail through without being subject to required approvals. As such, currently, a listed entity can grant loan, give guarantee / security in connection of loan to / on behalf of an entity, which technically is not a related party, but either is a promoter or an entity in which the promoter has vested interest against the interest of stakeholders of the lending company.

Existing provisions regulating financial transactions

Currently, section 177, 185 and 186 of Act, 2013 are the major provisions governing any financial transactions. Section 188 of the Act, 2013, does not cover financial transaction within its coverage and therefore the same get ruled out anyway. Section 177 provides for scrutiny of inter-corporate loans as well as approval and modifications of all related party transactions. The challenge of this section are that firstly, transactions with interested unrelated party gets ruled out and   consequently the committee is left with the duty of a post mortem scrutiny and not a prior scanning of the transaction. Sec 186 provides for limits of financial transaction i.e giving of loan, investment, guarantee, security in connection with loan and also keeps a check on minimum rates to be charged in case of loan. Transactions beyond the limits require approval by special majority of the shareholders. Sec 185 talks about granting of loan to directors and director-interested entities. While there is complete prohibition of granting of such loan to the director himself or his relative / firm, loan can be granted to interested-companies, subject to approval by special majority of shareholders of the lender company.

To get such approval is not a tough task in a company with high promoter-holding, and the promoters can easily get their transaction through. Unlike sections 188 and 184 where the voting rights of the interested parties are restricted in the general meeting and board meeting respectively, section 185 and 186 does not provide for any such restrictions.

As per Reg 23 of LODR, related party transactions, which includes financial transactions as well, requires approval of shareholders by majority. This approval is by the majority of the minority as all entities falling under the definition of related parties cannot vote to approve the relevant transaction irrespective of whether the entity is a party to the particular transaction or not.

Proposed amendment – need and proposal 

It is to be noted that whenever there is a transaction with a promoter related entity, there may be a potential threat to the interest of the non-promoter group / minority shares. Accordingly, approval of the majority of such minority is to be essentially sought to ensure that the resources of the company are not been siphoned away / wrongly used / alienated by the promoters and that the interest of such minority is secured. As mentioned above, in the existing regime, question of approval from such majority of minority arise only for material RPTs under LODR.

Hence, all such transactions which does not fall under the category of “RPT” and / or “material” remains unguarded and thus putting the corporate governance of the company at stake.  SEBI, in its report on working group of RPT[3], has clearly put forward its intent to curb such influential transactions by the promoter / promoter group and to revise the definition of related party itself. Once the said proposal is made effective, all transactions with promoter / promoter group will be a RPT. However, inspite of such revision in the definition of RPT, only material transactions will require approval of minority shareholders.

Through the proposal in the consultative paper, SEBI intends to move a step ahead of what the working group discussed. SEBI now proposes to require all guarantee transactions, irrespective of the materiality to be approved by the majority of minority shareholders. Additionally, the directors of lending company are required to establish and record “economic interest” in granting of such guarantee.

Essence of voting by majority of minority

It is no approval, if the person seeking approval and granting approval is the same. In corporate democracy, approval is essentially ought to be sought from the class of people whose rights seem to be prejudiced from transaction proposed in the interest of another class. Reg 23 of LODR and sec 188 of Act, 2013 already recognises such majority of minority approval wherein all the related parties of the company refrain from voting.

Significance of “economic interest”

Any prudent mind would require risk and reward, benefit and burden to be shared proportionately. It is absolutely irrational to say that a listed company is extending guarantee / security in connection with loan but has no benefit in return.

It is to be noted that charging of guarantee commission or charging of interest is not to be misunderstood as presence of economic interest. There are charged only to keep the transaction at arm’s length. However, the exposure of the lender company is the amount of loan / amount guaranteed.

