[Analysis] SEBI Board Meeting Highlights [Dec. 2024] – Stricter Norms for SME IPOs | Use of AI Tools | Expansion of the UPSI Definition

On December 18, 2024, the Securities and Exchange Board of India (SEBI) implemented a comprehensive set of amendments during its 208th board meeting, as detailed in the Press Release (PR No. 36/2024). These regulatory adjustments emphasise SEBI's ongoing commitment to enhancing transparency, strengthening governance, and bolstering the overall regulatory framework across different market segments. Key highlights from the board meeting include:
– Stricter Norms for SME IPOs
– Corporate Governance Norms for High-Value Debt Listed Entities
– Expansion of the UPSI Definition
– Recognition of Past Risk and Return Verification Agency
– Regulated Entities' Responsibility for AI Tools
– Enhanced Framework for Securitised Debt Instruments
– Amendments to Mutual Fund Regulations
– Simplified Compliance for Custodians
– Electronic Payments Mandate for Listed Entities
– Timely Payment of Annual Fees by Depositories
– Investor Protection Measures for REITs and InvITs
– Facilitation for Small and Medium REITs
These initiatives reflect SEBI's strategic focus on streamlining regulatory processes, enhancing market liquidity, and ensuring robust protection for investors.

Table of Contents

Introduction

1. Introducing Stricter Norms for SME IPOs to Enhance Transparency and Governance
2. Corporate Governance Norms for High-Value Debt Listed Entities (HVDLEs)
3. SEBI Widens the Scope of Definition of ‘UPSI’ and Introduces Threshold Limits for Identifying Events as UPSI
4. Simplification of ‘Business Responsibility and Sustainability Report’ Requirements for ESG Disclosures and Reporting
5. Strengthening of Regulatory Framework for Merchant Bankers by Ensuring High Standards of Compliance
6. Enhanced Framework for Securitised Debt Instruments with Focus on Liquidity and Investor Protection
7. Amendments to SEBI (Mutual Fund) Regulations, 1996 to Facilitate Ease of Doing Business
8. Simplified Compliance and Enhanced Governance Framework for Custodians
9. Recognition of ‘Past Risk and Return Verification Agency’ to Enhance Transparency in Financial Services Market
10. Regulated Entities to Take Full Responsibility for Use of ‘AI Tools’ and Ensure Data Privacy and Security
11. Mandating Electronic Payments by Listed Entities to Security Holders
12. Timely Payment of Annual Fees by Depositories and Independent Verification of Annual Charges Paid to Board
13. Strengthening Investor Protection Measures for REITs and InvITs
14. Measures Towards Ease of Doing Business for Small and Medium REITs
15. Conclusion

Introduction

The Securities and Exchange Board of India (SEBI), in its 208^th board meeting dated December 18, 2024, approved a series of amendments. These amendments aim to strengthen the regulatory framework, improve transparency and enhance governance across various sectors.

The Press Release (PR No. 36/2024), dated December 18, 2024, highlights the key approvals made by the Board. These include:

• The introduction of stricter norms for SME IPOs to improve transparency and governance,
• Corporate Governance Norms for ‘High-Value Debt Listed Entities’,
• Widening of the scope of the definition of UPSI,
• Recognition of ‘Past Risk and Return Verification Agency’ and
• Regulated Entities to take full responsibility for ‘AI tools’ and ensure data privacy and security.

The key highlights of the SEBI’s board meeting in detail are as follows:

1. Introducing Stricter Norms for SME IPOs to Enhance Transparency and Governance

The Board has approved amendments to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, and SEBI (LODR) Regulations, 2015, to enhance transparency and streamline processes for SME IPOs and listings. The amendments are as follows:

• Eligibility for IPO – Issuers can make an IPO only if they have an operating profit (earnings before interest, depreciation and tax) of at least Rs 1 crore from operations in any 2 out of 3 previous financial years at the time of filing the Draft Red Herring Prospectus (DRHP).
• Offer for Sale (OFS) Limits – Selling shareholders in SME IPOs must not exceed 20% of the total issue size, and their sales are limited to 50% of their holdings.
• Promoters Lock-In – Lock-in on promoters’ holdings held in excess of the Minimum Promoter Contribution (MPC) will be released in a phased manner, i.e. lock-in for 50% of promoters’ holding in excess of MPC must be released after one year, and the remaining 50% must be released after two years.
• Cap on General Corporate Purpose (GCP) – GCP amounts in SME IPOs must be capped at 15% of the amount being raised by the issuer or Rs 10 crores, whichever is lower.
• Restrictions on Loan Repayment – SME issues cannot use proceeds to repay loans taken directly or indirectly from promoters, promoter groups, or related parties.
• Further Issues by SME Companies – SME companies can raise funds without migrating to the main board, provided they comply with the SEBI (LODR) Regulations applicable to main board-listed entities.

