[Analysis] SEBI Board Meeting Highlights [September 2024] – Mutual Fund Lite Framework | New Investment Product/Asset Class | Optional T+0 Settlement Cycle

On September 30, 2024, the Securities and Exchange Board of India (SEBI) introduced a series of key amendments during its 207th board meeting, as outlined in the Press Release (PR No. 25/2024). These amendments demonstrate SEBI's continued commitment to refining market regulations and enhancing investor protection. Major highlights from the board meeting include:
– Liberalised Mutual Fund Lite Framework
– Regulatory Framework for a New Investment Product
– Enhanced Trading Facilities
– Expansion of the T+0 Settlement Cycle
– Regulatory Easing for Investment Advisers and Research Analysts
– Streamlined Rights Issue Processes
– Facilitation Measures under SEBI (LODR) and (ICDR) Regulations
– Speedy Disposal of Certain Violations
– Enhanced Transparency for Offshore Derivative Instruments
– Nomination Facility Reforms
– Insider Trading Regulation Enhancements
– Frameworks for ESG Debt Securities
– Self-Attestation for Document Requirements
– Revised Informal Guidance Scheme

These initiatives reflect SEBI's strategic focus on simplifying regulatory frameworks, enhancing market liquidity, and ensuring robust investor protection.

Table of Contents

Introduction

1. Introduction of a Liberalised Mutual Fund Lite Framework for Passively Managed Schemes
2. Introduction of a Regulatory Framework for a New Investment Product/Asset Class
3. Mandates Qualified Stock Brokers to Offer either an ASBA-like Facility or a 3-in-1 Trading Facility for Secondary Market Investors
4. Enhancement of Scope of Optional T+0 Settlement Cycle
5. Review of Regulatory Framework for Investment Advisers and Research Analysts to Facilitate Ease of Doing Business
6. Enabling Faster Rights Issues Along with Flexibility of Allotment to Specific Investors
7. Facilitating Ease of Doing Business under SEBI (LODR)
8. Amendments to SEBI (Intermediaries) Regulations to Facilitate Speedy Disposal of Matters w.r.t Certain Types of Violations
9. Facilitating Ease of Doing Business under Certain SEBI Regulations
10. Proportional Rights and Fair Treatment for All Investors in Alternative Investment Funds
11. Board Approvals and Mandates for Offshore Derivative Instruments (ODIs)
12. Enhancement of Nomination Facilities in Indian Securities Market
13. Amendments to the SEBI (Prohibition of Insider Trading) Regulations, 2015
14. Establishment of Frameworks for ESG Debt Securities in the Indian Securities Market
15. Self-Attestation for SEBI Document Requirements
16. Approval of the Securities and Exchange Board of India (Informal Guidance) Scheme, 2024

Introduction

The Securities and Exchange Board of India (SEBI), in its 207^th board meeting dated September 30, 2024, has approved a series of amendments. According to the Press Release (PR No. 25/2024) dated September 30, 2024, the Board outlined several key approvals. These initiatives, along with simplified compliance, reflect SEBI’s commitment to market development and investor protection. The key highlights of the SEBI’s board meeting are as follows:

1. Introduction of a Liberalised Mutual Fund Lite Framework for Passively Managed Schemes

The Board has approved the introduction of a liberalised Mutual Fund Lite (MF Lite) framework for passively managed schemes. Under this framework, the Board has relaxed the requirements relating to eligibility criteria for sponsors, including net worth, track record, profitability, responsibility of trustees, approval process and disclosures.

The framework aims to promote ease of entry, encourage new players, reduce compliance requirements, increase penetration, enhance market liquidity, facilitate investment diversification and foster innovation.

Further, existing AMCs with both active and passive schemes will have the option to separate their respective passive schemes, if they so desire, to a different group entity, thereby resulting in the management of active and passive schemes by separate AMCs under a common sponsor.

2. Introduction of a Regulatory Framework for a New Investment Product/Asset Class

The Board has approved amendments to the SEBI (Mutual Funds) Regulations, 1996, to introduce a new investment product under the existing Mutual Fund framework. The new investment product is intended to bridge the gap between mutual funds and portfolio management services regarding flexibility in portfolio construction.

The new product aims to provide investors with a professionally managed and well-regulated product that offers greater flexibility and higher risk-taking capabilities for higher ticket sizes while ensuring that appropriate safeguards and risk mitigation measures are in place.