Few examples of embedded economic interest in a transaction can be as follows:

  1. A holding company extending loan to its wholly-owned subsidiary for funding acquisition of land for building of plant may be benefitted by the figures of such subsidiary at consolidated level;
  2. A listed company guaranteeing on behalf of another unrelated-related entity which is the customised raw material provider of the lending company

Different scenarios of financial transaction considering the proposal of SEBI:

S. No. Transaction between Existing provision Proposed amendment Analysis
1

 

 Two unlisted companies Section 186 / 185, if  applicable Unlisted companies are not covered No Impact
2 Listed company with its related party – beyond materiality threshold Section 186 / 185, if  applicable and Reg 23- shareholders’ approval through resolution where no  related  party  shall  vote  to  approve Ensuring the economic interest + Prior  approval  from  the shareholders on a “majority of minority” basis Irrespective of the materiality, where there is any transfer of financial obligation, prior approval of unrelated shareholders will be required
3 Listed company with related party not within materiality threshold No requirement for shareholders’ approval Ensuring the economic interest + Prior  approval  from  the shareholders on a “majority of minority” basis Irrespective of the materiality, where there is any transfer of financial obligation, prior approval of unrelated shareholders will be required
4 Listed company with unrelated related party[4] No requirement prescribed under law

Open issues

  1. While the proposed amendment is absolutely on-point and timely amendment in the wake of several corporate scams in the recent past being witnessed by the country, however, it will achieve its intent if the same is not kept limited to guarantee / security in connection with loan, but also extended for granting of loan to such unrelated-related entities;
  2. Also, the list of entities is kept vague in the Paper (promoter(s)/ promoter group/ director / directors relative / KMP etc) and may be better clarified in the amendments, however, the intent seems to be quite clear to include any promoter / promoter group / management related entity;
  3. Lastly, it is not clear as to who should refrain from voting for majority of minority voting – all promoter / promoter group entities / all related parties of the listed entity;

 

[1] https://www.sebi.gov.in/reports-and-statistics/reports/jan-2020/report-of-the-working-group-on-related-party-transactions_45805.html

[2] https://www.sebi.gov.in/reports-and-statistics/reports/mar-2020/consultative-paper-with-respect-to-guarantees-provided-by-a-listed-company_46234.html

[3] SEBI Report on working group of RPT dated 27th January, 2020 ibid

[4] Includes promoters which may not fall under definition of related party – like promoter not holding any shareholding in the company

Read our article on proposed changes by working group of SEBI on Related Party Transactions here: http://vinodkothari.com/2020/01/expanding-the-web-of-control-over-related-party-transactions/

Read our articles on the topic of related party transactions here: http://vinodkothari.com/article-corner-on-related-party-transactions/

SEBI introduces enhanced disclosure and standardized reporting for AIFs

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Timothy Lopes, Executive, Vinod Kothari Consultants Pvt. Ltd.

finserv@vinodkothari.com

SEBI has vide circular dated 5th February, 2020[1] introduced a standard Private Placement Memorandum (PPM) and mandatory performance bench-marking for Alternative Investment Funds (AIF). The move is part of SEBI’s initiative to streamline disclosure standards in the growing AIF space. The changes are made based on the recommendations of the SEBI Consultation Paper[2] on ‘Introduction of Performance Bench-marking’ and ‘Standardization of Private Placement Memorandum for AIFs’.

Template for Private Placement Memorandum (PPM)

The SEBI (AIF) Regulations, 2012 specified broad areas of disclosures required to be made in the PPM. This led to a significant variation in the manner in which various clauses, explanations and illustrations are incorporated in the PPMs. Hence, this led to concerns that the investors receive a PPM which provides information in a manner which is too complex to easily comprehend or with too little information on important aspects of the AIF, e.g. potential conflicts of interests, risk factors specific to AIF or its investment strategy, etc.

Thus, SEBI has mandated a template[3] for the PPM providing certain minimum level of information in a simple and comparable format. The template for PPM consists of two parts –

Part A – Section for minimum disclosures, which includes the following –

  • Executive Summary –

This lays down the summary of the parties and terms of the transaction. In effect, it is a summary term sheet of the PPM, laying down essential features of the transaction.

  • Market opportunity / Indian Economy / Industry Outlook;

The theme of this section includes a general economic background followed by investment outlook and sector/ industry outlook. This section may include any additional information as well which may be relevant. An illustrative list of additional items which may be included has been specified in the template.

  • Investment Objective, Strategy and Process;

A tabular representation of the investment areas and strategy to be employed is laid down in under this head. Further, a flow chart depicting the investment decision making process and detailed description of the same is required to be specified. This will give investors a comprehensive idea of the ultimate investment objective and strategy.

