In our series of case studies on corporate laws, we present to you our first case study on Related Party Transactions. Readers and viewers are invited to share their views and solutions in the comment section below –
Case Study 1- Related Party Transactions| Category | Eligibility Requirement | Quantum* |
| NBFCs (including SDPs) meeting prudential requirements | ● Complies with applicable regulatory capital adequacy requirements/leverage restrictions/Adjusted net-worth for each of the last three financial years including the financial year for which the dividend is proposed
○ For SPDs, minimum CRAR of 20% to be maintained for the financial year for which dividend is proposed. ● Net NPA ratio shall be less than 6% in each of the last three years, including as at the close of the financial year for which dividend is proposed to be declared.○ Calculation of NNPA ● Complies with the provisions of Section 45 IC of the RBI Act/ Section 29 C of the NHB Act, as the case may be, that is to say, has transferred 20% of its net profits to the regulatory reserve fund ● No explicit restrictions placed by the regulator on declaration of dividend |
● Type I NBFCs- No limit● CICs and SPDs- 60% ● Other NBFCs- 50% |
| NBFCs (other than SPDs) not meeting prudential requirements | ● Complies with the applicable capital adequacy requirements/ leverage restrictions in the financial year for which dividend is proposed to be paid● Has net NPA of less than 4% as at the close of the financial year. | 10% |
| Criteria | Bank | NBFCs |
| Eligibility | Only those banks would be eligible to declare dividends who have a CRAR of at least 9% for preceding two completed financial years and the accounting year for which it proposes to declare dividend and Net NPA less than 7% | NBFC-ND-NSI with leverage upto 7 times and NBFC-ND-SI with a CRAR of not less than 15% for last three years (including the FY for which dividend is declared) and Net NPA less than 6% in each of the last three years |
| In case not meeting eligibility | In case any bank does not meet the above CRAR norm, but has a CRAR of at least 9% for the accounting year for which it proposes to declare dividend, it would be eligible to declare dividend provided its Net NPA ratio is less than 5% | In case any NBFC does not meet the above eligibility criteria for each of the previous three FY, but meets the capital adequacy for the accounting year, for which it proposes to declare dividend and has a Net NPA ratio of less than 4% at the close of the FY, it shall be allowed to declare dividend, subject to a maximum of 10% on the DP ratio. |
| Quantum | Dividend payout ratio shall not exceed 40 % and shall be as per the prescribed matrix | CIC’s and SPDs shall ensure the maximum dividend payout ratio does not exceed 60%, while the other NBFCs shall not exceed 50% of the DP ratio. For Type I NBFCs there is no limit. |
| Reporting | All banks declaring dividends should report details of dividend declared during the accounting year as per the proforma furnished by RBI | NBFC-Ds, NBFC-ND-SIs, HFCs & CICs declaring dividend should report the details of dividend within a fortnight after declaration of dividend to RBI/NHB, as may be applicable. |
A comparative analysis between the Companies Act, SEBI Guidelines and SEBI Circular dated 18th Oct. 2019
– Ajay Kumar K V | Manager (corplaw@vinodkothari.com)
The Reserve Bank of India has issued Guidelines[1] for Appointment of Statutory Central Auditors (SCAs)/Statutory Auditors (SAs) of Commercial Banks (excluding RRBs), UCBs and NBFCs (including HFCs) under Section 30(1A) of the Banking Regulation Act, 1949, Section 10(1) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980 and Section 41(1) of SBI Act, 1955; and under provisions of Chapter IIIB of RBI Act, 1934 for NBFCs, on 27th April 2021.
The Guidelines provide for appointment of SCAs/SAs, the number of auditors, their eligibility criteria, tenure and rotation as well as norms for ensuring the independence of auditors.
However certain provisions of these Guidelines are either completely different or stringent as compared to the provisions of the Companies Act, 2013 (Act). Further, in case of listed entities the question would arise whether the SEBI circular CIR/CFD/CMD1/114/2019[2] dated 18th October 2019 shall be applicable, where the existing auditor is ineligible to continue as the auditor of the company and a new auditor is to be appointed.
In this write up, we have discussed the requirements under both RBI Guidelines as well as the Act.
