SEBI

SEBI’s Take on Rumour Verification: Micromanagement or a Welcome Move?

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[By Dharani Maddula & Anoushka Das] The authors are students of Symbiosis Law School, Pune.   Introduction On 28 December 2023, the Securities and Exchange Board of India (“SEBI”) published a new Consultation Paper on Amendments to SEBI Regulations with respect to Verification of Market Rumours (“Consultation Paper”). The paper seeks to use material price movement instead of material event as defined under Regulation 30 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations 2015 (“(LODR) Regulations”) attributable to a rumour to determine when a rumour verification is necessary. The paper also aims to give more clarity on the determination of price change to be considered on stocks, bonds and valuation in buybacks while allowing for relaxation on the 24 hour timeline on the rumour verification. This consultation paper was published after taking into consideration various observations and suggestions put forth by the Industry Standard Forum (“ISF”) composed of representatives from industry bodies such as FICCI, ASSOCHAM, and CII. The need for such a framework can be traced back to the recent case of Reliance Industries Limited v. SEBI dealing with the JIO-Facebook deal where market rumours fuelled price variation.  Proposed Changes   Through this paper, SEBI seeks to suggest the criteria of material price movement based on the price range of securities for determining the need for rumour verification. In order to ascertain a material price change, the price range of such a share needs to be taken into consideration. While accounting for shares falling within the higher price change, any small change in the price will be considered material in terms of absolute price, while a higher price change will be considered material for cheaper shares. The changes in benchmark indices will be a determining factor while accounting for market dynamics influencing such a price change.  It notes that for shares falling under the high price range, a low percentage move would be considered as a material price change, and for shares falling in the lower price range, a higher percentage move in price would be considered as a material price change in order to determine the difference of prices in absolute terms in both price ranges. This shall also be determined by taking into account movement in the benchmark indices such as NIFTY50 and Sensex to factor in market dynamics.   The consultation paper suggests two frameworks for the determination of material price movement. “Framework A” entails considering the price from the day before the company confirmed the rumour while ignoring subsequent market changes to determine the transaction price. On the other hand “Framework B” entails  excluding the price variation in price due to the rumour and its subsequent confirmation from the Volume Weighted Average Price calculation and adjusting the same according to the daily prices. Irrespective of the Framework chosen, SEBI clearly intends to allow for fairness in price determination while acknowledging potential drawbacks in both the frameworks in its consultation paper.    The consultation paper also suggests a minor amendment to the proviso to Regulation 30(11) of the (LODR) Regulations which requires listed entities to verify, deny or clarify any rumours within 24 hours of its report in any mainstream media. This timeline is now suggested to be changed to within 24 hours from the material price movement. This is said to be implemented from 1st February 2024 for the top 100 listed companies and from 1st August 2024 for the top 250 listed companies.   The unaffected price as proposed by the ISF will be applicable from 60 days admeasuring from the date of confirmation of the rumour till the date of public announcement by the company or any other relevant disclosure such as a board approval by the company. In cases of competitive bidding for a potential M&A deal without an unidentified buyer, the applicable time period for unaffected price shall be 180 days from the date of confirmation of the rumour to the relevant date under the applicable regulations.   The rationale behind these implementations on the basis of material price movement is to provide an effective mechanism to combat false market sentiment and nullify any impact of the securities of such listed entities. The metric of material price movement helps in narrowing the pool of rumours of potential rumours that can cause an upheaval in the market. The consultation paper in order to reinforce this sentiment by casting an obligation upon the Key Managerial Personnel (“KMP”) to provide accurate and timely response as required under Regulation 30(11) of the (LODR) Regulations. The consultation paper also imposes a restriction upon the listed companies to not hide under the garb of UPSI when the same news report may be used by an insider as a defence. This initiative aims to establish and uphold industry standards for a more efficient business environment.  Hurdles in practical implication and impact on the market   Regulation 30(11) of the (LODR) Regulations acts as a  general provision for listed entities to verify any market rumour. The consultation paper strengthens this obligation by imposing the same on all top 250 listed companies by 1st August 20024 which ensures that such listed entities give heed to rumours being spread through mainstream media. This is an interesting move as most companies choose not to comment on any such rumours due to internal policies.  SEBI substantiated its resolution for combating misinformation by relying on similar mechanisms under Section-202.03 of the New York Stock Exchange (NYSE) Company Manual on “Dealing with Rumours or Unusual Market Activity” where companies are supposed to confirm, clarify or deny such rumours with appropriate public statements. After comparing the two statutes, it should be noted that there are a few deviations in SEBI’s methodology pertaining to such rumours. SEBI in the paper relies on Regulation 30(11) for the definition of a rumour which mentions that a rumour triggering this provision should not be general but specific in nature and deal with an impending material event. The yardstick on what will be considered “specific” is not spelt in the paper or any