  • Fund/Scheme Structure;

A diagrammatic structure of the Fund/ Scheme which discloses all the key constituents and a brief description of the activities of the Fund/ Scheme.

The diagrammatic representation shall specify, for instance, the sponsor, trustee, manager, custodian, investment advisor, offshore feeder, etc. 

  • Governance Structure; 

To enhance the governance disclosures to investors and ensure transparency this section mandates disclosures of all details of each person involved in the Fund/ Scheme structure, including details about the investment team, advisory committees, operating partners, etc.

  • Track Record of the Manager;

The track record of the Fund Manager is of great significance since investors would like to know the skill, experience and competence of the Manager before making an investment.

The template mandates disclosures about the manager including explicit disclosure of whether he is a first time manager or experienced manager.

  • Principal terms of the Fund/ Scheme;

Explicit disclosures about the principal terms such as minimum investment commitment, size of the scheme, target investors, expenses, fees and other charges, etc. are required to be disclosed as per the template.

Major terms and disclosures are covered under this section. 

  • Principles of Portfolio Valuation;

This section would broadly lay down the principles that will be used by the Manager for valuation of the portfolio company.

The investors would get a fair idea of the manner in which valuation of the portfolio would be undertaken, in this section.

  • Conflicts of interest;

All present and potential conflicts of interests that the manager would envisage during the operation of the Fund/ Scheme at various levels are to be disclosed under this section.

This would enable investors to factor in the conflicts of interests existing or which may arise in the future of the fund and make an informed decision.

  • Risk Factors;

All risk factors that investors should take into account such as specific risks of the portfolio investment or the fund structure are required to be disclosed in the PPM.

These risks would include operational risks, tax risks, regulatory risks, etc. among other risk factors. 

  • Legal, Regulatory, and Tax Consideration;

This section shall include standard language for legal, regulatory and tax considerations as applicable to the Fund/Scheme, including the SEBI (AIF) Regulations, 2012, Takeover Regulations, Insider Trading Regulations, Anti-Money Laundering, Companies Act, 2013. Taxation aspects of the fund are also to be disclosed.

  • Illustration of fees, expenses and other charges;

A tabular representation of the fees and other charges along with the expenses of the Fund are required to be disclosed for transparency of investors and no hidden charges. 

  • Distribution Waterfall;

The payment waterfall to different classes of investors is required to be disclosed in detail.

  • Disciplinary History.

Any prior disciplinary action taken against the sponsor, manager, etc. will be required to be disclosed for better informed decision making of investors.

Part B – Supplementary section to allow full flexibility to the Fund in order to provide any additional information, which it deems fit.

The template requires enhanced disclosures mandatorily required to be made by the AIF, such as risk factors, investment strategy, conflicts of interest and several other areas that may affect the interest of the investors of AIFs.

This will standardize disclosures across the AIF space and increase simplicity of information to investors in a standard reporting format. Enhancing disclosure requirements will increase investor understanding about AIF schemes.

Further there is a mandatory requirement to carry out an annual audit of the compliance of the PPM by either an internal or external auditor/ legal professional. The findings arising out of the audit are required to be communicated to the Trustee or Board or Designated Partners of the AI, Board of the Manager and SEBI.

Exemption has been provided from the above PPM and audit requirements to the following classes of funds:

  1. Angel Funds as defined in SEBI (Alternative Investment Funds), Regulations 2012.
  2. AIFs/Schemes in which each investor commits to a minimum capital contribution of Rs. 70 crores (USD 10 million or equivalent, in case of capital commitment in non-INR currency) and also provides a waiver to the fund from the requirement of PPM in the SEBI prescribed template and annual audit of terms of PPM, in the manner provided at Annexure 3 of the SEBI Circular.

These requirements are however applicable from 01st March, 2020.

Bench-marking for disclosure of performance

Considering that investments by AIFs have grown at a rate of 75% year on year in the past two years, a need was felt to introduce disclosures by AIFs indicating returns on their investments. Prior to the SEBI circular there was no disclosure requirement for AIFs on their investment performance.

