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Takeaways from the SEBI Board Meeting - June 21, 2018

Finsec Law Advisors

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SEBI in its recent board meeting on June 21, 2018 has approved various reforms regarding IPOs, takeovers, and buy-back of securities. SEBI has also approved proposals of the Gandhi Committee on Market Infrastructure Institutions such as stock exchanges, clearing corporations, and depositories. Further, marking a shift in regulatory approach, SEBI has decided to issue a consultation paper to discuss a regulatory mechanism for unregistered entities which undertake third party fiduciary engagements under securities laws, such as chartered accountants, practicing company secretaries, cost accountants, valuers, monitoring agencies, etc. While the specific details of these changes are not available at the moment, the key takeaways from the board meeting are as follows:

Amendments to the Takeover Code

SEBI has now permitted the upward revision of offer price in a takeover or acquisition of listed companies until one working day before the commencement of the tendering period, which until now was 3 working days. This would be helpful as it would provide more time to an acquirer who wishes to readjust the open offer price for the open offer to be successful, and shareholders would get the benefit of an upward revision of price.

New SEBI (Buy-back of Securities) Regulations, 2018

The existing SEBI (Buyback of Securities) Regulations, 1998 would now be replaced by a new set of regulations. The new buy-back regulations intend to align and incorporate the requirements and restrictions relating to buy-backs under the Companies Act, 2013 (under Section 68 and 70) in order to consolidate all buy-back provisions in one place. In addition, the “buy-back period” has been defined as the period between board resolution / declaration of results for special resolution authorizing the buyback and the date on which payment of consideration is made to the shareholders.

New SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018

SEBI has also approved a new set of regulations which would replace the existing SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009. The new ICDR, 2018 will introduce the following key changes in primary market offerings of securities: (a) the requirement to announce the price band for an issue 5 working days before opening would now be reduced to 2 working days; (b) financial disclosure in case of public issues/ rights issues would have to be made for 3 years, as opposed to 5 years. Restated and audited financial disclosures will be required to be made on a consolidated basis only (with standalone financials to be disclosed on the website of the issuer company); (c) Any shortfall in the minimum promoters’ contribution (upto 10%) may now be met by institutional investors without being identified as “Promoters”; (d) the shareholding threshold for identifying “promoter group” is revised from 10% to 20%, among other changes to the meaning of promoter group. While this may reduce disclosure obligations for listed companies, it may also bring down the visibility of the corporate holding structure of a listed company for public shareholders; (e) the definition of “group companies” has been made more specific, and it shall include companies (other than promoter(s) and subsidiaries) with which there were related party transactions during the period for which financial information is disclosed; (f) insurance companies and foreign portfolio investors (except Cat III), promoted by entities related to the lead manager, have been permitted to participate in the Anchor Investor category, in addition to mutual funds promoted by lead managers; and (g) in a main board IPO, the 100% underwriting requirement would now be restricted to the minimum subscription level i.e. 90%. While these changes are geared towards making primary market offerings more efficient, the exact nature of their impact would be more evident once the regulations are published and brought in force.

Changes regarding Market Infrastructure Institutions (MII)

Based on the recommendations of the Gandhi Committee constituted by SEBI for the “Review of regulation and relevant circulars pertaining to MIIs”, SEBI has approved various committee proposals regarding Stock Exchanges, Clearing Corporations, and Depositories. SEBI has brought parity in the shareholding limits for all MIIs and therefore, all eligible domestic and foreign entities will now be permitted to hold up to 15% shareholding in an MII. The concept of “sponsor” (51% threshold) has been removed in case of depositories and existing sponsors have 5 years to reduce their respective shareholding to 15%. SEBI has emphasized the role and importance of Public Interest Directors (PIDs) in MIIs and sought to strike a balance between PIDs and shareholder directors on the board/committees of MIIs. Further, a risk-based approach for calculation of net-worth for clearing corporations has been approved. This is intended to be a dynamic way to capture the risks faced by a clearing corporation. However, the committee has shied away from making substantive reforms including removing the anti-competitive ownership caps and removing the net worth requirement. Networth is important for clearing corporations and totally irrelevant for stock exchanges, and retaining the same would restrict new innovative alternate exchanges from coming up.

Regulation of third-party fiduciaries in the securities market

In light of the critical role played, in the securities market, by various unregistered (with SEBI) entities such as chartered accountants, practicing company secretaries, cost accountants, valuers, monitoring agencies, etc., SEBI has also decided to explore options to expand and crystalize its regulatory reach over such unregistered entities. These unregistered entities often act in a fiduciary capacity by undertaking third party fiduciary duties from other registered entities to perform essential functions relating to the securities market. To ensure stricter oversight on such fiduciary duties/assignments/engagements performed by unregistered entities, SEBI has approved a proposal to issue a consultation paper to amend various regulations in respect of such entities which undertake fiduciary functions in relation to any issuers, pooled investment vehicles, registered intermediaries, and market infrastructure entities. While this may be necessary, there is an imminent risk that such regulation may be seen as regulatory overreach by other regulatory agencies which have jurisdiction over these unregistered entities/professions.