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SEBI Board Meeting: January 2016

Finsec Law Advisors

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SEBI in its board meeting dated January 11, 2016 decided on the following key issues:

Prudential limits on debt investments by Mutual Funds: All fresh investments by a new or existing mutual fund schemes will have to comply with stricter investment restrictions in relation to debt securities. In order to better equip mutual funds to handle adverse credit events and provide enhanced diversification benefits to mutual fund investors, SEBI has reduced debt exposure limits for mutual funds at the issuer, sector and group levels. The maximum exposure of a debt scheme to the debt securities of a single company has been brought down from 15% to 10% of the corpus. Sector exposure has been brought down from 30% to 25%.

Exposure to Housing Finance Companies has been brought down from 10% to 5%. These changes appear to have been prompted by recent payment defaults on debentures. Although some consider diversification as a half measure towards mitigating risk, the move may bring additional comfort to investors.

Debt E-Book: SEBI had recently mooted the idea of having an electronic book for better price discovery in primary market issuances of debt, which, until now, have primarily been negotiated over-the-counter private placement deals. In furtherance thereof, the board of SEBI has approved the said proposal and has proposed to make it mandatory for private placement of bonds above Rs. 500 crore to use the electronic book. Given that the debt market primarily comprises sophisticated investors who havefunctioned efficiently through flexible negotiated issuances, the purported improvements in efficiency and transparency through the electronic book will have to be tested with time.

Exit opportunity to dissenting shareholders: Variations in objects of an issue after raising of capital is usually looked at with suspecting eyes. Sections 13 and 27 of the Companies Act, 2013 require a company, which has raised money from public through prospectus, to secure a special resolution for changing the objects of the issue or varying the terms of a contract referred to in the prospectus. Further, dissenting shareholders have to be provided an exit opportunity by the promoters and shareholders having control over the company. Towards this, SEBI seeks to amend the SEBI (ICDR) Regulations, 2009 to provide for a framework for operationalising the exit mechanism for dissenting shareholders. In brief, dissenting shareholders would get an exit opportunity if a proposal is dissented by at least 10% of the shareholders and if the amount to be utilized for the objects for which the prospectus was issued is less than 75% of the amount raised. On the face of it, this does not sound problematic. However, such overprotective arrangements hinder the flexibility needed by a company to efficiently use its resources in turbulent economic conditions, and must be avoided.