2. Corporate Governance Norms for High-Value Debt Listed Entities (HVDLEs)

The Board has approved key proposals to enhance corporate governance norms for High-Value Debt Listed Entities (HVDLEs). It includes the following:

• Increased Threshold for HVDLE Identification – The threshold for identifying HVDLEs has been raised from Rs. 500 crores to Rs. 1000 crores to align with Large Corporate thresholds.
• Flexibility in Committee Constitution – HVDLEs will have more flexibility in forming their Nomination and Remuneration Committee (NRC), Risk Management Committee (RMC), and Stakeholder Relationship Committee (SRC).
• Directorship Restrictions – HVDLEs will be included in the count for directorship ceilings to ensure directors can focus adequately on each listed entity. This restriction will not apply to ex-officio positions in PSUs or Public-Private Partnership (PPP) entities.
• Related Party Transactions (RPTs) – For debt-listed entities with substantial related party shareholding, material RPTs will require a No-Objection Certificate (NOC) from the Debenture Trustee, who must obtain approval from debenture holders before shareholders’ approval can be sought. This will apply from April 1, 2025.
• Introduction of Voluntary’ Business Responsibility and Sustainability Report’ (BRSR) – A voluntary BRSR requirement will be introduced for HVDLEs, aligning them with good governance practices on par with equity-listed entities.
• Relaxation for PPP Entities – Entities set up under the Public-Private Partnership (PPP) model will be relaxed from director composition requirements in the LODR Regulations, similar to PSUs or statutory entities.

3. SEBI Widens the Scope of Definition of ‘UPSI’ and Introduces Threshold Limits for Identifying Events as UPSI

The Board approved amendments to the definition of UPSI under Regulation 2(1)(n) of the SEBI (Prohibition of Insider Trading) Regulations, 2015, by including 17 out of the 27 items not already covered in the illustrative list from material events requiring disclosures under Regulation 30 of SEBI (LODR) Regulations, 2015. This change aims to enhance regulatory clarity, certainty, and uniformity in compliance within the ecosystem.

Further, for identifying events as UPSI, threshold limits as prescribed for events from Para A and Para B of Part A of Schedule III of the SEBI (LODR) Regulations, 2015, have been made applicable.

4. Simplification of ‘Business Responsibility and Sustainability Report’ Requirements for ESG Disclosures and Reporting

To facilitate ease of doing business for listed entities and their value chain partners, SEBI has introduced changes to the Business Responsibility and Sustainability Report (BRSR) requirements on Environmental, Social, and Governance (ESG) disclosures.

The implementation of ESG disclosures for value chain partners has been deferred by one year, now applicable from FY 2025-26 instead of FY 2024-25. Similarly, the requirement for ‘assessment or assurance’ of these disclosures will now commence from FY 2026-27 instead of FY 2025-26.

To further simplify compliance, ESG value chain disclosures will remain voluntary, replacing the earlier ‘comply-or-explain’ mandate. Additionally, the scope of reporting has been streamlined to focus on the top upstream and downstream partners contributing 2% or more of the listed entity’s purchases and sales while ensuring coverage of at least 75% of total value. For the first year of reporting, data from the previous year will be optional.

5. Strengthening of Regulatory Framework for Merchant Bankers by Ensuring High Standards of Compliance

The Board has reviewed and approved amendments to the SEBI (Merchant Bankers) Regulations, 1992, focusing on the registration, eligibility, and activities of Merchant Bankers (MBs) and their net worth criteria. The key amendments are as follows:

• Scope of Permitted Activities – Now, MBs (excluding banks and public financial institutions) can only undertake permitted activities. Non-permitted activities must be transferred to a separate legal entity within two years in compliance with SEBI’s code of conduct.
• Prohibition on New Valuation Activities – MBs are prohibited from undertaking new valuation activities but may complete existing ones. For future valuation work, separate registration with the relevant authority is required within nine months.
• Categorisation of MBs Based on Net Worth – MBs must be categorised into two groups based on their net worth. Category 1 MBs must have a net worth of at least Rs. 50 crore, enabling them to undertake all permitted activities. Category 2 MBs, with a net worth of at least Rs. 10 crore, are eligible for all activities except managing equity issues on the Main Board.
• Revenue Requirements for MB Categories – Revenue requirements have been set for Category 1 (Rs. 25 crore over three years) and Category 2 (Rs.5 crore over three years), with exceptions for MBs managing only debt or hybrid securities.
• Compliance Officer Qualifications and Experience Criteria – Compliance Officers must hold a Company Secretary qualification or a law degree with two years of experience or five years of experience with NISM certifications.