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Navigating SEBI’s Directive on MITC: Simplifying Broker-Client Relationships

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[By Subhasish Pamegam & Hrishikesh Goswami] The authors are students of Gujarat National Law University.   Introduction  While advertisements regularly encourage retail investors to ‘read all investment related documents carefully’ prior to investments in the securities markets, reading through voluminous documents and making sense of the complex legalities discussed in them is nearly impossible for an uninitiated individual. Wouldn’t it be simpler if there were a set of terms and conditions that were declared as the most important ones? Keeping these concerns in mind, the Securities Exchange Board of India (SEBI), through its November 13, 2023 circular, declared that the Most Important Terms and Conditions (MITC) shall be notified by competent authorities in order to simplify the following documents which were declared to be crucial in formalizing the broker-client relationship-  i. Account opening form ii. Rights and obligations iii. Risk disclosure documents   iv. Guidance note v. Policies and procedures vi. Tariff sheet This circular revises the Master Circular for Stock Brokers and marks a pivotal shift in the broker-client relationship within the Indian securities market. This also represents the initiation of a concerted effort to streamline and enhance transparency in the often complex and voluminous documentation governing these relationships to make sure clients understand the important terms and conditions associated with the investments they make. Additionally, SEBI has set strict timelines for brokers to intimate both new and existing clients about the MITC guidelines. This was done after considering the readiness of the market participants with the an intention to allow a smooth transition to the new regime. The authors in the present article attempt to analyze the dynamics of broker-client relationships and the implications of MITC on these relationships. This article also examines SEBI’s role in protecting investor’s interests and MITC’s conformity with this function.  Additionally, this paper aims to explore the potential challenges that might arise out of this circular and suggest appropriate measures to mitigate them.    Broker-Client Relationship A broker is legally defined as a ‘member of the stock exchange’ who is duly certified by SEBI. However, for a layman, a stock-broker is a person who acts as an intermediary and assists retail investors in buying and selling securities from registered stock exchanges.   Brokers in India are bound by a code of conduct which specifies standards of professional conduct and holds brokers responsible for faithfully executing orders on behalf of investors without discriminating based on the volume of business involved. This code further rests a responsibility on brokers to refrain from engaging in malpractices that can prove detrimental to the interest of investors and also requires them to fairly disclose details, including conflicts of interest, while also holding that brokers shouldn’t provide investment advice to investors.   SEBI, over the years has expressly recognized the fact that the securities markets often fall prey to fraudulent activities, which endanger the interests of retail investors, who are often unfamiliar with the technical intricacies involved. In recognition of this threat, Mr. U.K Sinha, ex-chairman of SEBI, stated that the protection of retail investors from such exploitation is one of the key objectives of the regulator.  MITC as a Solution to Voluminous Documentation:  When considering MITC as a solution to voluminous documentation, it is crucial to acknowledge the challenges SEBI faces in effectively regulating intermediaries like stock brokers. Brokers form the backbone of the capital market, yet instances of technical glitches caused by errors on the part of these intermediaries have inflicted significant losses upon investors. These documents often distract investors from noticing critical aspects of their relationship with brokers due to their complex and voluminous nature. This surplus of information tends to obscure the essential terms and conditions, making it difficult for investors to discern the crucial elements, which exposes them to risk. MITC emerges as a focused solution to mitigate this issue by streamlining the extensive and complex documents governing these broker-client relationships. By providing the most critical terms and conditions in a standardized format, MITC will provide investors with clearer and more comprehensible information. This focused approach not only simplifies the information overload but also provides a shield against potential misinterpretation or manipulation by stock brokers.   In Reliance Securities Ltd vs Vivek Sharma, the stock brokers were made liable for losses incurred by investors due to technical glitches and lack of understanding of their online trading platform. This case highlighted the responsibility of brokers to protect investors from losses due to technical shortcomings.  The complexity and volume of documentation often exacerbate these technical issues. MITC’s implementation would also solve such issues by formalizing the broker-client relationship with clearer terms. SEBI’s Role in Protecting the Rights of Investors In Adjudicating Officer, Securities and Exchange Board of India v. Bhavesh Pabari, the Court underscored the objective of the SEBI Act to establish a board for protecting the interests of the investors in the securities market. SEBI mandates that stockbrokers safeguard the investors by ensuring protection regarding dividends, bonus shares and similar rights related to transactions. They are obligated to reconcile accounts, issue detailed contract notes promptly after trades and ensure swift payout of funds or securities within prescribed timelines, thereby securing the interests of the investors/clients. The mandate upon stockbrokers under Schedule II of the SEBI (Stock Brokers And Sub-Brokers) Regulations, 1992, to act in the interests of the investors and ensure fairness to their clients is in line with the role of MITC to ensure transparency and simplifying the broker-client relationship. In line with SEBI’s mandate to protect investors, MITC focuses on critical aspects and empowers investors to make informed decisions, which aligns with SEBI’s commitment to promote transparency and investor awareness through initiatives like the Investor Charter. This charter ensures that investors have access to standardized and understandable documentation, fostering trust, confidence and informed decision-making in the market. But the real challenge for SEBI will lie in ensuring compliance to these standards across the vast spectrum of brokers and investors, thereby raising concerns about uniformity and consistent adherence to MITC. This will impose a new obligation on