-Shreya Masalia and Anushka Vohra
In order to make the existing delisting Regulations robust, efficient, transparent and investorfriendly, the Securities Exchange Board of India (‘SEBI’) has issued the SEBI (Delisting of Equity Shares) Regulations, 2021[1] (‘Delisting Regulations, 2021’) on June 11, 2021, thereby superseding the erstwhile SEBI (Delisting of Equity Shares) Regulations, 2009[2] (‘Erstwhile Regulations’). The Erstwhile Regulations were notified on June 10, 2009. Thereafter, several amendments have been carried out in the delisting regulations according to the changing need and developments in the securities market. Thus, to further streamline and strengthen the process to be followed for delisting, the Delisting Regulations have been introduced.
In India, a large number of entities are listed on regional stock exchanges, serving no public interest at all. In fact, over the years, most of them have become non-compliant. However, given the cumbersome process of delisting, these companies have chosen to remain listed. The Delisting Regulation, 2021 has made the path of exit for these entities comparatively easier.
In this article, the authors have made an attempt to discuss the changes in the delisting procedure as introduced vide the Delisting Regulations, 2021.
Listing of shares at stock exchanges provides for free transferability and ready marketability to the shares of a company. In contrast to that, when a public company chooses to go private, it has to delist from the stock exchanges – which means that the shares of that company will no longer be available for trading on the platform provided by the stock exchange.
The Companies choose to list themselves to grab the advantages of listing viz; lower cost of capital, greater shareholder base, liquidity in trading of shares, prestige etc. But the companies need to be contended that the benefits of listing outweigh the listing costs, the compliance requirements do not overburden the companies and do not expose them to disciplinary actions.
Initially, there existed 21 regional stock exchanges (‘RSE’) in India of which 20 such RSEs have shut down over the years due course due to their lack of financial viability, exchanges becoming defunct, usage of archaic technology and subsequent derecognition of the exchanges by SEBI. The lone-standing regional stock exchange is the Calcutta Stock Exchange (‘CSE’), which is also at its verge of getting shut. Various companies continue to be listed on CSE, however the economic viability of the same is still questionable. The Delisting Regulations provide for an easy exit opportunity to these companies by significantly reducing the time-period of the delisting process and streamlining the same.
Also with the relisting bar of 5 years in case of voluntary delisting having been reduced to 3 years will now allow the companies to relist in a comparatively lesser period of time and raise funds for their new venture.
The statistics given below show that there has been a tremendous increase in the number of companies being delisted from the stock exchange. Delisting from the stock exchanges could either be undertaken voluntarily, or compulsory delisting by the Stock Exchanges or delisting pursuant to liquidation.
(Source: NSE)
Compulsory delisting generally, is caused due to procedural and compliance lapses by the companies. Amongst other causes, the major causes for compulsory delisting include non-payment of listing fee, reduction in public shareholding and failure to meet the same, unfair trade practices at the behest of the management/promoters etc.
While compulsory delisting is at the precept of the Stock Exchanges, companies opt to voluntarily delist themselves.
The most common rationale for companies to opt for voluntary delisting in the recent time has been;
The Delisting Regulations, as laid down by SEBI provides two modes of delisting of equity shares viz; (a) Compulsory and (b) Voluntary:
Further, in the case of voluntary delisting, companies have the following options:
In the case of 1 and 2 above, the companies have an obligation to provide an exit opportunity to the existing shareholders.
While the process in case of iii. above remains the same, changes have been brought about in the way a company has to manage the delisting offer pursuant to provision of exit opportunity. The gist of the changes introduced by the Delisting Regulations have been discussed below.
In the Erstwhile Regulations, the process flow was that the acquirer used to intimate their intention to delist the Company to the Board and the Board would then intimate the same to the Stock Exchanges before granting its approval.
Now the Delisting Regulations, 2021, cast an obligation on the acquirer to intimate to the Stock Exchanges, their intention to delist the Company first and within one working day of its intimation shall also inform the Company at its Registered Office, this is termed as the Initial Public Announcement.
Comments: An intention to delist a company is a price sensitive event and can have a major impact on the market. Hence, its immediate disclosure to the public is warranted. Therefore, to fill the lacunae on information being made available to the public, intimation by the acquirer has been made mandatory.
