Contra trade restrictions on promoter group
Link to Informal Guidance by SEBI – https://www.sebi.gov.in/sebi_data/commondocs/sep-2020/SEBI%20let%20Raghav%20IG_p.pdf
Posts
SEBI automates continual disclosures under PIT and SAST regulations
Physical disclosures to continue in certain cases
Updated as on September 23, 2020, June 16, 2021, August 25, 2021 and March 07, 2022
– Team Vinod Kothari and Company
Introduction & Background
SEBI, in its Board meeting dated June 25, 2020, discussed and approved necessary amendments[1] in SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘PIT Regulations’) that were notified vide gazette notification[2] dated July 17, 2020. One of the amendments made pertained to insertion of enabling power to prescribe format for continual disclosures under PIT Regulations in order to mandate System Driven Disclosures (‘SDD’).
Earlier, in December 2015[3], SEBI had notified SDD in the first phase pertaining to acquisition/ disposal of equity shares by promoters/ promoter group based on specified thresholds under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (‘SAST Regulations’) and PIT Regulations and pledge of equity shares by promoters/promoter group under the SAST Regulations. Thereafter, in May 2018[4] next phase of SDD was implemented for disclosure under Reg. 29(1) and 29(2) of SAST Regulations by non-promoters and continual disclosures under Reg. 7(2) of PIT Regulations for directors and employees. Refer Figure 1: Flow of events in relation to SDD.
Thereafter, SEBI vide circular[5] dated September 09, 2020, superseded the aforesaid circulars dated December 01, 2015, December 21, 2016 and May 28, 2018 with respect to implementation of SDDs under PIT Regulations and mandated SDD for trading in equity shares and equity derivative instruments i.e. Futures and Options of the listed company (wherever applicable) by the entities. Read more →
SEBI Settlement Scheme 2020
SEBI during FY 2018-19 conducted an investigation into the trading activities in illiquid stock options at BSE for a period of 1st April, 2014 to 30th September, 2015. As a result of the investigation, SEBI observed that there were large scale reversal trades executed in stock options by various entities.
Reversal trades refers to trading i.e. buying and selling of stocks from and to the same counterparty during a day which creates artificial trade units of stocks in the question. In such trades one party suffer losses and buy stock at higher rate and within seconds execute reversal trade and sell these stocks to the same counter party at a relatively lower rate thereby resulting to gains for other party. Supreme Court in the appeal no. 1969 dated 8th February, 2018 quoted:
“Trading is always with the aim to make profits. But if one party consistently makes loss and that too in pre-planned and rapid reverse trades, it is not genuine, it is an unfair trade practice.”
Such kind of transactions executed by entities were considered non-genuine by SEBI as they were not executed with the basic trading rationale. These transactions were prohibited pursuant to the provisions of section 4(2) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (‘PFUTP Regulations’) which provides:
“(2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely: —
(a) indulging in an act which creates false or misleading appearance of trading in the securities market;”
Pursuant to such restriction under the PFUTP Regulations, SEBI issued show cause notices to various entities (approximately 14000 entities) demanding justification for executing reversal trades at a loss. Entities who were involved in executing such trades were liable for penalty under section 15J of the SEBI Act. Generally, SEBI has levied a fine of approximately Rs. 5 lakhs on entities i.e. the minimum under section 15J of SEBI Act, however, the parameter of determination of fine was subjective and hence even higher fine has been levied to some entities.
Rationale behind the scheme
SEBI was penalising entities for non-genuinely trading in illiquid stock options through price manipulation under the PFUTP Regulations and SEBI Act. However, tax evasion with respect to such trading activities were to be separately investigated and penalised by IT Authorities. Hence, most entities were contesting the SEBI order with higher authorities to avoid notice/regulatory action from the IT Authorities.
The Hon’ble SAT vide its order dated 14th October, 2019 in the matter of R S Ispat Ltd vs SEBI directed:
“We are adjourning this matter today, so that SEBI may consider holding a Lok Adalat or adopting other alternative dispute resolution process with regard to the illiquid stock options”
Hence, to settle the proceedings initiated for such entities, SEBI introduced a scheme to settle the matter.
Scheme
Regulation 26 of SEBI (Settlement Proceedings) Regulations, 2018, empowers SEBI to specify settlement schemes as and when desirable for defaults conducted by entities. SEBI for the purpose of reducing the administrative burden of pending proceedings relating to trading in illiquid stock options, issued a public notice on 27th July, 2020 for introduction of Settlement Scheme, 2020.
Pursuant to the scheme a one-time settlement opportunity is being provided to entities involved in dealing of illiquid stock options during the period from 1st April, 2014 to 30th September, 2015. The validity of the scheme is for a period ranging from 1st August, 2020 to 31st October, 2020.