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SEBI Greenlights REIT Way: Approval for Fractional Ownership of RE

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[By Shaswat Kashyap & Snigdha Dash] The authors are students at Gujarat National Law University and National Law University, Odisha respectively.   Introduction  In recent years, India has seen a rise in web platforms, such as WiseX and others, offering investors the chance to invest in real estate (RE) assets through fractional ownership. Recognizing the growing value of investments and the increasing number of investors, the Indian watchdog deemed it crucial to formalise the sector. In a move to safeguard the interest of investors, the Securities and Exchange Board of India (SEBI) in its 203rd board meeting dated 25 November 2023, took a crucial step by granting approval for the implementation of a regulatory mechanism governing fractional ownership of RE assets. This strategic move followed the issuance of a Consultation Paper (CP) on May 12, 2023, which proposed the inclusion of Fractional Ownership Platforms (FOPs) within the purview of SEBI (Real Estate Investment Trust) Regulations 2014 (The Regulations) through necessary amendments.   In the CP, the regulatory watchdog proposed Real Estate Investment Trusts (REITs) type registration including listing, terming it as Micro, Small and Medium (MSM REITs). In common parlance, REITs are types of trusts or corporations that invest in real estate directly by purchasing properties or buying mortgages.  The Board approved the amendments to the Regulations for SM REITs with an asset value of at least 50 crores as opposed to a threshold of 500 crores for existing REITs. SM REITs shall have the facility to formulate mechanisms for real estate asset ownership through Special Purpose Vehicles (SPVs) constituted as companies. This aims at providing investor protection measures that will thereby ensure the orderly development of the Real estate sector and the market. The move would be beneficial, especially for retail investors unfamiliar with such a structure.   Understanding Fractional Investment  A concept still at its nascent stage in India, Fractional Investment is an investment strategy wherein the acquisition cost is divided among various investors who invest in securities issued by SPV established by the FOP.  Such investment serves investors with a limited appetite for real estate who desire focused investment in a specific location through multiple SPVs and helps one maintain a diversified portfolio when one has a low capital to invest. FOPs play a vital role by providing investment in pre-leased real estate by bringing a pool of investors on the same paradigm.  Fractional Investment in real estate or property provides an alternative to engaging in the real estate sector via REITs and reduces the financial burden on single investors while allowing them to generate a steady stream of cash flow and long-term returns.  Decoding the Rationale behind this Approval: Addressing the Challenges  The regulatory oversight of FOPs is either ambiguous or absent. SEBI, with recent approval, is making efforts to address various other challenges that include:   First, In most cases, the SPVs are constituted as private limited companies and are thus subjected to the regulations outlined in the Companies Act, 2013. However given how the FOPs obtain the interest of participation from members of the public, the SPV may have undertaken a Deemed Public Issue (DPI) without complying with issuing a prospectus and filing and registering with SEBI. It may further breach the maximum number of shareholders permitted for the private companies as per the Companies Act, i.e., 200.   Second, even though the FOP provides fractional ownership to purchase real estate, it doesn’t necessitate any uniformity of disclosures regarding the valuation of RE and other disclosures. Such Fractional Investment mainly targets Non Institutional Investors (NII) but the investor has to depend on the FOP for the necessary information to aid diligence by potential investors Insufficient transparency and disclosure of essential information to an investor could result in financial losses for the investor. This may occur due to misrepresentation, the sale of real estate assets/securities from SPVs without accurate valuation awareness, and similar factors.  Third, the mode and manner of completion of the purchase/ acquisition of RE is ambiguous and doesn’t have a mandatory independent review or assurance mechanism. The CP suggest that such an amendment will rescue the investors who fall prey to mis-selling and provide an end-to-end regulatory mechanism for grievance redressal.  Further, the migration of current SPVs or other structures established by FOPs to the REIT may result in the treatment of such investment by investors as investment in Business Trusts under the Income Tax Act which provides certain tax benefits which are otherwise not granted to the SPV in the existing scenario. Therefore, the proposed amendment will also ensure to reduction of the complexity attached to the issuance through SPVs.  Proposed Scope of Regulation: A Brief Overview  1. It facilitates a provision for registration and regulation of FOPs under REIT Regulations: Any person or legal entity including FOPs who facilitate fractional investment by any structure is required to register with SEBI to work as SM REIT in the manner specified by SEBI in its standard format.  2. It is optional to come under the ambit of REIT: The chairman of SEBI, Madhabi Puri Buch clarified that the existing fractional ownership has the option to either navigate to the ambit of REIT or stay under the company structure. The better explanation to register under REIT will reach a wider audience ensuring credibility and attracting overseas flows.   3. It ensures investor interest: There is an expectation that the FOPs will comply with the new framework and further upgrade their scale, the new framework is investor-friendly. While still trying to evolve from a nascent stage, the investors will get the right investment option and attract larger portfolios ensuring continued assets to meet the increasing demand. It will also make sure that investors are protected, common practices are disclosed and there is a robust redressal mechanism.   4. Another proposal suggests setting a minimum subscription of Rs. 10 lakh. Currently, most platforms maintain a minimum ticket size of Rs. 25 lakh. The regulator is considering further reductions as the market matures.  Critical Analysis  The NIIs apart from having limited