2.Time-bound mechanism
The delisting procedure involves intricacies requiring approvals at various stages.Unlike the t new regulations specify the timelines for the entire process, making it less cumbersome and time-bound, as shown in the table below:
| Event / compliance | Existing Timeline | Revised Timeline |
| Board resolution | None specified | Within 21 days from the date the acquirer expresses his intention |
| Special resolution | None specified | Within 45 days from the date of approval of the board |
| Escrow Account | Before making public announcement | Not later than 7 working days from the date of obtaining the shareholder’s approval. |
| In-principle approval | None specified | Within 15 working days from the date of obtaining shareholders approval or receipt of any statutory or regulatory approval; whichever is later. |
| Outcome of Reverse Book Building (‘RBB’) | None specified | To be announced within 2 hours from the closure of the bidding period. The same is also required to be published in the same newspapers as the newspapers in which the detailed public announcement was made within 2 working days from closure of the tendering period. |
| Release of shares in case of failure of offer | Within 10 working days from the closure of the offer, where bids were not accepted | In case of failure due to
90% of the shares are not tendered: on the date of disclosure of the outcome of the RBB process
Discovered price being rejected by acquirer: on the date of making public announcement for the failure of the delisting |
| Payment on successful delisting | Within 10 working days from closure of offer | Discovered price same as floor price: payment through secondary market settlement mechanism
Discovered price higher than floor price: within 5 working days from the date of making the payment to the public shareholders |
| Final application to the stock exchanges after successful delisting | Within a period of 1 year from the date of passing of special resolution | Within 5 working days from the date of making the payment to the public shareholders
|
3.Due diligence by Peer Reviewed Company Secretary
Before making the public announcement in case of voluntary delisting, the board had to appoint a Merchant Banker for carrying out the due diligence and then on obtaining the in-principle approval, the acquirer had to appoint a Merchant Banker to act as manager to the issue. The Regulations provided that the Merchant Banker appointed by the board could act as manager to the offer.
Comments: Realising that this could probably result in conflict of interest, the new regulations provide that the board shall appoint a Peer Reviewed Company Secretary, who shall be independent of the promoter/ acquirer/Merchant Banker/or their Associates before the board meeting for granting approval and the Company Secretary shall carry out the necessary due diligence. Further, the acquirer shall before making the initial public announcement, appoint a Merchant Banker to act as manager to the offer. This has also opened up a new avenue for the Company Secretaries in Practice.
4.Escrow Account
Under the Erstwhile Regulation, the acquirer was required to deposit the consideration amount in the Escrow account after getting in-principle approval from SE however before making the PA. The new regulations make it obligatory on the acquirer to open an escrow account even before applying for in-principle approval. The acquirer has to deposit an amount equivalent to 25% of the total consideration at the time of opening the escrow account and the remaining consideration amount of 75% shall be deposited in the escrow account prior to the detailed public announcement.
Comments: Because of stringent timelines, surety is provided that the acquirer has the financial stability and has earmarked funds for the proposed delisting. Moreover, since this is an interest-bearing account, there would be no loss of interest, even if the delisting offer fails at the end.
5.Enhanced responsibility on the Board of Directors
The new regulations intend to be more robust as far as the responsibility of the board is concerned. The erstwhile regulations required that the board shall before granting its approval certify that the proposed delisting is in the interest of the shareholders. And this certification was mere infructuous because there was no disclosure of the same and no reasonable justification, for that matter.
Comments: Considering a situation, where the Expression of Interest is received from an amicable acquirer i.e. the case of friendly takeover, there is a possibility of collusion between the acquirer and the management and in that case the interest of shareholders’ might take a back seat. However, to avoid the same, Regulation 28 has been added into the new regulations which provides that upon receipt of the detailed public statement the Board of Directors shall constitute a committee of independent directors to provide written reasoned recommendations on the delisting offer and the same shall also be disclosed by the Company in the newspapers where the detailed public statement was published, at least 2 working days before the bidding period.
6.Investor friendly regulations
SEBI, being the watchdog of the Securities Market, had been established to protect the interest of investors as one of its main objectives, amongst others.
The Delisting Regulations provide that the public shareholders who could not participate in the RBB process could further tender their shares upto 1 year from the date of delisting and the promoter shall accept the tendered shares at the price which was finalised through RBB.
In addition to that, the new regulations now require the promoter/acquirer/Merchant Banker to comply with the following on a quarterly basis for 1 year from the date of delisting:
Comments: While the shareholders were given a time of upto 1 year, it was observed that the promoters did not take active steps to bail out the remaining shareholders.
7.Indicative Price
The new regulations have unraveled the concept of Indicative Price. As a general practice, some companies with a view to wriggle out of the complexities of remaining listed on the bourses, used to mention the terms indicative price or attractive price in the letter of offer. This price being higher than the floor price, was used to lure the shareholders to tender their shares.
The new regulations have defined Indicative Price as being a price higher than the floor price.
Comments: Even though the word has found its place in the regulations, in our view, SEBI should place a capping on the indicative price so as to ensure that the Companies do not offer lucrative price to the shareholders.