Further, the minimum investment limit for the new product will be Rs 10 lakh per investor across all investment strategies of the new product in a particular AMC. The new product is intended to add depth and variety to the country’s investment landscape through a new asset class.

3. Mandates Qualified Stock Brokers to Offer either an ASBA-like Facility or a 3-in-1 Trading Facility for Secondary Market Investors

The Board has mandated qualified stock brokers (QSBs) to either provide the facility of trading supported by the blocked amount in the secondary market using the UPI block mechanism (ASBA-like facility for secondary market) or the 3-in-1 trading account facility from February 1, 2025. A 3-in-1 trading account is a combination account with a savings account, demat account and trading account.

However, clients of the QSBs will have the option to either continue with the existing trading facility by transferring funds to Trading Members (TMs) or opt for the facility provided by the QSBs.

4. Enhancement of Scope of Optional T+0 Settlement Cycle

The Board reviewed the performance of the Beta version of the optional T+0 settlement cycle. It enhanced its scope by approving an increase in the number of scrips eligible for trading from 25 to the top 500 listed companies in terms of market capitalisation.

All registered Stock Brokers can offer their investors access to the optional T+0 settlement cycle and will be free to charge differential brokerage for the same. In the T+0 settlement cycle, trades are settled on the same day they occur, which means that the transfer of shares to the buyer’s account and funds deposited in the seller’s account happen on the same day of the trade.

Brokers who are designated as Qualified Stock Brokers (QSBs) and meet the parameter of minimum number of active clients for qualification as QSB, and all Custodians, must put in place systems to enable seamless participation of their clients in optional T+0 settlement cycle.

Further, an optional Block Deal window mechanism will be introduced under the T+0 settlement cycle as an 8.45 am to 9.00 am session alongside the existing block windows under the T+1 settlement cycle. Also, the optional T+0 settlement in the equity cash market will continue co-existing with the extant T+1 settlement cycle.

5. Review of Regulatory Framework for Investment Advisers and Research Analysts to Facilitate Ease of Doing Business

The Board has approved the proposal to review the regulatory framework for Investment Advisers (IAs) and Research Analysts (RAs) to facilitate ease of doing business by relaxing eligibility criteria for registration and simplifying compliance requirements.

The proposed changes in the regulatory framework for IAs and RAs are expected to simplify, ease, and reduce compliance requirements for IAs and RAs and bring in regulatory changes in line with the continually evolving nature of their businesses. Some of the key proposals approved by the Board are as follows –

5.1 Relaxation in eligibility criteria for IAs and RAs

The minimum qualification requirement is to be reduced to a graduate degree in specified fields. There must be no requirement for experience to register as IA and RA.

IAs/RAs must initially have base certifications (NISM Series-XA and XB for IAs and NISM-Series-XV for RAs) at registration. Subsequently, no requirement to obtain base certifications afresh must exist. However, a certification based on incremental changes/developments would be required. Further, the net-worth requirement must be replaced with a reduced deposit requirement.

5.2 Easing of compliance requirements for IAs and RAs

Applicants must be allowed to seek registration as Investment Advisers (IAs) and Research Analysts (RAs). Applicants (individual/partnership firm) engaged in other business activities and employment (other than those related to securities and subject to certain conditions) must be allowed to seek registration as part-time IA/part-time RA. They must be required to disclose the nature of other activities and must ensure that there is no conflict of interest between IA/RA activities and their full-time business activities.

Further, the requirement for corporatisation by individual IAs has been relaxed. The threshold would now be 300 clients or fee collection of INR 3 crore during the financial year, whichever is earlier, as compared with the existing threshold of 150 clients.

6. Enabling Faster Rights Issues Along with Flexibility of Allotment to Specific Investors

With a view to facilitating ease of doing business, to enable faster Rights Issue along with the flexibility of allotment to specific investors and giving an investment opportunity to existing shareholders, the Board has approved the following –

6.1 Rights Issue to be completed within 23 working days from board meeting approving rights issue

As per the new norms, the Rights Issue must be completed within 23 working days from the date of the issuer’s board meeting approving the rights issue, as against the present average timeline of 317 days. This mechanism would be even faster than the preferential allotment route, which takes 40 working days. In addition, it would give existing shareholders of the company an opportunity to participate even more in the company’s future potential growth.