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Decoding MCA’s move allowing Direct Listing of Indian Securities on Foreign Exchange

Leave a Comment / Company Law /

[By Anand Vardhan & Piyush Raj Jain] The authors are students of Gujarat National Law University.   Introduction   The Ministry of Corporate Affairs has enforced section 5 of The Companies (Amendment) Act, 2020, through a notification dated 30th October, 2023 . This has led to an addition to section 23 of The Companies Act 2013 . It is a welcome move as it seeks to boom the Indian Economy by opening the routes for Indian Companies to raise funds by directly listing their equity on foreign stock exchanges and also opening a million-dollar Indian market for foreign Investors. There is a need for diversification of investors across the Indian economy given ongoing evolution and internationalization of capital market across the globe.   As foreign competitiveness being the need of the hour for our corporate culture, this post analyzes the earlier regime, present amendment and its analysis along with our suggestions for the proposed framework by uncovering the lacunae in the proposal and the regulatory framework needed to address such lacunae.  Earlier regime  Under the existing framework, if an Indian company wished to access the global market to list its equity capital, it can only get listed through the American Depository Receipts (ADR) and Global Depository Receipts (GDR). These depository receipts acted as a security certificate representing a certain number of a share of a company of other country, not listed on stock exchange of that country, which can be purchased by investors. Further, an Indian company can directly list its debt securities on foreign stock exchange through Foreign Currency Convertible Bonds (FCCB), also known as masala bonds, and foreign currency exchangeable bonds, which are issued by companies in currencies other than the domestic currency of the company issuing it.   Present Amendment   The new provision allows direct listing of the public companies registered in India on foreign stock exchanges as permitted by the government. The added provision also empowers Central Government to exempt certain classes of public companies from following the procedural requirement prescribed in the Companies Act to get listed on the stock exchange, which may include declaration by beneficiary to the company share, filing return of significant beneficial owners of the company, punishment on non-payment of dividend etc.  Analysis  Implications  One of the most important implications and benefits which this amendment would provide to Indian Companies, especially startups is the option of a new jurisdiction to raise funds. Further, this will also help the companies in increasing their valuation. The option for companies incorporated in India to list their shares on Foreign Exchanges will enhance and diversify their sources and pool of capital as well as provide them with a larger and diverse base of investors. This will help the Indian Companies to trade their securities in major currencies across the world, like Euro, Dollar, or Renminbi.   As discussed earlier, for raising funds overseas in the earlier regime, ADR and GDR were used to list in the foreign exchanges, but it required a complex procedure even a complex restructuring such as externalization, but this amendment may do away with any such requirements by providing an alternate route to raise funds overseas. Further, this will even allow companies incorporated in India to access foreign funds at a lower cost. In the earlier regime, Indian companies had to invest cost and time for accounting in Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) for ADR and GDR respectively, but the direct listing will allow Indian companies to prepare accounts in Indian Accounting Standards (IndAS) only which will help them to reduce the cost and time involved as IndAS is now globally accepted.   The implications that this amendment will have on the Indian Economy are threefold, i.e., it will lead to the spreading of the strength of the “India” brand across the globe. Along with it, the amendment will also lead to boost competitiveness for Indian Companies which will further lead to boost efficiency and growth for Indian Economy.   This amendment to the Companies Act will also contribute to the development of a clear and advanced legal regime for reverse-flipping the holding structure of companies incorporated in India by allowing the shifting of such holdings’ domicile to India.   Lacunae  There are certain lacunae concerning the amendment. These need to be clarified by the MCA at the earliest through detailed rules and regulations so that the companies incorporated in India can get the benefits of listing in a foreign exchange and explore the foreign market.  Certain points which need to be clarified by MCA at the earliest are that which kind of securities can be listed in the foreign exchanges, in which foreign exchanges could the listing be done and by which class of companies it can be done.  The amendment even talks about the power of the Central Government to exempt any class of public companies from procedural requirements under the Companies Act, but it doesn’t talk about what kind of exemptions and the procedure to give those exemptions along with the eligibility of the companies to avail those exemptions.   The other lacunae that revolve around these amendments are will the investors give the valuation same to the company listed on foreign exchange same as that they would have provided in India and also what will be the commercial benefits of the listing of a company incorporated in India on a Foreign Exchange.   There are other legal challenges, mainly related to the disparities between the compliances required by the companies in the Indian regime vis-à-vis the securities regime of the overseas countries where the company intend to be listed.   The implementation of the amendment will also require the amendments to the current legal regime governing the listing of securities on stock exchanges and foreign exchanges, namely FEMA, Companies Act and SEBI Regulations.   Suggestions for Proposed Framework  In order to do away with the above-discussed lacunae, the MCA could take its route through the following proposed frameworks.  The main question before the MCA being the criterion to choose the

