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IFSC: Liquidity Enhancement Schemes and Debt Securities

Finsec Law Advisors

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SEBI has issued new circulars relating to the International Financial Services Center (IFSC) in their endeavor to attract more companies to list and to attract greater liquidity.

Liquidity Enhancement Schemes

The Liquidity Enhancement Scheme (“LES”) was originally instituted to provide brokers and other intermediaries with incentives for a specified period of time to bring liquidity in pre-recognized illiquid securities. These incentives have to be transparent and measurable, and can be in the form of discount in fees, adjustment of fees in other segments, cash payments, or shares, including options and warrants, of the stock exchange. SEBI, through its circular dated April 23, 2014, had revised the LES in regard to the equity cash and equity derivatives segments. Pursuant to this, the incentives offered cannot exceed 25% of the net profits or free reserves, whichever is higher, of the stock exchange. Further, the shares given as incentives in a financial year cannot exceed 25% of the total issued and outstanding shares of the stock exchange.

Recognizing the need for LES and understanding the inability of nascent IFSC exchanges to attain sufficient net profits/ free reserves, SEBI has recently issued a circular exempting them from complying with the abovementioned clauses. Based on a normative study of LES, the exchanges have to create a reserve to meet LES incentives/expenses and submit a proposal for approval. Such reserve is excluded from net worth calculation.

[UPDATE: It has been clarified vide a circular that the exemption shall be applicable to all products traded in the IFSC.]

Debt Securities in IFSC

SEBI has recently issued a circular further amending the provisions governing issue and listing of debt securities in the IFSC. Stock exchanges are now required to evolve a detailed framework prescribing eligibility criteria and issue requirements for issuers of debt securities in IFSC. This shall be submitted to SEBI for approval. Further, in addition to the requirement of mandatory listing of debt securities issued in the IFSC, securities issued outside the IFSC are now permitted to list on stock exchanges in the IFSC. However, such issuers must be residents in Financial Action Task Force (FATF) member jurisdictions. Stock exchanges are required to evolve listing requirements to be complied by issuers, including provisions pertaining to corporate governance.

Further, SEBI has now permitted over the counter trading of debt securities in IFSC subject to clearing and settlement through clearing corporations in IFSC. These OTC trades have to be reported to the exchanges within 15 minutes. Lastly, it has been clarified that a ‘Person Resident in India’ shall not invest or trade in debt securities issued or listed in IFSC by Indian entities. They can invest in Rupee denominated bonds issued or listed in IFSC, to the extent permitted by RBI.

These circulars are welcome steps by SEBI which increase liquidity and give issuers more clarity while listing securities in the IFSC.