6.2 Discontinuation of the current requirement of filing a draft letter of offer with SEBI

The Board has approved discontinuing the current requirement of filing a draft letter of offer with the SEBI for issuance of its observations. Instead, it will be filed with Stock Exchanges for their in-principle approval, as the entity is already a listed entity. Stock Exchanges would confirm that the issuer is in compliance with LODR disclosure requirements.

6.3 Rationalisation of the content of Letter of Offer to contain only relevant information w.r.t rights issue

The Board has approved rationalising the content of the Letter of Offer to contain only the relevant information regarding the rights issue, viz., object of issue, price, record date, entitlement ratio, etc.

6.4 Dispensing with mandatory requirement of appointment of Merchant banker by an Issuer

The Board has approved the proposal to dispense with the mandatory requirement of appointing a Merchant Banker by an Issuer and making it optional subject to the completion of the rights issue within the timeline of 23 working days.

6.5 Stock Exchanges and Depositories to concurrently carry out activities of Registrar to an Issue

Stock Exchanges and Depositories can concurrently carry out activities of the Registrar to the issue, namely, validation of applications and finalisation of the basis of allotment. Further, stock exchanges and depositories must develop a system for automated validation of applications within six months.

6.6 Permitting promoters to renounce their rights entitlements to any specific investor

The Board has permitted promoters to renounce their rights entitlements to any specific investor and allowed the issuer to allot an under-subscribed portion of rights issued to any specific investor. However, appropriate disclosures are made via advertisement in this regard.

6.7 Mandatory appointment of a Monitoring Agency for all rights issue irrespective of issue size

The Board has made the appointment of a Monitoring Agency mandatory for all rights issues, regardless of the issue size, to monitor the use of proceeds of the issue.

6.8 Rights Issue below Rs 50 crore now governed by SEBI (ICDR) Regulations, 2018

Rights Issues of issue size less than Rs 50 crore have been brought under the purview of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.

7. Facilitating Ease of Doing Business under SEBI (LODR) Regulations, 2015 and SEBI (ICDR) Regulations, 2018

The Board has approved the following key measures to facilitate the ease of doing business for listed and to be listed entities through amendments to the SEBI (LODR) Regulations, 2015, and SEBI (ICDR) Regulations, 2018.

7.1 Ease of doing business for listed entities under SEBI (LODR) Regulations, 2015

The Board has approved the following measures to facilitate ease of doing business under SEBI (LODR) Regulations, 2015 –

• Introduction of a single filing system for listed entities to file relevant reports, documents, etc., on one exchange, which will be automatically disseminated at the other exchange(s).
• Integration of periodic filings into two broad categories viz., Integrated Filing (Governance) and Integrated Filing (Financial), to minimise the number of filings done on a periodic basis.
• Detailed advertisement of financial results in newspapers would be optional for listed entities.
• Providing an additional time of 3 months to fill up vacancies in Board Committees at listed entities and to fill up vacancies in Board, Committees and Key Managerial positions at listed entities coming out of the CIRP under IBC.
• Disclosure of material events/information –
• Additional time (3 hours instead of 30 minutes) for disclosure of the outcome of the meeting of the board of directors that concludes after trading hours.
• Disclosure of tax litigations and tax disputes based on materiality.

7.2 Ease of doing business for listed entities under SEBI (ICDR) Regulations, 2018

The Board has approved the following measures to facilitate ease of doing business under SEBI (LODR) Regulations, 2015 –

• Combining ‘pre-issue advertisement’ and ‘price band advertisement’ as a single advertisement and mandating disclosure of certain information through a QR code link.
• Permitting issuers to voluntarily disclose proforma financials for acquisition or divestment already undertaken or proposed to be undertaken from issue proceeds in case of public issues, rights issues and QIPs.
• Harmonisation of the provisions of ICDR and LODR Regulations with respect to thresholds for identification of material subsidiary, disclosures related to material litigation, material agreements, qualifications of compliance officer etc.

8. Amendments to SEBI (Intermediaries) Regulations to Facilitate Speedy Disposal of Matters w.r.t Certain Types of Violations

To expeditiously and efficiently handle cases of certain securities law violations by Intermediaries, the Board has approved amendments to the SEBI (Intermediaries) Regulations, 2008, for inclusion in the provisions for summary proceedings.