There was no bench-marking of returns disclosed by AIFs to their prospective or existing investors. However, returns generated on investment is one of the most important factors taken into consideration by potential investors and is also important for existing investors in order to be informed about the performance of their investment in comparison to a benchmark.

Therefore, it is felt that there is a need to provide a framework to bench-marking the performance of AIFs to be available for the investors and to minimize potential misselling.

In this regard SEBI has introduced the following –

  1. Mandatory bench-marking of the performance of AIFs (including Venture Capital Funds) and the AIF industry.
  2. A framework for facilitating the use of data collected by Bench-marking Agencies to provide customized performance reports.

The new bench-marking framework prescribes that each AIF must enter into an agreement with a Bench-marking Agency (notified by an AIF association representing at least 51% of the number of AIFs) for carrying out the bench-marking process.

The agreement between the Bench-marking Agencies and AIFs shall cover the mode and manner of data reporting, specific data that needs to be reported, terms including confidentiality in the manner in which the data received by the Bench-marking Agencies may be used, etc.

Reporting to the Bench marking Agency –

AIFs are required to report all the necessary information including scheme-wise valuation and cash flow data to the Bench-marking Agencies in a timely manner for all schemes which have completed at least one year from the date of ‘First Close’. The form and format of reporting shall be mutually decided by the Association and the Benchmarking Agencies.

If an applicant claims a track-record on the basis of India performance of funds incorporated overseas, it shall also provide the data of the investments of the said funds in Indian companies to the Benchmarking Agencies, when they seek registration as AIF.

PPM and Marketing material –

In case past performance of the AIF is mentioned in the PPM or any marketing material the performance versus benchmark report provided by the benchmarking agencies for such AIF/Scheme is also required to be provided.

Operational Guidelines for the benchmarking criteria is placed in Annexure 4 to the SEBI Circular.

Further there is an exemption from the above requirements to Angel Funds registered under sub-category of Venture Capital Fund under Category-1 AIF.

Conclusion

These changes are likely to bring about higher disclosure and transparency in the AIF space, especially for existing as well as potential investors of AIFs. Standardization of PPM will eliminate any variance from the manner of disclosures made by various AIFs.

Links to related write ups –

http://vinodkothari.com/2018/03/can-aif-grant-loans/

http://vinodkothari.com/wp-content/uploads/2018/03/PPT-on-financial-and-capital-markets_27-02-18_final.pdf

http://vinodkothari.com/aifart/

[1] https://www.sebi.gov.in/legal/circulars/feb-2020/disclosure-standards-for-alternative-investment-funds-aifs-_45919.html

[2] https://www.sebi.gov.in/reports-and-statistics/reports/dec-2019/consultation-paper-on-introduction-of-performance-benchmarking-and-standardization-of-private-placement-memorandum-for-alternative-investment-funds_45215.html

[3] https://www.sebi.gov.in/sebi_data/commondocs/feb-2020/an_1_p.pdf

SEBI brings in revised norms for Portfolio Managers

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Timothy Lopes, Senior Executive

Harshil Matalia, Assistant Manager

finserv@vinodkothari.com

corplaw@vinodkothari.com

Updated as on 27th August, 2020

The securities market regulator has recently introduced the new SEBI (Portfolio Managers) Regulations, 2020 (PMS Regulations), bringing in several changes to the Portfolio Management industry, including doubling the ticket size for investments and increasing the net-worth requirement of Portfolio Managers.

The Portfolio Management Services (PMS) industry has witnessed substantial growth in its Assets Under Management (AUM) in the last 5 years as shown in the data below. There has also been a substantial increase in the number of clients, indicating that the PMS industry plays a significant role in managing funds of High Net-worth Individuals.

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Recent Developments in Corporate Laws

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In its stride to achieve transparency, good governance, and ease of doing business, the Government has time and again introduced amendments, proposed new ideas in the corporate laws. The very recent example of such changes are (a) Changes in RPTs proposed in LODR; (b) Minority Squeeze outs under Companies Act; and (c) introduction of Winding-up Rules, 2020.

In light of the these amendments/ proposed amendments, it becomes important to understand its impact on the already existing set-up. A brief analysis of the aforementioned topics has been discussed here