Special provisions for delisting of shares already existed for small companies in the erstwhile regulations. SEBI has further prescribed the following special provisions for delisting:
1.Special provisions for delisting of shares on Innovators Growth Platform
These provisions are similar to the provisions for delisting of shares from the main board however, these provisions require that shares tendered reach 75% of the total issued shares of that class and at least 50% shares of the public shareholders as on date of the board meeting in which such delisting is approved are tendered and accepted instead of the 90% requirement.
2. Special provisions for a subsidiary company getting delisted through scheme of arrangement wherein the listed holding entity and subsidiary company are in the same line of business
Transactions covered under the given head will not attract provisions of these Regulations provided the various conditions mentioned in regulation 37(2) have been complied with.
SEBI, vide notifcation dated July 09, 2021 has exempted the listed subsidiary companies, getting delisted through scheme of arrangement, that are –
– in the ‘same line of business’ as of its holding company;
– the subsidiary shall be a listed subsidiary of a listed holding company for a period of 3 years.
Further, vide said notification, SEBI has also laid down the following criteria for ascertaining whether the listed holding entity and subsidiary are in the ‘same line of business’:
3. Special provisions for delisting by operation of law
These provisions shall be applicable in case of winding up of a company and recognition of a stock exchange by SEBI. In the former, the process of winding up shall be as prescribed by the prevalent regulatory framework. However, the latter seems highly unlikely.
The new regulations have eased the earlier complex procedure of voluntary delisting. The enhanced disclosures and transparency will help to instil confidence among the shareholders. The business environment is dynamic and the time-bound procedure would help the companies to avail exit from the Stock Exchanges and explore their business opportunities by going private.
In India, “Delisting” process has seen very less success as compared to the global market. The new regulations irrefutably addresses some core aspects and also emphasizes on incremental improvements by plugging some of the gaps in the Erstwhile Regulations, as the new Regulations inter alia provide for delisting of equity shares of a subsidiary company (having the same line of business), delisting pursuant to a scheme of arrangement and delisting due to operation of law such as due to winding up of a company or de-recognition of a stock exchange. However, in view of the authors, the cautious approach taken by the SEBI in the New Regulations may still narrow its applications. The impact of the changes brought in through New Delisting Regulations on the success rate of the delisting process is yet to be seen.
[1] https://egazette.nic.in/WriteReadData/2021/227507.pdf
[2] https://www.sebi.gov.in/legal/regulations/jun-2009/sebi-delisting-of-equity-shares-regulations-2009-last-amended-on-march-6-2017-_34625.html
[3] “acquirer” includes a person –
(i) who decides to make an offer for delisting of equity shares of the company along with the persons
acting in concert in accordance with regulation 5A of the Takeover Regulations as amended from
time to time ; or
(ii) who is the promoter or part of the promoter group along with the persons acting in concert.
Ourresources on the topic:-
-Megha Mittal
The Securities and Exchange Board of India (‘SEBI’) has issued a consultation paper dated 19th May, 2021, on proposed framework for Gold Exchange in India and draft SEBI (Vault Managers) Regulations, 2021 (‘Consultation Paper’), thereby seeking public comments on the framework for operationalising gold exchange and the regulation of intermediaries inter-alia Vault Managers.
While the idea of setting up a regulated gold exchange was highlighted in the Union Budget 2018-19 as well as in the Budget 2021-22, the Consultation Paper comes as the first concrete step towards bringing into operation a gold exchange for the Indian market. This comes in the backdrop of the fact that despite being the second largest consumer and importer of gold, India continues to be a price-taker – India does not play any significant role in influencing the global price-setting for the commodity. As such, the Consultation Paper envisages an entire ecosystem of trading and physical delivery of gold so as to create a transparent and robust market which paves the way for India to become a global price setter.
That being said, before delving into the procedural aspect, it is important to understand the fundamentals as to what are the objectives being aimed, what would the target market look like, and if at all the proposed framework would put the investors, the parties and the nation in a better place that is today.
-Megha Mittal (mittal@vinodkothari.com)
Amidst the various concerns addressed in the Board Meeting dated 25th March, 2021,[1] the Securities and Exchange of Board of India (‘SEBI’) extensively dealt with several issues identified with respect to Alternative Investment Funds (‘AIFs’), inter-alia a green signal to AIFs for investing in units of other AIFs; ambiguity regarding the scope of the term ‘start-up’; and the need for a code of conduct laying down guiding principles on accountability of AIFs, their managers and personnel, towards the various stakeholders including investors, investee companies and regulators.