Settlement mechanism
The scheme provides an indicative criteria for determining the settlement amount on the basis of:
- Artificial volume created
- Number of non-genuine trades
- Numbers of contracts resulting in creation of artificial trades
Further, uniform consolidated settlement factor of 0.55 shall be applied to calculate the net settlement amount payable by entities. For the purpose of determination, SEBI has introduced a separate web page where settlement amount for the purpose of such orders can be calculated. This can be accessed at Link
| Process of determination of settlement amount | ||
| 1. | Company has to provide two information:
a) Category of payment i.e. for order or settlement b) PAN details of the entity |
|
| 2. | The following details gets auto filed by providing PAN details: | |
| i) Name of the entity | ||
| ii) Entity type | ||
| iii) Number of contracts reversed | ||
| iv) Number of non-genuine trades | ||
| v) Artificial volume of trades | ||
| 3. | The settlement amount gets automatically calculated. The payment amount is segregated as follows: | |
| a) Settlement amount (as calculated using the 0.55 factor) | b) Registration fees
For bodies corporate: Rs. 25,000 For individuals: Rs. 15,000 |
|
| 5. | Mandatory attachments:
1. Income tax returns for last 3 years 2. Copy of PAN card of the entity/individual 3. Undertaking and waivers as required under the SEBI (Settlement Proceedings) Regulations, 2018 |
|
| 5. | Payment process:
For the purpose of making payment under the settlement scheme, the entity has to withdraw any pending proceeding in the said matter. After withdrawal, entities can use this web page for payment of settlement amount. |
|
The settlement amount is directly proportionate to the artificial volume of trades executed by the entities. We have obtained data of 15 entities on sample basis for analysis of settlement amount. The same is represented below:
| Sl.No. | No. of contracts reversed | No. of non-genuine trades executed
|
Artificial volume of trades | Settlement amount |
| 1. | 107 | 970 | 7,97,21,572 | 39,77,500 |
| 2. | 85 | 750 | 2,76,68,000 | 35,12,500 |
| 3. | 21 | 396 | 2,00,25,000 | 25,72,500 |
| 4. | 83 | 492 | 2,75,50,000 | 33,57,500 |
| 5. | 210 | 512 | 1,21,77,000 | 39,77,500 |
| 6. | 165 | 612 | 2,55,25,750 | 39,77,500 |
| 7. | 1672 | 4968 | 30,70,27,560 | 83,17,500 |
| 8. | 191 | 526 | 2,91,34,000 | 39,77,500 |
| 9. | 12 | 92 | 2,79,61,000 | 21,17,500 |
| 10. | 252 | 666 | 7,17,69,750 | 42,87,500 |
| 11. | 14 | 83 | 1,22,92,500 | 19,62,500 |
| 12. | 682 | 1646 | 7,16,45,000 | 50,62,500 |
| 13. | 9 | 194 | 81,29,000 | 21,07,500 |
| 14. | 14 | 116 | 1,25,98,000 | 21,07,500 |
| 15. | 61 | 332 | 3,37,92,000 | 30,47,500 |
Hence, basis the aforesaid table, we understand that higher the artificial trades executed, the higher will be the settlement amount. However, the point of focus here is where SEBI has levied fine of approximately Rs. 5 lakhs on entities, why will entities pay a higher settlement amount then the actual fine. Further, the whole intent of settling a proceeding is to settle it at a lower cost than actual fine. Here, the fine ranges around Rs. 5 lakhs, however, the settlement amount ranges from Rs. 20 lakhs and may go upto Rs, 83 lakhs or even higher.
Process of availing the settlement scheme
Whether settlement proceedings shall avoid scrutiny of IT department?
As regards penal provisions under IT provisions are concerned, the details of trading in illiquid stock options is linked to the PAN details of the entity. Further, the portal also requires to attach the ITR of last three years of the entity.
In this regard, whether the intent of the settlement proceeding is also to channelize information and link the proceedings with IT department, is still unknown. Further, the fate of intention of entities to delay/waive the IT proceedings by either challenging the SEBI order in higher court or settling the proceedings shall be seen only when IT departments start sending letters to such entities.
Generally, settlement refers to neither admitting nor denying any non-compliance. Therefore, entities opting for settlement scheme may have a better chance before the IT department. However, whether this can also safeguard entities them from being penalised by the IT authorities is uncertain.
Conclusion
The entities who opt for settlement scheme has to pay the settlement amount through the portal after withdrawing any pending proceedings. As regards, entities which do not opt for such schemes, the proceedings, as is, shall continue.
Our presentation can be viewed here: https://www.youtube.com/watch?v=CK6QOm4k8Rw
SEBI clarifies trading in unrestricted securities and confidential nature of restricted list
Link to Informal Guidance – https://www.sebi.gov.in/sebi_data/commondocs/aug-2020/IG%20Let%20by%20SEBI%20KP_p.PDF
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:
https://vinodkothari.com/2017/09/sebis-yet-another-move-to-ensure-minimum-public-shareholding/
https://vinodkothari.com/2018/02/sebi-qualifies-qip-for-achieving-mps/
Read our other articles on Corplaw : https://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.
Amendments in SEBI (PIT) Regulations, 2015: From April, 2019 to July, 2020
Watch our Youtube video for the subject: https://www.youtube.com/watch?v=Ly3KaQblJBE