[Analysis] SEBI Board Meeting Highlights [June 2024] – Curbs on Unregistered Advisors | Flexible Delisting | Enhanced Cybersecurity

On June 27, 2024, the Securities and Exchange Board of India (SEBI) announced significant regulatory changes to enhance market transparency, investor protection, and operational efficiency. Key reforms include:
– Restrictions on SEBI-regulated persons from associating with unregistered investment advisors, specifically targeting the influence of unregistered financial influencers ('finfluencers') by allowing only educational collaborations without financial advice or performance claims.
– Improvements to the voluntary delisting process, introducing a Fixed Price Process with a premium requirement for frequently traded shares and alternative mechanisms for Listed Investment Holding Companies.
– Exemptions for University Funds registered as Category I and II Foreign Portfolio Investors (FPIs) from stringent disclosure requirements.
– Streamlining the public issue process for debt securities and Non-Convertible Redeemable Preference Shares, reducing timelines for public comments, subscription periods, and listings.
– Implementing measures to facilitate business for Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trusts (REITs), including shorter notice periods for meetings and reduced trading lots.
– Allowing short-term borrowing for Category I and II Alternative Investment Funds (AIFs) to manage temporary shortfalls.
– Introducing a comprehensive 'Cybersecurity and Cyber Resilience Framework' to enhance the security and resilience of regulated entities against cyber threats.

These changes aim to refine the regulatory framework, promoting more efficient and secure market practices while safeguarding the interests of investors.

Table of Contents

Introduction

1. Restrictions on SEBI-regulated persons from associating with unregistered investment advisors
2. Providing flexibility in delisting framework and counter-offer mechanisms
3. University Funds registered as Category I FPIs are exempted from additional disclosure requirements
4. Streamlining public issue process for debt securities and Non-Convertible Redeemable Preference Shares
5. Measures to facilitate ease of doing business for InvITs and REITs
6. Allowing Category I and II AIFs to borrow for up to 30 days to cover shortfalls in investor contributions
7. Approves ‘Cybersecurity and Cyber Resilience framework’ for Regulated Entities
8. Conclusion

Introduction

On June 27, 2024, the Securities and Exchange Board of India (SEBI), in its 206th meeting, unveiled a series of transformative regulatory changes designed to boost transparency, safeguard investors, and enhance operational efficiency across various financial segments[1]. The key measures include restrictions on SEBI-regulated persons from associating with any individual or entity that directly or indirectly provides advice or recommendations related to securities, offering flexibility in the voluntary delisting framework, and exempting University Funds registered or eligible to be registered as Category I and II FPIs from certain disclosure norms.

Additionally, SEBI has streamlined the public issue process for debt securities, allowed short-term borrowing for AIFs, and approved a ‘Cybersecurity framework’ for regulated entities. The key highlights of the SEBI’s Board Meeting in detail are as follows:

1. Restrictions on SEBI-regulated persons from associating with unregistered investment advisors

Financial influencers have gained significant traction in recent years on social media platforms such as Instagram, YouTube and Twitter. These individuals often provide advice on investing, personal finance, and other financial products. While some finfluencers may offer genuine educational content, others have been criticized for misleading investors and promoting financial products without proper authorisation.

To address the risk associated with ‘finfluencers,’[2] the Board has approved proposals to restrict the association of regulated entities with unregistered entities. It has banned registered entities from associating with unregistered investment advisors and allowed them to associate with unregistered entities if they only share educational content. The proposals are as follows:

1.1 Regulated Entities are prohibited from associating with ‘Unregistered Finfluencers’

To curb the influence of unregistered finfluencers, SEBI-regulated entities, and their agents must not engage in any form of association or financial transactions with individuals or entities who provide advice and recommendations regarding securities returns or performance unless such advice or recommendations are permitted by the Board.

1.2 Regulated Entities focused on ‘Investor Education’ and ‘digital platforms’ are allowed to associate with Finfluencers

However, the above restriction excludes associations involving SEBI-regulated entities or their agents with individuals or entities exclusively focused on investor education, without giving advice, recommendations, or making claims about returns or performance. It also exempts digital platforms with SEBI-approved preventive and curative measures that prevent unauthorized advice or claims.