Thus, with a view to target the issues in consideration, the Board proposed that the following amendments be introduced in the SEBI (Alternative Investment Funds) Regulation, 2012 (‘AIF Regulations’/ ‘Principal Regulations’)[2] –
The aforesaid proposals, put to the fore in view of the suggestions and requests received from several stakeholder groups like the domestic AIFs, global investors, and the regulatory bodies, have now been notified vide notification dated 5th May, 2021, via the SEBI (Alternative Investment Funds) (Second Amendment) Regulations, 2021[3] (‘Amendment Regulations’). A key takeaway from the Amendment Regulations is the flexibility granted w.r.t. indirect investments by AIFs for investment in units of another AIF, however with some riders and possible gaps, as discussed below.
Below we summarise and discuss the amendments introduced vide the Amendment Regulations, and analyse its impact
By Sharon Pinto & Sachin Sharma, Corplaw division, Vinod Kothari & Company (corplaw@vinodkothari.com)
Background
The inception of the idea of Social Stock Exchanges (SSEs) in India can be traced to the mention of the formation of an SSE under the regulatory purview of Securities and Exchange Board of India (SEBI) for listing and raising of capital by social enterprises and voluntary organisations, in the 2019-20 Budget Speech of the Finance Minister. Consequently, SEBI constituted a working group on SSEs under the Chairmanship of Shri Ishaat Hussain on September 19, 2019[1]. The report of the Working Group (WG) set forth the framework on SSEs, shed light on the concept of social enterprises as well as the nature of instruments that can be raised under such framework and uniform reporting procedures. For further deliberations and refining of the process, SEBI set up a Technical Group (TG) under the Chairmanship of Dr. Harsh Kumar Bhanwala (Ex-Chairman, NABARD) on September 21, 2020[2]. The report, made public on May 6, 2021[3], of the TG entails qualifying criteria as well as the exhaustive ecosystem in which such an SSE would function.
In this article we have analysed the framework set forth by the reports of the committees with the globally established practices.
Concept of SSEs
As per the report of the WG dated June 1, 2020[4], SSE is not only a place where securities or other funding structures are “listed” but also a set of procedures that act as a filter, selecting-in only those entities that are creating measurable social impact and reporting such impact. Further the SSE shall be a separate segment under the existing stock exchanges. Thus, an SSE provides the infrastructure for listing and disclosure of information of listed social enterprises.
Such a framework has been implemented in various countries and an analysis of the same can be set forth as follows:
A. United Kingdom
B. Canada
C. Singapore
Further the financial criteria entails the need for a fixed limit of minimum market capitalization, publication of financial statements and use of market-based approach for achieving its purpose.
D. South Africa
Key ingredients for a social enterprise
Qualifying criteria and process for onboarding
As per TG recommendation, an NPO is required to register on any of the Social Stock Exchange and thereafter, it may choose to list or not. However, an FPE can proceed directly for listing, provided it is a company registered under Companies Act and complies with the requirements in terms of SEBI Regulations for issuance and listing of equity or debt securities.
Further, the TG has recommended a set of mandatory criteria as mentioned below that NPOs shall meet in order to register.
A. Legal Requirements:
B. Minimum Fund Flows:
In order to ensure that the NPO wishing to register has an adequate track-record of operations.
Framework for listing
Post establishment of the eligibility for listing and the additional registration criteria in case of NPOs, the social enterprises may list their securities in the manner discussed further. The listing procedures vary for NPOs and FPEs and is set forth as follows:
A. NPOs
B. FPEs
Types of instruments
Depending on the type of organisation, SSEs shall allow a variety of financing instruments for NPOs and FPEs. As FPEs have already well-established instruments, these securities are permitted to be listed on the Main Board/IGP/SME, however visibility shall be given to such entities by identifying them as For Profit Social Enterprise (FPSE) on the respective stock exchanges.
Modes available for fundraising for NPOs shall be Equity (Section 8 Co’s.), Zero Coupon Zero Principal (ZCZP) bonds [this will have to be notified as a security under Securities Contracts (Regulation) Act, 1956 (SCRA)], Development Impact Bonds (DIB), Social Impact Fund (SIF) (currently known as Social Venture Fund) with 100% grants-in grants out provision and funding by investors through Mutual Funds. On the other hand, FPEs shall be able to raise funds through equity, debt, DIBs and SIFs.
