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Explained | SEBI’s new rules for independent directors, accredited investors and more

Independent director norms get tighter; mutual funds have been asked to invest more of their own funds in risky schemes

June 30, 2021 / 11:23 AM IST
Source: ShutterStock

Source: ShutterStock

Capital markets regulator, the Securities and Exchange Board of India (SEBI) took key decisions during its board meeting on June 29. As part of its efforts to enhance corporate governance in listed companies, the watchdog has tightened the norms for appointment or removal of independent directors. Among other things, it also made REITs and InvITs more accessible for retail investors and increased rewards for informants to curb insider trading. Here is a primer on the key decisions:

Independent directors to get more independence.

Independent directors (IDs) are supposed to play an important role in upholding corporate governance standards in any company. The common view, however, has been that promoters appoint “friendly” individuals as IDs who can be easily influenced during board meetings. The regulator has now amended the process to appoint or remove IDs, which effectively reduces the say that a promoter gets in such decisions.

SEBI has said that the appointment, reappointment, and removal of IDs can be done through a special resolution only – which requires 75 percent votes in favour – instead of the current requirement of an ordinary resolution that can be passed with a simple majority. The amendment gives public shareholders more say in deciding who can be made an independent director in the company.

Further, the composition of the Nomination and Remuneration Committee (NRC), which selects IDs, has been modified to include two-thirds independent directors instead of the current requirement of a simple majority. SEBI has also mandated that if an ID resigns, then the company will have to disclose the full resignation letter. The new norms will come into effect from January 1, 2022.

REITs and InvITs to become more accessible for retail investors.

Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) are looked upon as attractive investment avenues with many entities looking at such structures to raise money from the capital markets. While the underlying assets in REITs are income-generating commercial or residential properties, InvITs are backed by infrastructure projects. Currently, there are three REITs and two InvITs listed on the Indian stock exchanges. Earlier, the minimum application size was around Rs 55,000 in REITs and InvITs, which has now been reduced to between Rs 10,000 and Rs 15,000. The trading lot size has also been brought down to just one unit. The lower application size and trading lot would help in attracting more retail investors to the segment.

Mutual funds to have more ‘skin in the game’.

In April this year, the regulator had said that key management personnel of mutual funds should be given a minimum of 20 percent of their salary in the form of units of mutual fund schemes that they oversee. The rationale was that if the key personnel have more ‘skin in the game’, the quality of fund management would improve. Many in the industry opposed it and earlier this week the regulator postponed the implementation of the proposed norms from July 1 to October 1. Notwithstanding the divided opinions of the mutual fund industry on this issue, the regulator has mandated that fund houses will have to invest a minimum amount of their own funds as ‘skin in the game’ in schemes based on the risk profile of the particular scheme. Simply put, a scheme with a higher risk profile would require a higher investment by the fund house. Earlier, the norm was to invest 1 percent of the amount raised during the New Fund Offer (NFO) or Rs 50 lakh, whichever was less.

Higher reward to informants

Among other decisions, the regulator has amended the insider trading regulations to allow a maximum of Rs 10 crore to be awarded to an informant. The earlier cap was Rs 1 crore. The higher quantum of reward could encourage entities to come forward with leads related to violation of insider trading norms though the probe and the final disposal of the matter typically takes a lot of time and often remains caught in a legal wrangle.

Accredited investors

SEBI has also announced a framework for so-called ‘Accredited Investors’ who will have the benefit of investing in Alternative Investment Funds (AIF) or portfolio management services an amount which is lower than the minimum mandated by the regulator. Such investors will also enjoy certain relaxations in terms of compliance. Such accredited investors could include individuals, family trusts, proprietorships, and so on. The move is likely to provide such entities higher flexibility and options in terms of investment decisions.

Easier norms for debt securities

The regulator has merged a couple of its own regulations to make it easier for debt issuers without a three-year track record to float debentures. It further said they could do so provided they sell these debentures through a private placement to qualified institutions and the issue is floated only through an exchange based platform

Ashish Rukhaiyar is a financial journalist
first published: Jun 30, 2021 11:23 am