2. Providing flexibility in delisting framework and counter-offer mechanisms

In order to facilitate ease of doing business, protect investors’ interests, and provide flexibility in the Voluntary Delisting framework, the SEBI Board has approved the following proposals:

2.1 Introduction of Fixed Price Process for delisting, ensuring minimum 15% premium for frequently traded shares

SEBI has introduced a Fixed Price Process[3] as an alternative to the Reverse Book Building[4] (RBB) process for delisting of companies whose shares are frequently traded. The fixed price offered by an acquirer must be with at least 15% premium over the floor price as determined by Delisting Regulations.

2.2 Introduction of alternative delisting framework for Listed Investment Holding Companies

SEBI has also introduced an alternate delisting framework for listed Investment Holding Companies (IHC) through a scheme of arrangement through selective capital reduction.

A listed IHC meeting the criteria of having at least 75% of its fair value (net of liabilities) from direct investments in equity shares of other listed companies will be allowed to take the following actions under SEBI’s new scheme:

• Such companies can transfer their equity shares held in other listed firms to their public shareholders in proportion to their holdings.
• They can make proportionate cash payments to public shareholders based on other assets, including investments in land, buildings, unlisted companies, and similar assets.

Upon the extinguishment of all public shareholding, the IHC shall be delisted.

2.3 Modification of ‘Counter-Offer Mechanism’ in case of delisting via Reverse Book Building

In the case of delisting via reverse book building, the counteroffer mechanism allows shareholders to propose a price higher than the current bid price offered by the acquirer during the delisting process. SEBI has now introduced modifications to the Counter-Offer mechanism under the RBB process. This includes:

• Reducing the threshold for making a counter-offer from existing 90% to 75%, provided at least 50% of public shareholding has been tendered.
• Setting a minimum counter-offer price based on the higher of the volume-weighted average price (VWAP) of tendered shares or an indicative price offered by the acquirer.
• Successful delisting requires the acquirer to achieve a post-offer aggregate shareholding of 90%.

3. University Funds registered as Category I FPIs are exempted from additional disclosure requirements

The Board has approved an exemption proposal to ease business operations for Foreign Portfolio Investors (FPIs). Under this decision, University Funds and university-related Endowments, registered or eligible to be registered as Category I FPIs, are exempted from additional disclosure requirements outlined in SEBI’s August 24, 2023 circular[5]. This exemption is subject to the following conditions:

• Its India equity AUM is less than 25% of its Global AUM.
• Its global AUM is more than Rs 10,000 crore equivalent.
• It has filed appropriate returns/filings with the respective tax authorities in its home jurisdiction to evidence that the entity is in the nature of a non-profit organisation that is exempt from tax.

4. Streamlining public issue process for debt securities and Non-Convertible Redeemable Preference Shares

The Board has approved the proposal to streamline the public issue process for debt securities and Non-Convertible Redeemable Preference Shares (NCRPS) to provide issuers with faster access to funds. The following decisions have been made –

4.1 Reduction in timeline for public comments on draft offer documents, minimum subscription period and listing

The Board has decided to reduce the period for seeking public comments on the draft offer documents from 7 working days to 1 day for listed issuers and 5 days for other issuers. Further, the minimum subscription period has been reduced from 3 to 2 working days.

Also, the listing timeline has been reduced from T+6 working days to T+3 working days. This change will initially be optional for one year and mandatory thereafter, ensuring all listings occur on a T+3 basis.

4.2 Flexibility for Public Issue Advertisements via Electronic Modes

The Board has provided issuers with flexibility by allowing them discretion in advertising public issues via electronic modes, subject to a window advertisement (containing a QR Code and Link to full advertisement) in newspapers.

4.3 Mandating UPI for individual investors for investments up to Rs 5 lakhs

The Board has harmonized the procedure for applying in the public issue of debt securities and NCRPS through intermediaries with that in the case of specified securities by mandating UPI for individual investors where the investment is up to Rs 5 lakhs.

5. Measures to facilitate ease of doing business for InvITs and REITs

The Board has approved several proposals to facilitate ease of doing business related to activities of InvITs and REITs.

5.1 Shorter notice period for InvIT and REIT unitholder meetings

The Investment Manager of an InvIT or the Manager of a REIT can now convene a meeting of unitholders by giving a notice shorter than 21 days, subject to prior consent from the unitholders.

5.2 Quarterly reporting of investor complaints and alignment of disclosure timelines

The statement of investor complaints must be placed before the Board of Directors of the Investment Manager of InvIT or the Manager of REIT and the Trustee on a quarterly basis. Additionally, the timeline for disclosing statements of deviations or variations in using proceeds from the stated objects will align with the financial results submission to stock exchanges.

