The Securities and Exchange Board of India (Sebi) on Wednesday approved key recommendations of the HR Khan Committee on rules for foreign portfolio investors (FPIs).
Easing the regulatory framework for foreign portfolio investors, Sebi on simplified KYC requirements for them and permitted them to carry out off-market transfer of securities.
The proposals were cleared by the Sebi's board during its meeting in Mumbai as part of efforts to simplify and expedite the registration process for foreign portfolio investors (FPIs).
Apart from doing away with the broad-based eligibility criteria for institutional FPIs, under the new framework, FPIs would be classified into two categories instead of three. "Documentation requirements for KYC have been simplified," Sebi said in a release after the board meeting.
FPI regulations have been redrafted based on the recommendation of a committee headed by former RBI deputy governor H R Khan.
The regulator has decided to amend its regulations for credit rating agencies to ensure that any listed or unlisted entity, before getting rated, gives an explicit consent to obtain from their lenders and other entities full details about their existing and future borrowings as also their repayment and delay or default of any nature and provide the same to the rating agencies.
The proposal, which the regulator said would enable rating agencies to get timely information on possible defaults, was approved by Sebi's board at its meeting here.
The move is aimed at helping the rating agencies better understand the rated entity's financial strength and incorporate the impact of these details in their ratings.
The provisions of the rating agreement between a rating agency and its client or issuer of securities are governed by the Sebi (Credit Rating Agencies) Regulations, framed in 1999.
With an aim to uncover insider trading cases, Sebi announced a new mechanism to reward informants with up to Rs 1 crore cash for any credible inside information through a specially created hotline and also proposed a possible amnesty or settlement for minor wrongdoings in return for cooperation in the probe.
Sebi's board approved a detailed set of rules for the new 'Informant Mechanism' under its Prohibition of Insider Trading (PIT) Regulations. However, these benefits would only be available to individuals and corporates, and professionals like auditors will not be able to use this route as they are duty-bound to report any wrongdoing.
The Sebi regulation seeks to curb insider trading to protect the interest of investors at large and defines 'insider trading' as trading of securities while in possession of unpublished price-sensitive information.
The insider trading is mainly carried out in a clandestine manner and the wrongdoers typically use proxies for communicating the relevant information and for executing the trades.
As any direct evidence of such communication is seldom available easily, the detection and prosecution of insider trading remain a challenge. Officials said it is imperative for Sebi to employ all legitimate means to detect insider trading and initiate action at the earliest to instil confidence among investors and ensure the integrity of the market.
Key aspects of revised Foreign Portfolio Investors Regulations
1. To simplify and expedite the registration process and to bring about ease in compliance requirements for FPIs, the broad-based eligibility criteria for institutional foreign investors has been done away with.
2. On reviewing the risk profiling of the FPIs, it is decided that the FPIs may be re-categorized into two categories - Category I and II, instead of the present requirement of three categories.
3. Registration for multiple investment manager (MIM) structures have been simplified.
4. Considering that the central banks are relatively long term, low-risk investors directly/ indirectly managed by the Government, the central banks that are not the members of BIS (Bank for International Settlement) shall also be eligible for FPI registration.
5. The entities established in the international financial services centre (IFSC) be deemed to have met the jurisdiction criteria for FPIs.
6. Documentation requirements for KYC have been simplified.
7. FPIs shall be permitted for off-market transfer of securities which are unlisted, suspended or illiquid, to a domestic or foreign investor.
8. Offshore funds floated by Indian Mutual Funds shall now be permitted to invest in India after obtaining registration as FPI. 9. The requirements for issuance and subscription of Offshore Derivative Instruments (ODIs) have been rationalised.
II. Norms for permitting companies listed on the Innovators Growth Platform with an option to trade under regular category
The Board approved the norms for migration of companies listed on the Innovators Growth Platform (IGP) to regular trade category of the main board. The key proposals approved by the Board are as follows:
1. The Company should have been listed on the Innovators Growth Platform for a minimum period of one year.
2. At the time of making the application for trading under the regular category of the main board, the number of shareholders should be minimum 200.
