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Key Outcomes of SEBI Board Meeting dated November 25, 2023

Finsec Law Advisors

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The Securities and Exchange Board of India (SEBI), in its recent board meeting held on November 25, 2023, approved key proposals aimed at enhancing the regulatory framework and promoting financial transparency. The changes approved by SEBI are summarized below:

I. Flexibility in the framework for Social Stock Exchange (SSE)

SEBI has approved the framework for SSE, thereby, introducing greater flexibility to foster fundraising by Not-for-Profit Organizations (NPOs). Among the approved changes are significant reductions in the minimum issue size for public issuance of Zero Coupon Zero Principal Instruments (ZCZP) by NPOs on SSE, from Rs.1 Crore to Rs. 50 lakhs. The minimum application size for such issuances has also been reduced from Rs. 2 lakhs to Rs. 10,000, facilitating broader participation, especially by retail investors.

The change in terminology from "Social Auditor" to "Social Impact Assessor" is expected to provide added assurance to NPOs by reflecting a positive stance towards the social sector. Notably, NPOs are now permitted to disclose their past social impact reports in fundraising documents, subject to the disclosure of key parameters such as the number of beneficiaries, cost per beneficiary, and administrative overhead. Lastly, more entities will be made eligible for registration and fundraising through the issuance and listing of ZCZP on SSE. The new framework is likely to facilitate NPOs to partake in fundraising and promote the overall well-being of the market infrastructure surrounding NPOs.

II. Introduction of Regulatory Framework for Index Providers

SEBI has also approved a regulatory framework for Index Providers. The approved framework, designed to align with the International Organization of Securities Commissions Principles for Financial Benchmarks, focuses on enhancing transparency and accountability in the governance and administration of financial benchmarks within the securities market. This framework is applicable exclusively to 'Significant Indices', which will be determined by SEBI based on objective criteria.

The need to regulate index providers arose as an outcome of the multiple uses of indices such as for benchmarking or issue of passive investment products, and the concerns associated with extensive reliance on such indices. Through the approved framework, SEBI seeks to minimize the risk of possible price manipulation in relation to stocks constituting an index and mitigate any conflict of interest, especially ones that may arise out of the discretion to change the methodology through which a stock is selected/omitted from an index.

III. Facilitation of Small & Medium REITs

SEBI has approved amendments to the SEBI (Real Estate Investment Trusts) Regulations, 2014, specifically targeting the regulatory framework for the facilitation of Small & Medium Real Estate Investment Trusts (SM REITs), with an asset value of at least Rs. 50 crores vis-à-vis the minimum asset value of Rs. 500 crores for existing REITs. This is expected to facilitate SM REITs to create separate schemes for owning real estate assets through special purpose vehicles constituted as companies. The regulatory framework approved by SEBI for SM REITs inter alia provides for the structure of SM REITs, migration of existing structure meeting certain specified criteria, experience and minimum unitholding requirement, investment conditions, valuation of assets, etc.

The introduction of SM REITs opens up new avenues of investment in real estate by smaller investors, thus, enabling wider participation across the industry. Given the global economic scenario, investors have been seeking alternatives to the equity markets. By regulating fractional ownership of commercial real estate, SEBI is providing viable alternative investment avenues to retail investors.

IV. Ease of compliance and investor interest protection in AIFs

SEBI has also introduced amendments to the SEBI (Alternative Investment Funds) Regulations, 2012, focusing on easing compliance and strengthening investor protection. Accordingly, any fresh investment made by an AIF, beyond September 2024, must be held in dematerialized form. Existing investments by AIFs are exempt from this requirement, except where the investee company is mandated under applicable law to facilitate the dematerialization of its securities and where the AIF, on its own, or along with other SEBI-registered intermediaries which are mandated to hold their investment in dematerialised form, has control in the investee company. Further, liquidation schemes of AIFs, AIF schemes whose tenure ends within a year from the date of issuance of the concerned notification, and AIF schemes which are in extended tenure as on the date of the issuance of the notification have also been exempted from this requirement.

The requirement for the appointment of a custodian, previously applicable only to Category III AIFs and Category I and II AIFs with a corpus exceeding Rs. 500 crores, has now been extended to all AIFs. AIFs may appoint a custodian associated with the manager or sponsor, subject to conditions similar to those under the SEBI (Mutual Funds) Regulations, 1996. SEBI has acknowledged that the average cost of compliance for schemes coming under the said mandate is approximately Rs. 88,000 per annum, based on a sample data analysis. Thus, SEBI seems to be pre-emptively rebutting any claims of these compliances being burdensome upon AIFs in terms of cost.

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