On December 16, 2020, the SEBI board had approved certain key amendments to the existing securities laws, some of which are discussed below:
Revised Framework for Mutual Funds
In a bid to expand the outreach of mutual fund schemes to investors and increase operational efficiency, the SEBI board has decided to permit sponsors who do not fulfil the profitability criteria to set up a mutual fund provided such sponsor has a net worth of Rs. 100 crore and continue to meet such net worth requirement till it records five years of continuous profitability. Under the existing framework, applicant sponsors are required to demonstrate profitability for a minimum of three out of the immediately preceding five years, including the fifth year, to obtain a registration for mutual fund, which made it difficult for fin-tech start-up companies to enter the mutual fund industry. This move will facilitate entry of more players in an already concentrated industry.
Further, mutual funds will be required to segregate and ring-fence the assets and liabilities of each scheme, apart from the existing requirement for scheme-wise segregation of bank and securities’ accounts. This will prevent mutual funds from using money collected from investors to pay their liabilities and adjust the same as losses. Apart from this, the SEBI board also approved certain other changes with a view to remove redundancies and address operational difficulties such as, streamlining the manner of computation of net worth which will be required to be maintained on a continuous basis, dispensing with the requirement to issue physical unit certificates, reduction in the existing maximum permissible exit load of 7%, reduction in the timeline for payment of dividend, etc. The detailed amendments are yet to be notified by SEBI.
MPS norms for Companies undergoing CIRP process
In its August 19, 2020 consultation paper, SEBI had proposed three options for achieving minimum public shareholding (MPS) of 25% for companies undergoing corporate insolvency resolution process (CIRP) that wish to re-list their securities post CIRP. Pursuant to receipt of public comments, the SEBI board has decided that companies undergoing CIRP that intend to remain listed will be required to have at least 5% of public shareholding at the time of re-listing and thereafter, achieve 10% MPS within 12 months and 25% MPS within 3 years of listing. This move will address concerns of volatility associated with a low public shareholding and ensure fair discovery of price, as observed in the case of Ruchi Soya Industries Limited, wherein its share price had surged by 8,929% within 5 months of relisting following acquisition by Patanjali Ayurved Limited, owing to a low public shareholding of 0.97%.
Further, SEBI has decided to dispense with the requirement of lock-in of promoters’ shareholding to enable them to contribute towards achieving the MPS of 10% within 12 months. Additionally, companies intending to re-list their securities post CIRP will be required to disclose information such as specific details of the resolution plan including assets post-CIRP, liabilities on companies’ assets, etc., and the steps to be taken by the incoming investor/acquirer to achieve MPS.
Relaxed norms for Promoters related to Further Public Offers Presently, promoters are required to contribute at least 20% towards a further public offer (FPO) and the said contribution is locked-in for a period of three years. SEBI has decided to dispense with the above requirements of minimum promoters’ contribution and subsequent lock-in requirements for issuers while making an FPO, subject to certain conditions such as: the equity shares of the issuer have been frequently traded on a stock exchange for a period of at least three years, at least 95% of the investor complaints have been redressed and the issuer has been in compliance with the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 for at least three years.Administration and Supervision of Investment AdvisersWith a view to strengthen the regulatory framework for IAs, the SEBI board has decided that persons seeking to register as investment advisers (IAs) will be required to seek membership of a body recognized by SEBI, as one of the conditions for registration. The Investment Adviser Administration and Supervisory Body (IAASB) will be responsible for administration and supervision of the IAs including redressal of grievances of clients and IAs, referral for enforcement action to SEBI, monitoring of the activities of IAs, etc. Further, SEBI has also approved a proposal for reduction in the total fees payable by IAs to SEBI, with a view to accommodate an administrative fee payable by IAs to the IAASB, so that the total cost borne by the IAs towards fees remains the same.Exemptions to Alternative Investment FundsIn October 2020, SEBI had introduced key amendments to the SEBI (Alternative Investment Fund) Regulations, 2012 (AIF Regulations) which inter alia provided for the constitution of an investment committee by the manager of an alternative investment fund (AIF). Further, the newly inserted Regulation 20(6) required that the investment committee members shall be equally responsible for the investment decisions of the AIF as the AIF manager, and that the AIF manager and the investment committee members will jointly and severally ensure that the investments of the AIF comply with the AIF Regulations, terms of the placement memorandum, any agreement with investor, etc.Pursuant to representations from several AIF industry participants seeking for dilution of the obligations of the investment committee members under Regulation 20(6), SEBI has decided to provide an exemption to the requirements under Regulation 20(6) for AIFs in which every investor has a capital commitment of at least INR 70 crore, and also provides an appropriate waiver to the AIF with regards to the applicability of clauses (i) and (ii) of Regulation 20(6).