Sebi Board approves major changes to curb front-running in AMCs; to increase participation in IFSC-based FPIs

Changes have also been announced for venture capital funds, REITs and InvITs.

The market regulator's Board approved a framework that makes it easier for non-resident Indians, overseas citizens of India (OCI) and resident Indians (RIs) to participate in foreign portfolio investors (FPIs) based out of International Financial Services Centres (IFSCs) in India, and asked asset management companies (AMCs) to have an institutional mechanism for deterrence of potential market abuse including front-running.

At its meeting on April 30, the Board also allowed passive schemes of AMCs to take higher exposure on group companies of the sponsor to allow the schemes to better reflect the underlying index. This will be allowed for indices specified by the Securities and Exchange Board of India (Sebi) and be subject to an overall cap of 35 percent investment in the group companies of the sponsor.

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The Board also agreed to a proposal to provide flexibility to venture capital funds registered under the erstwhile SEBI (Venture Capital Regulations), 1996,  to deal with unliquidated investments of their funds; and approved changes to SEBI (Infrastructure Investment Trusts) Regulations, 2014 and SEBI (Real Estate Investment Trusts) Regulations to make unit-based employee benefit scheme available, among other things.

FPIs and AMCs

Funds set up in IFSC will be allowed to have 100 percent contribution from NRIs, OCIs or RIs provided they submit PAN cards or self-declaration along with identity documents. Funds who want to have 100 percent contribution from NRIs, OCIs or RIs can also do so without submitting these documents provided they meet certain conditions.

AMCs have been asked to set up a place a structured institutional mechanism for identification and deterrence of potential market abuse including front-running and fraudulent transactions in securities. The standards for this mechanism will be set by Sebi in consultation with the industry body Association of Mutual Funds  in India (AMFI).

Sebi's Board also approved amendments to the Regulations to a) enhance responsibility and accountability of management of AMCs for such an institutional mechanism; and b) foster transparency by requiring AMCs to have a whistle blower mechanism.

VC Funds, InvITs and REITs

VC Funds, which were registered under the earlier VC Regulations, 1996, have been given the option to migrate to a separate sub-category of Alternative Investment Funds - I to help the VC funds deal with their unliquidated investments.

These can register themselves as Migrant VCFs under this category without paying any application/registration fee and without being subject to any additional investment conditions which were not applicable to them under the erstwhile VCF Regulations.

Migrated VCFs can then avail the flexibilities under AIF Regulations with respect to extension of tenure, liquidation period and Dissolution Period, to deal with unliquidated investments.

Schemes of VCFs whose tenure has expired and opt for migration shall be provided a one year additional liquidation period, as long as they do not have any investor complaint with regard to non-receipt of funds or securities.

InvITs and REITs will now be able to reward their investment manager/manager with their units in lieu of management fees, for the purpose of providing unit based employee benefits. Such units shall be allotted directly to the Employee Benefit Trust so that these units are used exclusively for the Unit-based Employee Benefit Scheme (UBEB) scheme.

Bond market

To enhance participation of non-institutional investors in the bond market, the Board has allowed the private placement of non-convertible debentures (NCDs) or non-convertible redeemable preference shares (NCRPS) at a reduced face value of Rs 10,000.

To safeguard investors, the Board has mandated a requirement of appointing a merchant banker for such issues.

Such NCDs and NCRPS will need to be plain vanilla, interest/ dividend bearing instruments. However, credit enhancements will be permitted in such instruments.

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Ease of doing business

Entities with only listed non-convertible securities (NCS) can give an intimation (in the form of a window advertisement) with a reference to QR code and link of website of listed entity and stock exchange in the newspapers regarding the financial results of the listed entity instead of disclosure of full financial results.

Rules have also been relaxed for market infrastructure institutions (MIIs). They can continue to disclose their shareholding pattern in the format applicable to listed companies and are no longer additionally required to disclose it in a separate format.

Other decisions related to ease of doing business such as issuance of Consolidated Account Statement in electronic form by default, rationalisation of inspection period of commodity warehouses and so on will be issued later through circulars.