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India’s Offshore Listing Regime – Examining The Regulatory Architecture

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[By Pratyush Hari and Meghana Gudluru] Pratyush is a student at Jindal Global Law School and Meghana is a student at Symbiosis Law School, Pune. On 4th March 2020, the Union Cabinet announced that it approved an amendment to the Companies Act, 2013 (“the Act”) which would allow Indian companies to list on foreign stock exchanges. Soon after, the Companies (Amendment) Bill, 2020 was introduced in the Lok Sabha seeking to amend, inter alia Section 23 of the Act, which would allow for offshore listing by Indian companies. Currently, the only way Indian companies can access foreign equity markets is through the American Depository Receipt (ADR) and Global Depository Receipt (GDR) regimes.  Indian companies can also list their debt securities on foreign stock exchanges through ‘masala bonds’ (Rupee denominated bonds), foreign currency convertible bonds (FCCB), and foreign currency exchangeable bonds (FCEB). Allowing direct offshore listing has been perceived to be a move that opens new doors of opportunity for Indian companies seeking to access global capital. However, certain aspects need to be considered in light of the regulatory changes surrounding the novel offshore listing framework. This post seeks to understand the background of the offshore listing framework and shed light on certain nuances of the framework that need further consideration. SEBI Expert Committee Report Recognizing the benefit behind Indian companies accessing global capital, the Securities and Exchange Board of India (“SEBI”) constituted an expert committee in 2018 to assess the viability of offshore listing for Indian companies. Additionally, the expert committee considered the listing of companies incorporated outside India on Indian stock exchanges. In December 2018, the expert committee released a report (“Report”) that delved into the economic implications of allowing offshore listing by Indian companies along with changes required to existing regulation. Some of the major takeaways from the Report are discussed below. Permissible Jurisdictions   The Report states that in the interest of security, offshore listing by Indian companies will only be allowed on certain pre-determined stock exchanges (“Permissible Jurisdictions”). The Permissible Jurisdiction must be a member of the Board of International Organization of Securities Commissions (“IOSCO”), whose securities market regulator is either a signatory to the IOSCO’s multilateral memorandum of understanding or shares a relationship with SEBI for information sharing arrangements[i]. Moreover, the Permissible Jurisdiction must be a member of the Financial Action Task Force. The Report emphasizes on stringent eligibility criteria for Permissible Jurisdictions. Presumably, to avoid potential misuse of this framework for illegal transactions like round-tripping of funds. The list of Permissible Jurisdictions in the Report under Annexure C includes NASDAQ, New York Stock Exchange, London Stock Exchange, and Shanghai Stock Exchange, amongst others. Changes to the Foreign Exchange Regime At present, the foreign exchange regime does not consider the listing of equity shares by an Indian company on a foreign stock exchange. The Report contemplates changes to the erstwhile ‘FEMA 20R’ which was subsequently superseded by the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (“NDI