6. Enhanced Framework for Securitised Debt Instruments with Focus on Liquidity and Investor Protection

The Board has approved key proposals to refresh and restate the Securitised Debt Instruments (SDI) Regulations, focusing on enhancing transparency, liquidity, and investor protection. The key proposals include:

• Demat Form Requirement – Listed or to-be-listed Securitised Debt Instruments (SDIs) must be issued and transferred only in demat form.
• Minimum Ticket Size – The minimum ticket size for a single investor, both during initial subscription and subsequent purchase of listed or to-be-listed SDIs, is defined as follows:

1. 1. For RBI-regulated originators – Rs. 1 crore at initial subscription, with no specification for subsequent transfers.
   2. For non-RBI-regulated originators – Rs. 1 crore for both initial and subsequent transfers, subject to the amortised value for trading purposes.
   3. For SDIs backed by listed securities – The ticket size will be the highest face value among the listed securities.

• Securitisation Conditions – The following conditions will apply to the securitisation resulting in the issuance of listed or to-be-listed SDIs:

1. 1. No single obligor should constitute more than 25% of the asset pool, with potential risk-based relaxation as specified by SEBI.
   2. The securitisation pool assets must be homogeneous.
   3. SDIs must be fully paid up upfront.
   4. Originators must have a track record of 3 years in creating the type of debt or receivable they wish to securitise.
   5. Obligors must also have a 3-year track record in the relevant debt or receivable type, excluding originators regulated by the RBI.

• Trustee Eligibility and Accountability – Trustees of the Special Purpose Distinct Entity (SPDE) for SDIs must be SEBI-registered Debenture Trustees. Amendments to the ‘Duties of Trustees’ and Trustee Code of Conduct aim to enhance clarity, accountability, and transparency.

7. Amendments to SEBI (Mutual Fund) Regulations, 1996 to Facilitate Ease of Doing Business

In its board meeting, the SEBI approved certain amendments to the SEBI (Mutual Funds) Regulations, 1996, to relax the regulatory framework related to the ‘alignment of interest of designated employees of AMCs with the interest of unitholders’. Further, the Board approved amendments to specify timelines for the deployment of funds collected by AMCs in New Fund Offers as per the asset allocation of a scheme.

7.1 Relaxing Framework Related to ‘Alignment of Interest of Designated Employees of AMCs with Interest of Unitholders’

The Board approved amendments to the SEBI (Mutual Funds) Regulations, 1996, to relax the regulatory framework related to the ‘alignment of interest of designated employees of AMCs with the interest of unitholders’. The objective is to facilitate the ease of doing business for mutual funds while mandating disclosure of the results of stress testing for all mutual fund schemes.

The relaxations pertain to the reduction of the minimum investment amount, reduction in frequency of disclosures, lower lock-in period for employees who have resigned, empowering of the Nomination and Remuneration Committee to verify compliances by designated employees, relaxed requirements for employees managing liquid funds and relaxed redemption norms.

7.2 Specifying Timelines for Deployment of Funds Collected by AMCs in New Fund Offer as per Asset Allocation of Scheme

The Board approved amendments to SEBI (Mutual Fund) Regulations to specify timelines for the deployment of funds collected by Mutual Funds in New Fund Offers (NFO) as per the specified asset allocation of a scheme.

The objective of the framework is to provide a timeline within which the fund manager would be required to deploy the funds garnered in an NFO as per the required asset allocation of the scheme.

Further, the framework provides investors with the option to exit the scheme without an exit load in case the fund manager is unable to deploy the fund within the specified timeline.

8. Simplified Compliance and Enhanced Governance Framework for Custodians

The Board approved the proposal to review SEBI (Custodian) Regulations, 1996. These measures are expected to simplify compliance while strengthening risk management and governance amongst custodians. The key proposals approved by the Board are as follows:

8.1 Net Worth Requirement and Operational Framework for Custodians

Custodians must maintain a dedicated net worth of Rs. 75 Crore. The existing Custodians must achieve the same within three years. Further, custodians must adopt a framework for a business continuity plan and disaster recovery, orderly winding down and enhancing obligations, similar to those of qualified stock brokers. Also, the Code of Conduct applicable to Custodians must be amended in line with that applicable to other intermediaries.

