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Key outcomes of SEBI's board meeting dated September 29, 2020

Finsec Law Advisors

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On September 29, the SEBI board approved certain major amendments to the existing securities laws. Some of these are discussed below:

Enhanced obligations of Debenture Trustees

According to the SEBI (Debenture Trustees) (Amendment) Regulations, 2020, debenture trustees are required to exercise independent due diligence in relation to the assets on which the charge is created. The debenture trustees shall also monitor the asset cover on a quarterly basis and the certificate from the statutory auditor with regard to the value of the receivables or book debts, shall now be obtained on a half-yearly basis, as opposed to an annual certificate as per the earlier mandate.

SEBI has, time and again, emphasized the role of debenture trustees as fiduciaries acting in the interest of debenture holders and the above amendments appear to be an attempt to revamp the role of debenture trustees, especially in light of the recent events surrounding DHFL and Franklin Templeton Mutual Fund, wherein the respective debenture trustees had received flak for failure to discharge their obligations.

Further, SEBI has mandated the creation of a ‘recovery expense fund’ by issuers at the time of making an application for listing of its debt securities, in order to ensure that debenture trustees can take prompt action for enforcement of the securities in the event of a default.

Exemption from reverse book building process for delisting of listed subsidiaries

With a view to ease delisting norms for listed entities undergoing restructuring, the SEBI Board has decided to grant an exemption from the reverse book building process in case of delisting of listed subsidiaries, if such subsidiary becomes a wholly owned subsidiary of the listed parent entity pursuant to a scheme of arrangement. Some of the pre-conditions to be fulfilled for availing such exemption are: 1) listed subsidiary and the holding company should be in the same line of business, 2) the votes cast by public shareholders of the listed subsidiary in favour of the delisting proposal should be at least twice the number of votes cast against it, and 3) the shares of both the subsidiary and the parent entity should have been listed for a minimum period of three years and the subsidiary should have been a subsidiary of the parent entity for at least three years preceding the voluntary delisting.

The above exemption will not only significantly reduce costs involved in such mergers, but the pre-conditions shall also ensure that the interests of minority investors of the listed subsidiary are protected.

Revised Norms for Mutual Funds

The SEBI board has decided to introduce a code of conduct for mutual fund managers, chief investment officers and dealers. The existing framework for mutual fund prescribes a code of conduct for the asset management company (AMC) and the mutual fund trustee only. In light of recent events such as lack of adequate risk management mechanisms, investment in illiquid securities, etc., a need was felt to increase accountability on part of designated persons in charge of investing client’s funds and make investments in mutual funds more reliable.

According to SEBI, the chief executive officer of the AMC shall ensure that the above persons comply with the proposed code of conduct. The provisions of the proposed code of conduct are yet to be notified by SEBI.

Additionally, SEBI has also decided to allow AMCs to become self-clearing members of clearing corporations for clearing and settlement of trades in the debt segment of stock exchanges, on behalf its mutual fund schemes. As orders are presently placed by mutual fund as a client through a stock broker and thereafter through a clearing member, the above change would reduce costs for mutual funds, which in turn would be beneficial for investors.

Disclosure of information pertaining to forensic audit of listed entities

Listed entities are now required to disclose information related to forensic audits to stock exchanges and provide details such as, initiation of audit, reasons for such initiation, etc., irrespective of whether such information is material. Listed entities shall also submit the final report, along with comments from the management, to the stock exchanges. While the above requirement of disclosure will address the information asymmetry in the market with regard to potential lapses in listed entities, which are otherwise not disclosed to investors under the garb of confidentiality, it may also discourage firms from undertaking such audits in future.

Limitation Period for Reporting Insider Trading Violations

Under the SEBI (Prohibition of Insider Trading) Regulations, 2015, no limitation period is prescribed for reporting of insider trading violations by whistleblowers under the informant mechanism. Therefore, the SEBI board has proposed that such violations can be reported for a period up to three years from the date of the violations. This will not only reduce the possibilities of frivolous complaints, but also allow SEBI to successfully undertake insider trading investigations, which otherwise becomes difficult in case the violations are committed years ago. Also, the informant will be required to provide specific information regarding the violation such as details of securities, trade details and details of the unpublished price sensitive information, etc.