Rules”). Amongst these changes, the Report suggests the addition of ‘Part B’ to Schedule 1 of FEMA 20R, addressing the purchase of equity shares of an Indian company listed on a foreign stock exchange by a person resident outside India. The equity shares of Indian companies listed abroad will, however, continue to be subjected to the Indian foreign exchange regime namely compliance with sectoral caps, entry routes, prohibited sectors, etc. Companies Act & SEBI Compliance According to the Report, Chapter III of the Act about prospectus and allotment of securities should not apply to the listing of equity shares of Indian companies on foreign stock exchanges. Certain listing obligations like the issuance of a prospectus are broadly similar across most Permissible Jurisdictions. Indian companies directly listing abroad are likely to be subject to the listing obligations of that Permissible Jurisdiction. Consequently, subjecting these Indian companies to Chapter III of the Act may prove to be redundant. This seems to be the underlying objective behind rendering Chapter III inapplicable to companies directly listing abroad. Additionally, Indian companies directly listing in Permissible Jurisdictions will not be subject to the rules and regulations laid down by SEBI. Such companies, however, will be bound by the listing framework of the Permissible Jurisdiction itself. On the other hand, listed Indian companies seeking to cross-list (list in India and abroad) will be bound by the listing framework in the Permissible Jurisdiction in addition to SEBI rules and regulations. Key Considerations The Report has addressed primary issues that arise while contemplating offshore listing such as regulatory changes, Permissible Jurisdictions, taxation etc. However, a regulatory change of such proportion is bound to uncover facets of the law that need further deliberation. Some of these legal aspects that need further thought are briefly discussed below. Access to Indian Investors  Resident Indian investors are bound by a cap on investments in overseas assets which will include equities of Indian companies listed abroad. Under RBI’s Liberalised Remittance Scheme (“LRS”), Indian residents are only allowed to remit $250,000 annually towards a foreign capital or current account transaction. While Indian residents would be subjected to the annual LRS cap, foreign investors are not subject to these monetary limits. They are however subject to restrictions on sectoral caps, entry routes, and prohibited sectors as prescribed by the NDI Rules. The difference in investment thresholds between Indian and foreign investors indicates a lopsided playing field. The situation gives rise to the peculiar problem wherein Indian investors are barred from investing more than the LRS limit in a company incorporated and headquartered in India. RBI will have to intervene and clarify its stance on the issue in order to curb this irregularity. Presumably, this LRS cap will have to be done away in order to increase access to these equities for Indian investors[ii]. Uniformity of Shareholder Rights For Indian companies seeking to cross-list their shares, it must be ensured that their equities represent the same rights entitlement to all shareholders, regardless of the jurisdiction. While Indian regulations do permit the issuance of shares with

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An Insight into SEBI’s Consultation Paper on Minimum Public Shareholding

