[Impact Analysis] of the SEBI Board Meeting – April 2024

What are SEBI Board Meetings?
The SEBI Board Meeting refers to the periodic meetings held by the Board of the Securities and Exchange Board of India (SEBI). SEBI is the regulator for the securities and commodity market in India under the jurisdiction of the Ministry of Finance, Government of India.

What is the Purpose of SEBI Board Meeting?
The purpose of these board meetings is to discuss and make decisions on various regulatory issues related to the securities markets, including approvals of new regulations, amendments to existing rules, oversight of market operations, and ensuring the protection of investor interests.

What is the Importance of SEBI Board Meeting?
These meetings are crucial as they set the regulatory framework and guidelines for market operations, aiming to enhance transparency, fairness, and efficiency in the capital markets. The outcomes of these meetings are closely watched by market participants as they can have significant implications on the functioning of the markets and the overall investment climate in India.

Table of Contents

Introduction

1. Introduction of a framework for Unit-Based Employee Benefit schemes for employees of InvIT/REIT managers
2. Venture Capital Funds (VCFs) can now migrate to AIF Regulations
3. SEBI’s Amendments to Issue and Listing of Non-Convertible Securities Regulations
4. Simplified Disclosure of Financial Results for entities with only Listed Non-Convertible Securities
5. Flexibility for increased participation by NRIs, OCIs, and Resident Indian Individuals in IFSC-based FPIs
6. Enhanced Flexibility for Mutual Fund Investments in Group Companies of Sponsors
7. AMCs to put in place a structured institutional mechanism for identification and deterrence of potential market abuse
8. Ease of Doing Business for Market Infrastructure Institutions (MIIs)

Conclusion

Introduction

The Securities and Exchange Board of India (SEBI) in its 205th board meeting dated April 30, 2024 has approved a series of amendments concerning investments in REITs and InvITs, venture capital (VC) funds, mutual funds, and market infrastructure institutions (MIIs).

The Press Release (PR No. 08/2024) dated April 30, 2024 highlights the key approvals made by the Board. These include:

(a) the introduction of a framework for Unit-Based Employee Benefit schemes for employees of InvIT/REIT managers,

(b) Venture Capital Funds (VCFs) can now migrate to AIF Regulations,

(c) simplified disclosure of financial results for entities with only listed non-convertible securities, and

(d) flexibility for increased participation by NRIs, OCIs and Resident Indian Individuals in IFSC-based FPIs.

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

1. Introduction of a framework for Unit-Based Employee Benefit schemes for employees of InvIT/REIT managers

The SEBI, in its board meeting, has notified amendments to SEBI (Infrastructure Investment Trusts) Regulations, 2014 and SEBI (Real Estate Investment Trusts) Regulations, 2014 in order to provide a framework for the Unit-Based Employee Benefits Scheme. The Board now has approved the proposal to provide a framework for Unit Based Employee Benefit schemes (UBEB) for the employees of investment manager/manager of InvIT/REIT.

Further, the investment manager/manager may receive the units of InvIT/REIT in lieu of management fees, to provide unit-based employee benefits. Such units must be allotted directly to the Employee Benefit Trust so that these units are used exclusively for the UBEB scheme.

2. Venture Capital Funds (VCFs) can now migrate to AIF Regulations

In order to address the issues faced by Venture Capital Funds (VCFs) registered under the erstwhile VCF Regulations, particularly regarding their inability to fully liquidate the investments of their schemes within the tenure, the Board has approved a proposal to offer VCFs the option to migrate to Alternative Investment Fund (AIF) Regulations upon the expiry of their tenure. This transition will enable VCFs to benefit from AIF facilities for managing unliquidated investments.

2.1 Salient features of the framework for migration

The Salient features of the framework for migration are as follows –

• A separate sub-category shall be created under Category I AIFs – VCFs called “Migrated VCFs”.
• VCFs registered under the erstwhile VCF Regulations may opt for registering themselves as Migrated VCFs. No application fee or registration fee shall be levied for the same.
• Migrated VCFs shall not be subject to any additional investment conditions which did not apply to them under the erstwhile VCF Regulations.
• Migrated VCFs can avail the flexibilities under AIF Regulations with respect to an 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. This extension is contingent upon the absence of investor complaints related to non-receipt of funds or securities.

3. SEBI’s Amendments to Issue and Listing of Non-Convertible Securities Regulations

The SEBI has introduced amendments to the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021. These amendments aim to update several provisions relating to disclosure of financial results in the offer documents, record dates, due-diligence certification, and reduction in face value of debt securities and Non-convertible Redeemable Preference Shares. A brief summary of the specific amendments is as follows:

3.1 Issuers permitted to disclose audited financials via web links and QR codes in offer document/placement memorandum

In order to reduce the size of the offer document, the Board has approved the proposal allowing issuers with listed outstanding non-convertible securities as on the date of the offer document to disclose audited financials for the last three years through the insertion of a web link and QR code in the offer document/placement memorandum.

3.2 Standardization of the record date for identifying eligible holders

In order to address inconsistencies relating to the fixation of record dates and to achieve uniformity and standardization across various issuers, the Board has approved the proposal specifying that the record date for the payment of interest (or dividend) and repayment of principal for debt securities/non-convertible redeemable preference shares must be 15 days prior to the due dates of payment obligations.

3.3 Alignment of formats specified under NCS Regulations with Master Circular for Debenture Trustees

The Board has approved the proposal to align the formats specified under the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 in line with those specified in the Master Circular for Debenture Trustees.