8.2 Outsourcing Norms and Vault Requirements for Custodians

Regarding outsourcing non-core custodian activities, the Custodians and Depositories Standard Setting Forum (CDSSF) may categorise a list of core/non-core activities in consultation with SEBI. Further, the requirement of vaults must apply only if the custodian is holding any physical securities.

9. Recognition of ‘Past Risk and Return Verification Agency’ to Enhance Transparency in Financial Services Market

In order to facilitate persons regulated by the Board or their agents to market their services to investors using their risk-return metrics, the Board has approved the proposal to recognise a “Past Risk and Return Verification Agency (PaRRVA)” which shall verify the risk-return metrics in respect of services of such persons or their agents.

A Credit Rating Agency (CRA) must act as PaRRVA, with a recognised stock exchange serving as PaRRVA Data Centre (PDC). Further, PaRRVA must verify risk-return metrics for Investment Advisors (IAs), Research Analysts (RAs), algorithmic Traders, and those persons permitted by the Board to offer these services.

10. Regulated Entities to Take Full Responsibility for Use of ‘AI Tools’ and Ensure Data Privacy and Security

The Board approved the proposal to amend certain provisions of SEBI Regulations, including the SEBI (Intermediaries) Regulations, 2008, the SEBI (Depositories and Participants) Regulations, 2018, to 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.

The SEBI-regulated persons must be solely responsible for the privacy, security, and integrity of investors’ and stakeholders’ data, including data maintained by them in a fiduciary capacity, the output arising from the usage of such tools and techniques and for complying with applicable laws in force.

11. Mandating Electronic Payments by Listed Entities to Security Holders

The Board approved the proposal to mandate that any payment, including dividends, interest, redemption, or repayment by a listed entity to its security holders, be made in electronic form only. In case of returned dividends/interest/redemption, the company will be obligated to inform the Demat account holders by registered post as well as by email/SMS to update their correct bank account details.

Further, the companies and depositories must engage in a sustained campaign to facilitate that investors populate their bank account details to receive their payments in electronic mode.

12. Timely Payment of Annual Fees by Depositories and Independent Verification of Annual Charges Paid to Board

The Board has approved amendments to the SEBI (Depositories and Participants) Regulations, 2018, for the following:

• The payment of an annual fee to the Board by depositories must be within 15 days from the beginning of each financial year.
• The depository must inform the Board of the details of remittance along with the statement of computation of annual charges certified to be correct by a Chartered Accountant to ensure correct computation and independent verification of annual charges paid to the Board by the depository.
• In case of non-payment, late payment or short payment of an annual fee or annual charge, the depository must be liable for payment of interest of 15% p.a. on the amount remaining unpaid or belatedly paid or short-paid for every month of delay or part to the Board.

13. Strengthening Investor Protection Measures for REITs and InvITs

The Board approved investor protection measures for Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trusts (REITs), allowing REITs and InvITs to invest in unlisted equity shares, but only in companies providing management, property maintenance, housekeeping and other incidental services to the REIT/InvIT assets subject to certain conditions.

Further, the Board approved ease of doing business proposals for REITs and InvITs, including permitting inter-se transfer of locked-in units amongst a sponsor group entity, defining “common infrastructure” in the REIT Regulations, and allowing three months to fill a vacancy for the position of director.

14. Measures Towards Ease of Doing Business for Small and Medium REITs

The Board approved the following proposals to facilitate ease of doing business related to activities of SM REITs:

• Standardising disclosures in the scheme offer document, including bifurcation of the document into Key Information of the Trust (KIT) and Key Information of the Scheme (KIS), the manner of updating KIT and the preparation of the scheme offer document in a manner that facilitates automated processing;
• Introducing guidelines for the public issuance of units by a scheme of SM REIT, including allocation in public issues, subscription periods, price bands, allotment procedures in case of oversubscription and minimum subscription amount, and
• Alignment of certain provisions relating to investment conditions and borrowings for SM REITs with those applicable to REITs

15. Conclusion

Overall, the key highlights mark a significant step toward strengthening the regulatory framework of the Indian securities market. The approved amendments focus on enhancing investor protection, improving market transparency, and ensuring more efficient market operations. These changes are expected to boost investor confidence, reduce systemic risks, and facilitate the long-term growth of the market, aligning with SEBI’s continued commitment to regulatory excellence.

Dive Deeper:
[Analysis] Key Highlights of the SEBI’s Board Meeting Decisions – March 2024
[Impact Analysis] of the SEBI Board Meeting – April 2024
[Analysis] SEBI Board Meeting Highlights [September 2024]