While SVF is an existing model for fund-raising, the TG has proposed various changes in order to incentivise investors and philanthropists to invest in such instruments. In addition to change in nomenclature from SVF to SIF, minimum corpus size is proposed to be reduced from Rs. 20 Cr to Rs. 5 Cr. Further, minimum subscription shall stand at Rs. 2L from the current Rs. 1 Cr. The amendments shall also allow corporates to invest CSR funds into SVFs with a 100% grants-in, grants out model.
Disclosure and Reporting norms
Once the FPE or the NPO (registered/listed) has been demarcated by the exchange to be an SE, it needs to comply with a set of minimum disclosure and reporting requirements to continue to remain listed/registered. The disclosure requirements can be enlisted as follows:
For NPO:
For FPE:
FPE’s having listed equity/debt will have to disclose Social Impact Report on annual basis and comply with the disclosure requirements as per the applicable segment such as main board, SME, IGP etc.
Other factors of the SSE ecosystem
a. Capacity Building Fund
As per the recommendation of the WG, constitution of a Capacity Building Fund (CBF) has been proposed. The said fund shall be housed under NABARD and funded by Stock Exchanges, other developmental agencies such as SIDBI, other financial institutions, and donors (CSRs). The fund shall have a corpus of Rs. 100 Cr and shall be an entity registered under 80G, which shall make it eligible for receiving CSR donations pursuant to changes to Section 135/Schedule VII of Companies Act 2013. The role of the fund shall encompass facilitating NPOs for registration and listing procedures as well as proper reporting framework. These functions shall be carried out in the form awareness programs.
b. Social Auditors
Social audit of the enterprises shall compose of two components – financial audit and non-financial audit, which shall be carried out by financial or non-financial auditors. In addition to holding a certificate of practice from the Institute of Chartered Accountants of India (ICAI), the auditors will be required to have attended a course at the National Institute of Securities Markets (NISM) and received a certificate of completion after successfully passing the course examination. The SRO shall prepare the criteria and list of firms/institutions for the first phase soon after the formation of SSEs, and those firms/institutions shall register with the SRO.
c. Information Repositories
The platform shall function as a research tool for the various social enterprises to be listed, thus Information Repository (IR) forms an important component of the framework. It functions as an aggregator of information on NGOs, and provides a searchable electronic database in a comparable form. Thus it shall provide accurate, timely, reliable information required by the potential investors to make well informed decisions.
Conclusion
The social sector in India is getting increasingly powerful – this was evident during Covid-crisis based on the wonderful work done by several NGOs. Of course, all social work requires funding, and being able to crowd source funding in a legitimate and transparent manner is quintessential for the social sector. We find the report of the TG to be raising and addressing relevant issues. We are hoping that SEBI will now find it easy to come out with the needed regulatory platform to allow social enterprises to get funding through SSEs.
Our other article on the similar topic can be read here – https://vinodkothari.com/2019/09/social-stock-exchange-a-guide/
[1] https://www.sebi.gov.in/media/press-releases/sep-2019/sebi-constitutes-working-group-on-social-stock-exchanges-sse-_44311.html
[2] https://www.sebi.gov.in/media/press-releases/sep-2020/sebi-constitutes-technical-group-on-social-stock-exchange_47607.html
[3] https://www.sebi.gov.in/reports-and-statistics/reports/may-2021/technical-group-report-on-social-stock-exchange_50071.html
[4] https://www.sebi.gov.in/reports-and-statistics/reports/jun-2020/report-of-the-working-group-on-social-stock-exchange_46852.html
[5] https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article=1906&context=jil&httpsredir=1&referer=
[7] https://ssir.org/articles/entry/the_rise_of_social_stock_exchanges
[9] https://ssir.org/articles/entry/the_rise_of_social_stock_exchanges
[10] https://www.samhita.org/wp-content/uploads/2021/03/India-SSE-report-final.pdf
[11] https://www.sebi.gov.in/reports-and-statistics/reports/may-2021/technical-group-report-on-social-stock-exchange_50071.html
Proposals approved in SEBI BM of March, 2021 made effective
Payal Agarwal | Executive ( corplaw@vinodkothari.com ) May 07, 2021
SEBI, the capital market regulator of India, vide a gazette notification dated 06th May, 2021 notified Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Second Amendment) Regulations, 2021 [“the Amendment Regulations”] that were approved in SEBI’s Board Meeting held on March 25, 2021. Most of the amendments were already rolled out earlier as consultation papers in 2020. The amendments become effective from May 06, 2021.
This article discusses the major amendments carried out and the likely impact and actionable for the listed entities.
