Several reforms across asset classes and the codifying of a whole new regulatory approach were announced following the Securities and Exchange Board of India's (SEBI) meet with its Board members on Wednesday.
The SEBI presented proposals that covered small and medium enterprises' (SME) initial public offerings (IPOs), performance validation and a new regulation that mandates public consultation as part of the process of the capital markets' regulator.
It was an exciting day and here are the nine crucial changes from the total 19 that were announced. Also, one regulation did not make the grade, which is likely to have come as a relief to many market participants.
1. Tougher norms for SME IPOs
The regulator has tightened norms around financial performance, corporate governance and promoter entities' skin-in-the game.
Here's a quick look at some of the changes. The issuer needs a minimum operating profit (earnings before interest, depreciation and tax) of Rs 1 crore for any of the two out of three previous financial years. Related party-transactions (RPT) norms, which are now applicable only to entities listed on the Main Board, will be applicable to SME segment too. Amount being raised for General Corporate Purpose (GCP) will be capped at 15 per cent of the total or Rs 10 crore, whichever is lower. Issues will not be permitted if their object is repayment of loan from promoter, promoter group or any related party, directly or indirectly. Lock-in on promoters’ holding held in excess of minimum promoter contribution (MPC) can only be now released in a phased manner: lock-in for 50 per cent of promoters’ holding in excess of MPC shall be released after one year and lock-in for remaining 50 percent promoters’ holding in excess of MPC can be released after two years.
2. Finally, performance validation agency
The market regulator finally announced the setting up of the highly awaited performance validation agency (PVA) called the Past Risk and Return Verification Agency (PaRRVA). Research analysts (RAs), investment advisors (IAs) and algo providers can seek verification of their risk-return metrics from this agency, though it is not mandatory that they do so.
A Credit Rating Agency (CRA) shall act as PaRRVA with a recognised stock exchange serving as PaRRVA Data Centre (PDC).
It will first be rolled out on a pilot basis and then on a regular basis, after incorporating feedback from stakeholders.
3. Safer merchant bankers
The regulator has raised the net worth requirement by 10x for one set of merchant bankers (MBs) and by 2x for another. Category 1 will need to have a net worth of Rs 50 crore and they are allowed to undertake all permitted activities; and Category 2 will need to have a net worth of Rs 10 crore and can undertake all activities, except managing issues on the Main Board.
The regulator also reviewed requirements around their eligibility and activities MBs can undertake. Activities outside of the SEBI-permitted ones need to be hived off to a separate legal entity with a separate brand name within two years, but both entities have to abide by the Code of Conduct specified by the regulator and both can share resources at an arm's length basis.
4. More of UPSI
Seventeen more events have been added to the list that will define Unpublished Price-Sensitive Information (UPSI) under the Prohibition of Insider Trading (PIT) Regulations, to bring it more in alignment with Regulation 30 of Listing Obligations and Disclosure Requirements (LODR) Regulations.
The regulator added that, “for events emanating from outside the company, flexibility has been provided to make entries in the structured digital database on a deferred basis, within two days, as well as to not have mandatory trading window closure.”
5. Public will have a say
In a big move, the market regulator has codified the public-consultation process with the Securities and Exchange Board of India (Procedure for making, amending, and reviewing of Regulations) Regulations, 2024.
Public consultation will be mandated as part of making and amending regulations and the new law also lays down the requirement of reviewing regulations. Any changes to policy and regulations will need to be open to public suggestions for a minimum of 21 days, and rationale for acceptance of the policies/regulations will be made available to the public, among other things.
6. Easier skin-in-the-game norms for mutual fund houses
The skin-in-the-game requirements that had been specified for designated employees of the asset management companies (AMCs) have been relaxed. There is a reduction in minimum investment amount and a lowering of lock-in period for employees who have resigned. Other changes easing of requirements for employees managing liquid funds and relaxing the redemption norms.
Under the new norms, there will also be timelines specified for the deployment of funds collected in New Fund Offers (NFOs). As the press statement issued by SEBI after the Board meeting said, "The new framework is aimed at encouraging AMCs to collect only as much funds in NFOs as can be deployed in a reasonable period of time [i.e. ordinarily 30 days], since in the open-ended funds investors always have the option to enter the scheme at a later date at the prevailing NAV [net asset value]."
7. Unlisted equity shares permitted for REITS, InVITs
In the two asset classes, the regulator will now permit investments in unlisted equity shares, but only of a company which provides property management / property maintenance / housekeeping / project management and other incidental services to the real estate investment trust (REIT) / infrastructure investment trust (InvIT) assets subject to conditions. They will also be allowed to invest in liquid mutual funds schemes but only where the credit risk value is at least 12 and falls under the Class A-I in the potential risk class matrix.
The regulator also announced ease-of-doing business measures for small and medium REITs, which includes standardising the disclosure in scheme offer document and aligning "certain provisions pertaining to investment conditions and borrowings for small and medium [SM] REITs vis-à-vis REITs".
8. RPT norms for High Value Debt Listed entities
The threshold for identification of High Value Debt Listed Entities (HVDLE) has been doubled from the current Rs 500 crore to Rs 1,000 crore, to align with the threshold specified for large corporates. In the debt-listed entities, if the shareholding is concentrated in the one or a few related parties, then material related party transactions shall require No-Objection Certificate (NOC) from the Debenture Trustee (who in turn shall obtain debenture holders’ approval).
9. Take responsibility for AI Tools
The regulator has placed the responsibility of use of artificial intelligence tools by regulated entities with the regulated entities themselves.
The new regulations will require "persons regulated by SEBI [including MIIs, registered intermediaries, AMCs, managers of pooled investment vehicles] who use Artificial Intelligence tools, either designed by them or procured from third-party technology service providers, to take full responsibility for their use of such tools." They will be responsible for ensuring data privacy and security, and for the outcome of these tools.
10. The one that didn't make it through
The Board of the market regulator did not clear the much-feared SEBI (Prohibition of Unexplained Suspicious Trading Activities in the Securities Market) Regulations. The proposed regulations says that, if there unexplained and suspicious trading activity, then the onus should be on the individual/entity to prove their innocence. According to sources, it was presented to the board in the meeting.
Also read: SEBI Board refuses to clear the much-feared PUSTA Regulations, say sources
While many market participants have voiced concerns about this regulation going against the principles of natural justice, the regulator had reasoned that this had become necessary with advancements in technology that made it possible to remove evidence easily. Also, the regulator pointed out, it was in line with the current practice of law and other global norms.
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