3. The company should have profitability/ net worth track record of 3 years or have 75% of its capital as on the date of application for migration held by Qualified Institutional Buyers in accordance with Regulation 6(1) and 6(2) of the ICDR Regulations for mainboard listings.
4. Minimum promoters contribution shall be 20% which shall be locked in for 3 years. Period of earlier lock-in of 6 months served at the time of listing on IGP shall be deducted from the stipulated lock-in requirement of 3 years.
III. Review of Buy-backs
The Board approved the following proposals regarding buy-back of securities:
1. SEBI shall continue with the current approach of allowing buybacks if post-buy-back debt to equity ratio is not more than 2:1 (except for companies for which higher debt to equity has been notified under the Companies Act, 2013) based on both standalone and consolidated basis.
2. Further, if post-buy-back debt to equity ratio is not more than 2:1 on a standalone basis and exceeding 2:1 on a consolidated basis, in such cases, buy-back would be permitted if:
i. Post buyback debt to equity ratio is not more than 2:1 on a consolidated basis after excluding the subsidiaries that are non-banking financial companies and housing finance companies and are regulated by RBI or National Housing Bank; and,
ii. All such excluded subsidiaries have a debt to equity ratio of not more than 6:1 on the standalone basis.
3. Further, the financial statements will continue to be considered on both standalone and consolidated basis for calculating the maximum permissible buy-back size and other related requirements relating to buy-back size.
Amendments to SEBI (Issue and Listing of Debt Securities by Municipalities) 2015
1. The definition of the issuer has been widened to include entities/bodies such as urban development authorities, city planning agencies, Pooled finance development funds etc. that perform functions, such as planning and execution of urban development projects/schemes, which are akin to those being performed by a municipality.
2. Considering the expansion of the definition of the issuer, the provision regarding the preparation of accounts has also been widened.
3. In order to enable municipalities/issuers, who are audited by CAG to submit their audited accounts to the stock exchange/debenture trustee/regulatory bodies, within the specified timelines and in line with the provisions applicable to listed public sector undertakings, it is proposed to adopt a two-step process for the audit of accounts. Further, the timelines for submission of annual and half-yearly financial results have been revised.
4. Different types of escrow accounts such as No Lien Escrow account. Interest Payment Account, Sinking fund account, etc. have been mandated for enhancing investor protection.
5. Deletion of certain requirements of multiple Intermediaries
i. The requirement of appointing a monitoring agency.
ii. The requirement of obtaining Viability certificate or Detailed Project Appraisal Report (DPAR) before the filing of offer document in case of public issue.
iii. Requirement of establishing a separate project implementation cell for monitoring of projects.
IV. Requirement of maintenance of 100% asset cover and specification of resources in whose favour charge can be created by the issuer.
V. Requirement of the backing of State or Central Government.
6. Other Changes
i. Requirement for in-principle approval of stock exchange has been mandated also for issuance of debt securities on private placement basis which are proposed to be listed.
ii. The requirement for the trading lot has been removed. The limit of two hundred persons to offer debt securities through private placement basis has been mandated per financial year.
Amendment to Sebi (Credit Rating Agencies) Regulations, 1999
In order to enable CRAs to have timely information on the default of an entity, Sebi (CRA) regulations were amended to incorporate an enabling provision in the rating agreement between the CRA and issuer/client, providing explicit consent to the CRA to obtain details of the existing and/or future borrowing of the issuer, its repayment and any delay or default in servicing of such borrowing, either from the lender or any other statutory/non-statutory organisation marinating any such information.
Amendments to Sebi (Mutual Funds) Regulations, 1996
The board decided to give flexibility to mutual funds to invest in unlisted non-convertible debentures (NCDs) up to a maximum of 10% of the debt portfolio of the scheme subject to such investments in unlisted NCDs having simple structures as may be notified from time to time, being rated, secured and with monthly coupons. This shall be implemented in a phased manner by June 2020.
(With inputs from PTI)