Brief of the amendments are as follows –
A gist of all the amendments under the Amendment Regulations have been captured in a snippet.
In terms of Regulation 3 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2013 (‘Listing Regulations’) the provisions of Listing Regulations are applicable to entities that list the designated securities on the stock exchange.
The Amendment Regulations clarify that the applicability of certain provisions of Listing Regulations based on market capitalisation will continue to apply even where the entities fall below the prescribed threshold.
While the market capitalisation may be derived for any day, the recognised stock exchanges viz. BSE Limited and National Stock Exchange of India Limited releases a list of listed entities based on market capitalisation periodically. However, the provisions under Listing Regulations become applicable based on market capitalisation as at the end of the immediate previous financial year.
The present amendment on the continuation of applicability of provisions even after the listed entity ceasing to be among the top 500, 1000, 2000 listed entities, as the case may be, seems inappropriate. The applicability of these provisions were originally introduced in view of the size of the listed entities that held major market cap. Indefinite applicability of the said provisions despite fall in the market capitalisation of the listed entity is more of a compliance burden. The provision should be amended by SEBI in line with the timeframe provided under Reg. 15 i.e. where a listed entity does not fall under the list of top 100, 500, 1000, 2000 for three consecutive financial years, the compliance requirement should cease to apply.
Therefore, a conjoint reading of both the provisions should be allowed to take a liberal interpretation in respect of the newly-inserted Regulation 3(2) as well, thereby relaxation of compliance requirements on completion of a look-back period of 3 consecutive financial years.
Regulation 21 of Listing Regulations requires the listed entities to constitute a Risk Management Committee (RMC). A comparative study of the erstwhile and the amended provisions w.r.t RMC is given below –
| Topic | Erstwhile provisions | Amended provisions |
| Applicability of RMC | · On top 500 listed entities (Based on market capitalisation) | · On top 1000 listed entities based on market capitalisation |
| Composition | · Members of Board of Directors
· Senior executives of listed entity · 2/3rds IDs in case of SR Equity Shares |
· Minimum 3 members
· Majority being members of board of directors · Atleast 1 Independent Director (ID) · 2/3rds IDs in case of SR Equity Shares |
| Minimum no. of meetings | One | Two |
| Quorum | Not specified | · 2 or 1/3rds of total members of RMC, whichever is higher
· Including atleast 1 member of Board |
| Maximum gap between two meetings | Not specified | Not more than 180 days gap between two consecutive meetings |
| Roles and responsibilities | The board of directors were to define the role and responsibility and delegate monitoring and reviewing of the risk management plan and such other functions, including cyber security. | As provided under Part D of Schedule II, that inter alia includes:
· Formulating of risk management policy; · Oversee implementation of the same; · Monitor and evaluate risks basis appropriate methodology, processes and systems. · Appointment, removal and terms of remuneration of CRO. |
| Power to seek Information | No such power. The same was only available with Audit Committee under Reg. 18 (2) (c). | RMC has powers to seek information from any employee, obtain outside legal or other professional advice and secure attendance of outsiders with relevant expertise, if it considers necessary. |
The roles and responsibilities of the RMC has now been specified in the Regulations itself, which were once left at the discretion of Board. The formulation of Risk Management Policy has also been delegated to the RMC, with particular contents of the policy being specified under the Schedule.
An important role of the RMC, among others, include review of the appointment, removal and terms of remuneration of Chief Risk Officer (CRO). The appointment of CRO is not a mandatory requirement under Listing Regulations. CRO is required to be appointed for all banking companies, and non-banking financial companies (NBFCs) having asset size of Rs. 50 billions or more, being registered as an Investment and Credit company, Infrastructure Finance Companies, Micro Finance Institutions, Factors, or Infrastructure Debt Funds. Further, the Insurance Regulatory and Development Authority of India (IRDAI) Corporate Governance Guidelines requires the insurance companies to appoint CRO.
The role of RMC further provides for co-ordination with other committees where the roles overlap. It is seen that the risk management function is also laid upon the Audit Committee. Therefore, the roles of both the committees might be overlapping. In view of the same, some companies choose to constitute one joint committee combining the roles of both Audit Committee and RMC. From the provisions providing for co-ordination of activities, it may also be taken as a clear indication that the committees cannot be merged into one, but co-ordinate where the activities require so.
While the Amendment Regulations are effective immediately, the changes cannot take place overnight. Therefore, it is advisable that the listed entities shall take the matter of constitution/ re-constitution of RMC in the ensuing Board Meeting. The modification of Risk Management Policy will be then taken up by the RMC and can be done within a reasonable period of time.