The provisions for summary proceedings provide the types of cases where summary proceedings shall be applicable, the process for issuing notice, the timeline for submission of a response, the timeline for passing the order, the conditions and obligations that the intermediary needs to satisfy, and the manner of intimation of the order to the intermediary.

The summary proceedings shall apply in the following situations –

• Expulsion as a member by stock exchanges or clearing corporations
• Termination of depository participant agreements by depositories
• Claims of return or performance which are not permitted by the Board
• Non-payment of specified fees to the Board or to such body as may be specified
• Failure to submit periodic reports for three or such consecutive periods as may be specified by the Board

Further, a Standard Operating Procedure (SOP) would be established to ensure that principles of natural justice are followed and that the outcome of the summary proceeding is proportionate to the nature of the violation.

9. Facilitating Ease of Doing Business under Certain SEBI Regulations

The Board has approved the following measures to facilitate ease of doing business in respect of SEBI (Merchant Bankers) Regulations, 1992, SEBI (Bankers to an Issue) Regulations, 1994, and SEBI (Buyback of Securities) Regulations, 2018.

9.1 SEBI (Merchant Bankers) Regulations, 1992

The Board approved the following measures to facilitate ease of doing business under SEBI (Merchant Bankers) Regulations, 1992 –

• Discontinuing the requirement of submitting a statement specifying Merchant Bankers’ responsibilities separately. Exempting common Independent Director between Issuer and Merchant Banker from the definition of associate subject to recusal by the said Independent Director regarding the issue, on both the Issuer’s and the Merchant Banker’s Boards.
• Accepting a recognised degree from a foreign university or institution in finance or law or, accountancy or business management for a grant of certificate of registration for Merchant Banker.
• Merchant Bankers acting as an Underwriter would need to fulfil their underwriting obligations before finalising the basis of allotment i.e. before T+2.

9.2 SEBI (Bankers to an Issue) Regulations, 1994

In addition to managing issue-related activities currently permitted under these regulations, bankers to an issue would now also be permitted to carry out activities as required under applicable regulations, such as open offers, buy-backs, and such other activities as may be specified by the SEBI.

9.3 SEBI (Buy-Back of Securities) Regulations, 2018

The Board approved the following measures to facilitate ease of doing business under SEBI (Buy-Back of Securities) Regulations, 2018 –

• Exclusion of promoters’ shares from entitlement ratio calculations if they opt out of buy-back and disclosing the same in the public announcement publicly and prominently.
• Disclosure of the entitlement ratio on the cover page of the Letter of Offer and providing a link for shareholders to check their buy-back entitlement
• Permitting companies to issue shares for subsisting obligations which are convertible during the buy-back period provided disclosures of subsisting obligations and their impact are disclosed in the public announcement

10. Proportional Rights and Fair Treatment for All Investors in Alternative Investment Funds

The SEBI has approved amendments to the AIF Regulations to clarify the regulatory intent for Alternative Investment Funds (AIFs) as pooled investment vehicles and ensure the fair treatment of all investors. Now, Investors’ rights to investments and distributions will be proportional to their commitments, with general rights treated on a pari-passu basis.

Further, the Board will allow entities controlled by governments and specified institutions to invest in junior classes of AIF units with less than proportional rights. Existing AIF schemes that prioritise certain investors cannot raise new commitments or invest in new companies while maintaining current investments.

AIFs may grant differential rights to certain investors without affecting others. The Standard Setting Forum for AIFs will establish the terms for these rights in consultation with SEBI. Large Value Funds are exempt from ensuring pari-passu rights, provided investors waive this requirement.

11. Board Approvals and Mandates for Offshore Derivative Instruments (ODIs)

The Board approved applying the additional disclosure framework from the SEBI circular dated August 24, 2023, to Offshore Derivative Instruments (ODI) subscribers, sub-fund structures, separate classes of shares, and equivalent structures of FPIs with segregated portfolios, ensuring their disclosure requirements align with FPIs.

11.1 Establishment of Monitoring and Compliance Mechanism for ODI Issuing FPIs

A monitoring and compliance mechanism will be established, requiring ODI-issuing FPIs to submit relevant subscriber information to Depositories and segregated portfolio details to the DDP/Custodian.

11.2 Consequences of Non-Compliance with Disclosure Requirements for ODI Subscribers

Non-compliance with disclosure requirements will result in the redemption of ODIs or liquidation of the segregated portfolio within 180 days, making defaulting ODI subscribers ineligible to subscribe to or hold any positions through ODIs from any ODI issuing FPI.