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[By Abhinav Gupta and Aayush Khandelwal] The authors are students at National Law University, Jodhpur. Introduction The Securities and Exchange Board of India (‘SEBI’) on August 19, 2020, issued a consultation paper to rejig the threshold for minimum public shareholding (‘MPS’) in companies which have undergone a resolution process under the Insolvency and Bankruptcy Code, 2016 (‘IBC’) and seek to relist following the resolution process. To enable MPS compliance, the consultation paper also proposes relaxation in the lock-in requirements of the shareholding of the incoming investor or promoter. In this article, the authors provide an insight into the proposals put forth by SEBI and the rationale behind the same. Further, they undertake an analysis of the viability of the options so suggested by the SEBI. Existing Norms Governing MPS and Lock-In Requirements for Such Companies Every listed company has to maintain a minimum of twenty-five percent public shareholding as mandated by Rule 19A(1) of the Securities Contracts (Regulations) Rules, 1957 (‘SCRR’). This mandate is known as the ‘public float’ rule. SEBI vide an amendment in 2018 allowed buyer in a resolution plan to acquire more than seventy-five percent of shares in a company which is otherwise restricted due to the ‘public float’ rule (see Regulation 3(2) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011). However, as per rule 19A(5) of the SCRR, a company has to increase the public shareholding to twenty-five percent within three years if the public shareholding falls below twenty-five percent but is above ten percent, pursuant to the implementation of a resolution plan under the IBC. The rule further provides that if the public shareholding falls below ten percent then it must be increased to at least ten percent within eighteen months from the date of such fall. Further, the preferential issue of equity shares in terms of resolution plan approved under the IBC is exempted from complying with the provisions of Chapter V of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (‘ICDR Regulations’). The only condition applicable is the lock-in period of one year (see Regulation 167(4) of the ICDR Regulations). This lock-in period implies that the shares issued pursuant to the resolution process cannot be sold by the shareholder for a period of one year from the date of trading approval. Proposals by SEBI SEBI has proposed the following suggestions in the consultation paper. Changing the period to achieve MPS: SEBI has suggested three options to rejig the threshold for MPS: Companies may be mandated to increase the public shareholding to ten percent within six months against the existing duration of eighteen months. They must increase the public shareholding to twenty-five percent within three years. Companies may be required to have at least five percent public shareholding at the time of relisting. They must increase the public shareholding to ten percent within twelve months, and twenty-five percent in the next twenty-four months. Companies may be required to have at least ten percent public shareholding at the time of relisting. They must increase the public shareholding to twenty-five percent within three years. Relaxation of the lock-in period: Another proposal by SEBI is to dilute the lock-in period requirement for the incoming investors. The rationale behind removing the period is that the lock-in period of one year on the equity shares of the incoming investor restricts the dilution of shares to comply with MPS norms. However, the relaxation of the lock-in requirement shall only to the extent which enables MPS compliance. Disclosures pursuant to the approval of the resolution plan: The consultation paper also proposes a standardized reporting framework pursuant to the approval of the resolution plan under the IBC. The proposed disclosure will incorporate detailed pre and post shareholding patterns, details of funds infused, creditors paid-off, additional liability on the incoming investors, the impact of the resolution plan on the existing shareholders, etc. Under the current provisions, the company is required to disclose only the salient features of the resolution plan approved under the IBC. SEBI is of the view that such additional disclosures may aid the public shareholders in the price discovery mechanism on re-listing of shares. An Analysis of the Proposals by SEBI Various relaxations to companies that have undergone the resolution process were given to facilitate the effective and timely resolution of the listed companies. The significant change in management during resolution proceedings prompted the regulator to ease certain norms and provide a suitable framework for compliance with securities law. However, such relaxations may sometime prove to be counterintuitive. For instance, the relaxation in the public float rule may lead to extremely low public shareholding which can be seen in the case of Ruchi Soya Industries Ltd. Post-resolution the public shareholding in Ruchi Soya Industries came down to a meager 0.97% and the share prices saw an increase of 8764% (from INR 17 to INR 1519). Such a low public shareholding raises concerns with respect to fairness and transparency, price manipulation, and the requirement of increased surveillance measures. Moreover, if a certain limited set of people hold most of the shares it would lead to manipulation or perpetration of other unethical activities in the securities market and limited participation in trading of shares resulting in demand and supply gap. This aligns with the observation of SEBI in the matter of E-land Apparel Ltd. that, “a dispersed shareholding structure is essential for the sustenance of a continuous market for listed securities to provide liquidity to the investors and to discover fair prices.” According to SEBI, these concerns can be tackled only after a minimum of ten percent of shares of a company are held by the public. For this reason, the regulator intends to lower down the relaxation period provided to achieve MPS. However, in our opinion, reducing the period to achieve MPS is concerning and poses a wide array of issues. The manner in which companies can achieve MPS is complex procedures. It may take time to issue shares to the public while complying with

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Saving Stressed Companies From The Cusp Of Insolvency: Examining The SEBI Consultation Paper On Pricing Of Preferential Issues And Exemption From Open Offers