What should be this period? A probable answer to this should lie in the proviso to clause (a) of Reg. 15 that permits a timeline of six months from the applicability to comply with corporate governance requirements as stipulated under regulations 17 to 27, clauses (b) to (i) and (t) of sub-regulation (2) of regulation 46 and para C, D and E of Schedule V. However, that is applicable only in case of companies covered in Reg. 15 (2) (a). Therefore, the time available is till June 30, 2021 as thereafter, the companies will be required to confirm on RMC composition in the quarterly filings done under Reg. 27.
Earlier, proviso to Regulation 15(2)(b) provided a clear stipulation of overriding effect of specific statute in case of conflicting provisions. The Amendment Regulations provides for deletion of the said proviso effective from September 1, 2021. No rationale seems to have been provided in the agenda[1] put up before SEBI at the board meeting for this major amendment.
Regulators viz. RBI, IRDA, PFRDA at times have specific corporate governance related compliances that are stricter and at times conflicting with the requirements of Listing Regulations. For eg. With respect to composition of Audit Committee for a public sector bank, RBI Circular of September, 1995 provides for following composition in case of public sector banks: (a) Executive Director of the Bank (Wholetime director in case of SBI) (b) two official directors (i.e. nominees of Government and RBI) and (c) Two non-official, non-executive directors (at least one of them should be a Chartered Accountant). Directors from staff will not be included in ACB. This is certainly conflicting with the composition provided in Reg. 18 of Listing Regulations.
Subsequent to September 1, 2021 these entities will be regarded as non-compliant of the provisions of Listing Regulations and may be subject to penalty in terms of SEBI Circular dated January, 2020.
Regulation 31A of the LODR Regulations specifies the conditions and approvals post which the promoters can be re-classified into public shareholders. SEBI had proposed changes to the same in a consultation paper dated 23rd November, 2020. The consultation paper was critically analysed in our article. Amendments have been made on similar lines in Regulation 31A.
Certain amendments have been made to remove the gap between the provisions of LODR Regulations, with that of the Companies Act, 2013 as given below –
Regulation 46 of the LODR Regulations provides the mandatory contents to be placed on the website of a listed entity. Most of the disclosures were already existing under respective regulations viz. Reg 30, 43A etc. However, the same has been consolidated under regulation 46. This will now enable stock exchanges to levy penalty in terms of SEBI circular dated 22nd January, 2020.
The listed entity is required to disclose the schedule of analyst or institutional investor meet and the presentations made to them on its website under regulation 46 and on the website of the stock exchange under Schedule III. The Amendment Regulations have explained the term ‘meet’ to mean the group meetings and calls, whether digitally or by physical means. The Amendment Regulations will require the listed entity to upload the audio/ video recordings and the transcripts within the prescribed timeframe. The same is in line with SEBI’s Report on disclosures pertaining to analyst meets, investor meets and conference calls. However, the amendment does not cover disclosure of one-to-one investor/ analyst meet conducted with select investors recommended in the said Report.
Certain circulars of SEBI lay down various requirements to be complied with in relation to the LODR Regulations. The Amendment Regulations have consolidated the requirements under the principal LODR Regulations.
The Amendment Regulations are very crucial and significant in nature. While on one hand, certain provisions are aligned with the Companies Act, 2013, whereas on the other hand, overriding powers have been given to LODR Regulations which will require the listed entities formed under special statute to comply with the LODR Regulations in entirety. Uniformity in timelines and relaxation in certain disclosure requirements will encourage ease of doing business, and the coverage of certain provisions extended to listed entities based on market capitalisation will have a remarkable impact on the corporate governance of listed entities.
[1] https://www.sebi.gov.in/web/?file=https://www.sebi.gov.in/sebi_data/meetingfiles/apr-2021/1619067328922_1.pdf#page=18&zoom=page-width,-17,763
Our other materials on the relevant topic can be read here –
-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.
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 major features of a CIS may be visible from the definition. These are:
The definition may be compared with section 235 of the UK Financial Services and Markets Act, which provides as follows:
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—
One may notice that this definition as well has substantially the same features as the definition in the UK law.
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.
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.”
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, https://vinodkothari.com/blog/property-share-business-models-in-india/
[2] Nidhi Jain, Collective Investment Schemes for Real Estate Investments in India, at https://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,< https://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, < https://vinodkothari.com/blog/collective-investment-schemes-for-real-estate-investment-by-nidhi-jain/>