3.4 Issuance of NCDs and Redeemable Preference Shares at reduced value to enhance investors participation

The Board has approved a proposal to allow issuers the option to issue Non-Convertible Debentures (NCDs) and Non-Convertible Redeemable Preference Shares (NCRPS) via private placement mode at a reduced face value of Rs. 10,000 along with the requirement to appoint a Merchant Banker. These NCDs and NCRPS must be plain vanilla, interest/dividend-bearing instruments. This initiative aims to enhance the participation of non-institutional investors in the bond market while safeguarding the interest of such investors.

4. Simplified Disclosure of Financial Results for entities with only Listed Non-Convertible Securities

To reduce compliance costs for listed entities, the Board has approved a proposal allowing entities with only listed non-convertible securities the option to give an intimation (via in the form of a window advertisement featuring a QR code and website link of the listed entity and stock exchange) in the newspaper regarding the financial results of the listed entity instead of disclosure of full financial results.

Further, for outstanding non-convertible securities, the listed entity must obtain prior approval from the Debenture Trustee. For future issuances, the listed entity is required to make disclosure in the offer document or obtain prior approval from the Debenture Trustee.

5. Flexibility for increased participation by NRIs, OCIs, and Resident Indian Individuals in IFSC-based FPIs

SEBI has approved a regulatory framework for providing flexibility for increased contribution by Non-Resident Indians (NRIs), Overseas Citizens of India (OCIs), and Resident Individuals (RI) in certain Foreign Portfolio Investors (FPIs) based in Indian IFSCs regulated by IFSCA.

5.1 How much Contribution Limits must be available for FPIs submitting copies of PAN cards

100% contribution limits must be available subject to the FPI submitting copies of PAN cards of all their NRI/OCI/RI individual constituents, along with their economic interest in the FPI, to the Designated Depository Participant (DDP). If a constituent does not have a PAN, the FPI is required to submit a suitable declaration along with copies of prescribed Identity documents such as an Indian passport, OCI Card, Aadhaar, etc.
Further, similar disclosure is also required in case of indirect holding in the FPI through non-individual constituents that are majority contributed to/owned/controlled by NRI/OCI/RI individuals on a look-through basis.

5.2.Conditions for IFSC Regulated Funds seeking 100% contributions

Funds set up in IFSC and regulated by IFSCA, desirous of having up to 100% aggregate contribution in their corpus from NRIs/OCIs/RI individuals, are not required to submit the above-mentioned documents if they satisfy the following conditions:

• Pooling: Contributions of all investors of the fund are pooled into one investment vehicle that is registered as an FPI, with no side vehicles.
• Pari-passu and Pro-rata: The corpus of the fund is a blind pool (i.e. common portfolio) with no segregated portfolios. All investors in the fund must have pari-passu and pro-rata rights in the fund.
• Diversification of investors: The fund has a minimum of 20 investors with each investor contributing not more than 25% to the corpus of the fund.
• Diversification of investments: A maximum of 20% of the corpus of the fund may be invested in the equity shares of an Indian-listed entity.
• Independent Investment Manager: The investors in the fund do not have a say in the investment decisions of the fund. The Investment Manager (IM) is completely independent in taking investment decisions for the fund.

6. Enhanced Flexibility for Mutual Fund Investments in Group Companies of Sponsors

Currently, Mutual Fund schemes are not allowed to invest more than 25% of their net asset value (NAV) in group companies of the sponsor. This restriction hampers passive funds from effectively replicating the underlying index, especially in cases where group companies of the sponsor comprise more than 25% of the underlying index.

SEBI has now approved an amendment to the SEBI (Mutual Funds) Regulations, 1996, allowing equity passive schemes to invest in group companies of sponsors up to the weightage of the constituents in the underlying index. This change, aimed at creating a level playing field for all Asset Management Companies (AMCs), includes an overall cap of 35% investment in sponsor group companies.

7. AMCs to put in place a structured institutional mechanism for identification and deterrence of potential market abuse

Considering the recent front-running instances observed by SEBI, the Board has approved amendments to SEBI (Mutual Funds) Regulations, 1996 for enhancing the existing regulatory framework by requiring Asset Management Companies (AMCs) to put in place a structured institutional mechanism for identification and deterrence of potential market abuse including front-running and fraudulent transactions in securities.

The mechanism must consist of enhanced surveillance systems, internal control procedures and escalation processes to identify, monitor and address specific types of misconduct including front running, insider trading, misuse of sensitive information, etc.

7.1 Exemption from the requirement of recording face-to-face communication

Regarding the requirement of recording all communication by dealers and fund managers, the Board has approved an exemption from the requirement of recording face-to-face communication, including out-of-office interactions, during market hours. This exemption will be made effective after the implementation of the institutional mechanism by the AMCs.

8. Ease of Doing Business for Market Infrastructure Institutions (MIIs)

To streamline compliance requirements and eliminate redundant provisions applicable to Market Infrastructure Institutions (MIIs) under the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018, the Board has approved several proposals. Among these is the decision that MIIs may continue to disclose their shareholding pattern using the same format as applicable to listed companies, eliminating the need for separate disclosure in an additional format.

Conclusion

Overall, these regulatory updates represent a significant step towards enhancing efficiency and transparency in the Indian financial ecosystem. By streamlining compliance requirements, eliminating redundancies, and introducing effective surveillance mechanisms SEBI aims to create a more conducive environment for investment. This proactive approach not only promotes market integrity but also instils confidence among investors, ultimately fostering growth and development in the capital markets.

Dive Deeper:
[Analysis] Key Highlights of the SEBI Board Meeting | 2021
[Analysis] Key Highlights of the SEBI’s Board Meeting Decisions – March 2024