5.3 Reduction in trading lot for Privately Placed InvITs

The trading lot for privately placed InvITs will be reduced to Rs 25 lakh.

5.4 Revision of timeline for payment of distribution to 5 working days

The timeline for the payment of distributions will be revised to five working days from the record date. The record date must be set two working days from the date of declaration of distribution, excluding the date of declaration and the record date.

6. Allowing Category I and II AIFs to borrow for up to 30 days to cover shortfalls in investor contributions

SEBI has approved the proposal to allow Category I and II AIFs to borrow for a period of up to 30 days to cover temporary shortfalls in investor drawdowns/contributions while making investments.

The cost of borrowing will be charged to the specific investor responsible for the shortfall. Additionally, to prevent frequent borrowing, there is a mandatory cooling-off period of 30 days between two consecutive borrowings availed by these AIFs.

These measures are designed to enhance the ease of doing business and provide AIFs with the necessary operational flexibility to manage their investment activities efficiently.

6.1 Investor Protection Measures for Large Value Funds (LVF)

To provide clarity to investors in Large Value Funds for Accredited Investors (LVFs)[6] about their investment horizon, the Board approved the following proposals –

• To limit any extension of LVF tenure to 5 years, subject to the approval of 2/3^rd of unit holders by value.
• If the LVF is not liquidated even after the maximum permissible tenure of 5 years, the LVF can opt for a further dissolution period as applicable to other AIFs.
• Existing LVF schemes that have not specified a cap on the extensions in tenure in their Private Placement Memorandums (PPMs) or whose extension period is beyond the permissible 5 years must align the same with this requirement within 3 months from the date of issuance of the circular.

Further, while realigning, such schemes must have the flexibility to revise their original base tenure of the scheme with the consent of all their investors.

7. Approves ‘Cybersecurity and Cyber Resilience framework’ for Regulated Entities

The Board has approved the Cybersecurity and Cyber Resilience Framework (CSCRF) for SEBI Regulated Entities (REs).

7.1 Meaning of ‘Cybersecurity and Cyber Resilience Framework’

CSCRF is a standard-based framework that broadly covers the five cyber resiliency goals, viz. anticipate, withstand, contain, recover, and evolve, which are adopted from the CERT-In Cyber Crisis Management Plan (CCMP) for countering Cyber Attacks and Cyber Terrorism.

7.2 Key Benefits and Components of CSCRF

CSCRF provides a structured approach to implement various solutions for cybersecurity and cyber resiliency. This framework would assist REs in strengthening the security posture of the REs and offers the following benefits:

• Cyber Risk Governance and Management Framework
• Categorizes data into ‘Regulatory’ and ‘IT and Cybersecurity’ categories
• Implementation of security operations Centre (SOC) and measuring its efficacy on a periodic basis.
• Guidelines for API security and mobile application security
• Cyber Capability Index (CCI) to assess cyber resilience.
• Software Bill of Materials (SBOM) to mitigate supply chain risks.

7.3 Timeline to adopt the CSCRF standards

SEBI Regulated Entities (REs) are provided with the following timeline to adopt the new standards and controls prescribed in the CSCRF:

• Six categories of entities where cybersecurity and cyber resilience circular already exists – January 01, 2025
• All other entities where CSCRF made applicable for the first time – April 01, 2025.

8. Conclusion

In conclusion, these changes aim to enhance transparency, safeguard investors, and boost operational efficiency across the financial sectors. By addressing critical issues such as restricting unregistered financial influencers, reforming delisting processes, streamlining public issue procedures and implementing a robust cybersecurity framework, SEBI is strengthening the regulatory landscape. The focus on investor education, ease of doing business, and stringent cybersecurity measures ensures a secure and efficient market environment, promoting informed investing and protecting investor interests.

[1] Press Release No. 12/2024

[2] A “finfluencer” is a social media influencer specializing in finance, providing advice and insights on investments and personal finance.

[3] Fixed-price issue is a process in which the offering price is predetermined before the subscription period begins.

[4] Reverse Book Building (RBB) is a process used in the stock market for discovering the price at which shares of a publicly listed company should be bought back from shareholders i.e., Delisting of Shares.

[5] SEBI has mandated the criteria for submission of additional disclosures by foreign portfolio investors under the FPIs norms. As per the criteria, details of all entities holding any ownership, economic interest, or exercising control in the FPIs need to be provided by certain FPIs.

[6] Regulation 2(1)(pa) read with Regulation 2(1)(ab) of SEBI (Alternative Investment Funds) Regulations, 2012

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