1 Comment / Capital Markets and Securities Law /

[By Srishti Suresh] The author is a third-year student at NALSAR University of Law, Hyderabad. Background In light of the COVID-19 outbreak and its resultant economic lockdown, several companies are cash starved and are facing immense financial crunch. There exists an incumbent need to infuse funds into such stressed entities, to enable them to avoid insolvency and bankruptcy proceedings. Consequently, the securities market regulator SEBI, issued a Consultation Paper on April 22nd 2020, titled Pricing of Preferential Issues and Exemption from Open Offer for Acquisitions on Companies having Stressed Assets.[i] The same seeks to tweak certain provisions under the current SEBI Issue of Capital and Disclosure Requirements (“ICDR”) Regulations, 2018, and the SEBI Substantial Acquisition of Shares and Takeover (“SAST”) Regulations, 2011. The Changes Proposed by SEBI in Consultation with the Primary Market Advisory Committee (PMAC) in Contrast to the Present ICDR and SAST Regulations Three aspects of the original Preferential Allotment route are sought to be tweaked, in order to encourage more private investors to infuse funds into stressed companies. First, an objective-criteria for what constitutes a ‘stressed company’ is to be made clear. This is to ensure that companies and investors alike, are made aware of those companies that are in urgent need of funding. At present, neither of the two Regulations enunciate on the criteria for determining what a stressed company is. As a consequence, if a company satisfies two out of the three criteria specified hereinunder, the same would be considered a ‘stressed company’. They are – A listed company which has previously disclosed its defaults in payments of interest and repayment of the principal amount on loans taken from any bank or financial institution, as well as listed/ unlisted debt securities for two consequent quarters, in consonance with the SEBI Circular.[ii] If there exists an inter-creditor agreement with the company, in terms of the RBI Circular[iii], and/or Downgrading of credit rating of the listed instruments of such stressed company to “D”. Further, the securities regulator has acknowledged the burdensome nature of the existing norms of raising capital, which has proven itself to be more of an impediment, and has proposed the following changes to be introduced to the ICDR and SAST Regulations. Exemption from Pricing Norms Currently, Regulation 164 of the ICDR requires the pricing of equity shares of a listed company (allotted through the preferential route), to not be less than the average of the weekly high and low of the weighted average price of the said shares on the recognized stock exchange during the twenty-six weeks preceding the relevant date (for frequently trading entities), OR The average of weekly high and low of the volume weighted average prices of the quoted shares during the two weeks preceding the relevant date.[iv] The exemption proposes to narrow down the price determination to Regulation 164(b), basing it on the weighted average price of the preceding two weeks, applicable even to frequently trading companies. Ordinarily, the twenty-six-week period is said to determine the demand surge for an entity’s shares, and the pricing is therefore based on the said period. But owing to crashing markets and deterioration of performance of industries, the latency period would create a wide gap in the pricing of such shares. The price at the beginning of the twenty-six-week period, before its decline in the forthcoming weeks, is significantly higher than what an investor would have to pay on the basis of the preceding two-week period. If the earlier requirements are imposed as a hard-handed rule, investors investing in frequently trading stressed entities would have to pay more to acquire shares and voting rights, and the financial burden imposed on an investor would increase manifold. Therefore, restricting the price determination to the two-week weighted average would allow companies and investors to factor in economic changes caused due to the unforeseen circumstances and the gap would be reasonably constricted. This is a reasonable measure to attract investments. Exemption from Open Offer Requirements Regulation 3 read with Regulation 7(1) of the SAST requires an investor, who has acquired 25% or more of such shares or voting rights in a company, to make a public announcement of an open offer. The open offer made to the existing shareholders should aggregate to a minimum of 26% of the total shares of the target company. The open offer is sought to be waived off in the new proposal. It seeks to serve two purposes; First, the entity is restricted in allocating such shares to promoters and promoter groups. This is to ensure that newer more efficient management is roped into a cascading entity, without further entrenching the position of promoters. Resuscitation requires dynamism and innovation, and this is furthered by attracting investors motivated to hold substantial interest in a stressed entity. Second, imposing burdens of an open offer would prove counterproductive in attracting potential investors in saving the entity. This is primarily because the earlier requirement of open offer creates a substantial financial obligation on the investor, in addition to his fund infusion. This would discourage plenty of investors and defeat the purpose of saving stressed entities from the cusp of insolvency. The Discounted Factor The Consultation Paper is open to public comments, while being inclusive of present and potential investors. A point that SEBI and PMAC seem to have overlooked, is that a slew of companies that have begun to have Non-Performing Assets (“NPA”), are slowly treading into the trajectory of insolvency owing to the economic shutdown caused by COVID-19. Many do not fall under the ambit of ‘frequently trading’ entities. But the trend observed in the economy has indicated that several small/medium companies (listed) are heading towards severe capital starvation and a plausible bankruptcy. Therefore, it would be prudent in extending the proposed exemptions in the ICDR and SAST Regulations to companies that have not yet fallen under the banner of stressed entities. But this expansion across the board would prove to be a double-edged sword, and thereby requires precaution. On one hand, the waiver of the

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