11.3 Prohibition on Derivatives in ODI Issuance and Requirement for Non-Derivative Underlyings

The Board also prohibited ODI issuing FPIs from issuing ODIs with derivatives as references or hedging them with derivatives on stock exchanges. ODIs will only be based on cash equity, debt securities, or other non-derivative permissible investments, fully hedged on a one-to-one basis throughout their lifespan.

11.4 Transition Requirement for Existing ODIs Hedged with Derivatives

Existing ODIs hedged with derivatives must be redeemed or converted to cash positions on a one-to-one basis within one year from the issuance of the guidelines.

11.5 Mandate for Dedicated FPI Registration for ODI Issuance Excluding Government Securities

Additionally, the Board mandated that FPIs issue ODIs (excluding those with government securities as underlying) only through a dedicated FPI registration, prohibiting proprietary investments under that registration.

12. Enhancement of Nomination Facilities in Indian Securities Market

To enhance investor convenience and establish uniform standards for nomination facilities across the Indian securities market, the Board has approved amendments to the SEBI (Mutual Funds) Regulations, 1996, and the SEBI (Depositories and Participants) Regulations, 2018. The key amendments include:

• Increased Nominees – The maximum number of nominees has been raised from three to ten.
• Nominee Authority – Nominees can act on behalf of incapacitated investors, subject to risk mitigation checks.
• Simplified Transmission – The process for transmitting assets to nominees and joint holders will require minimal documentation.
• Unique Identifiers – Nominees must provide unique identifiers, such as PAN, passport number, or AADHAAR.
• Consistent Norms – The introduction of consistent nomination norms across demat accounts and mutual fund investments.

13. Amendments to the SEBI (Prohibition of Insider Trading) Regulations, 2015

The Board has observed that certain individuals who have access to, or could reasonably be expected to have access to, UPSI are not currently captured under the definitions of ‘connected person’ and ‘immediate relative’. To address this gap, the Board has approved the following amendments:

Now, the following will be included in the definition of persons deemed as connected persons:

• A firm, its partners, or its employees where a ‘connected person’ is also a partner.
• Any individual sharing a household or residence with a ‘connected person.’

Further, the provision applicable to ‘immediate relatives’ will now extend to ‘relatives’.

A new definition of “relative” will be introduced, encompassing:

• The spouse of the person.
• The parent of the person and the parent of their spouse.
• The sibling of the person and the sibling of their spouse.
• The child of the person and the child of their spouse.
• The spouse of individuals listed in (c).
• The spouse of individuals listed in (d).

14. Establishment of Frameworks for ESG Debt Securities in the Indian Securities Market

To promote sustainable finance in the Indian securities market, SEBI has now approved the proposal to establish frameworks for the issuance of social bonds, sustainability bonds, and sustainability-linked bonds. Collectively with green debt securities, these instruments will be referred to as Environment, Social, and Governance (ESG) Debt Securities. Further, SEBI will periodically specify these frameworks, including adaptations of international standards to meet Indian requirements, along with the necessary disclosure obligations. Additionally, related standards will be developed by the Industry Standards Forum in consultation with SEBI.

15. Self-Attestation for SEBI Document Requirements

To streamline compliance for market participants, SEBI has approved amendments to certain regulations that replace the requirement for documents to be attested by a Notary Public or Gazetted Officer with self-attestation. Previously, this attestation was necessary for various documents, including applications for registration, requests for exemptions from open offers, applications for regulatory waivers, certificates of commencement of business from depositories, and undertakings related to administrative and civil proceedings.

16. Approval of the Securities and Exchange Board of India (Informal Guidance) Scheme, 2024

The Board has approved the replacement of the existing Securities and Exchange Board of India (Informal Guidance) Scheme 2003 with the proposed Securities and Exchange Board of India (Informal Guidance) Scheme, 2024. This new scheme expands eligibility to include regulated entities such as stock exchanges, clearing corporations, depositories, and managers of pooled investment vehicles registered with the Board.

Additionally, it aims to streamline the process for seeking guidance from the Board by establishing a dedicated nodal cell to receive and monitor applications. The Board also approved an increase in the application fee from ₹25,000 to ₹50,000 and the processing fee from ₹5,000 to ₹10,000.

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