[Key Highlights] Consultation papers on Review of SEBI (Buyback of Securities) Regulations

The Board took some of the key decisions in its meeting. The decisions include strengthening focus and governance mechanisms in Market Infrastructure Institutions (MIIs), approval of a few of the amendments to the existing buyback regulations as proposed earlier such as reduction of the timeline for completion of the Buyback through the Tender Offer Route. Some of the key highlights in this regard are as under:

1. SEBI recommends three verticals for the functions of Market Infrastructure Institutions

Market Infrastructure Institutions (Stock Exchanges, Clearing Corporations and Depositories) are key pillars of a vibrant and resilient securities market. In this regard, a comphrensive review was undertaken to strengthen the focus and of the governance of MIIs. Now, the functions of MII to be categorized into three verticals, namely:

(a) Critical Operations, Regulatory,

(b) Compliance and risk management and

(c) other functions, including business development.

Further, The Key Management Personnel (KMPs) heading the functions under the first two verticals to be at par in hierarchy with the KMPs heading the third vertical.

2. SEBI prescribes mandatory appointment of Public Interest Directors by Market Infrastructure Institutions

SEBI has now prescribed the process of appointment of Public Interest Directors (PIDs) in Market Infrastructure Institutions. This process is to be rationalized by mapping certain skill-sets/expertise to PIDs. Now, The MIIs will be required to mandatorily appoint PIDs with background and expertise in the areas of technology, law and regulatory, finance and accounts and capital markets.

Further, the internal evaluation of functioning of MIIs and their statutory committees to be done every year. In addition, an external evaluation shall be done by an independent entity once in three years.

Further, MIIs will set up an Investment Committee for evaluation of investments including capital expenditure, investments into other companies and CSR activities.

3. SEBI widens the scope of definition of Key Managerial Personnel’s

The definition of KMPs to be changed to cover employees based on importance of activities carried out by them and their relative hierarchy within the Market Infrastructure Institutions. Further, the MII will clearly delineate and segregate the roles and responsibilities of such identified KMPs within each function in order to improve overall accountability.

The appointment and removal of KMPs will be done by Nomination and Remuneration Committee (NRC). Also, a separate Chief Risk Officer is to be appointed. Further, the performance of KMPs will be evaluated in every six months. Also, no employee of the MII will be permitted to simultaneously be an employee of a subsidiary of the MII.

Also, a sharper Code of Conduct will be applicable to the MII, the governing board, directors, KMPs and committee members. MIIs will also be required to frame an internal policy for sharing and monitoring data which will entail means and manner of data sharing.

4. SEBI increases minimum utilization of the amount earmarked for buy-back through stock exchange route to 75%.

Buy-back through stock exchange route to be phased out in a gradual manner. Now, SEBI has increased the minimum utilization of the amount earmarked for buy-back through stock exchange route from existing 50% to 75%. Also, creation of a separate window on stock exchanges for undertaking buy-back till the time buyback through stock exchange is permitted.

5. SEBI reduces timeline for completion of Buyback through Tender Offer Route by 18 days

With a view to streamline the process of buy-back, create a level playing field for investors and promote ease of doing business, SEBI has prescribed reduction in timeline for completion of Buyback by 18 days by removing the requirement of filing draft letter of offer with SEBI and its observations thereof, and reduction of the duration of the tendering period and period available for payment of consideration to the shareholders.

Also, now upward revision of buy-back price can be made until one working day prior to the record date. Further, SEBI has mandated to place the relevant advertisements/documents with respect to buyback, such as, copy of the public announcement, letter of offer etc. in the respective website of the stock exchange(s), merchant banker and the company for better dissemination of information to shareholders.

6. SEBI introduces framework to facilitate ‘Execution Only Platforms’ for direct plans of Mutual Fund schemes.

As of now, there is no regulatory framework in place to facilitate the provision of such “execution only services” in direct plans of MF schemes, independent of the regulatory requirements applicable to IAs and Stock Brokers. Now, the Board has decided to introduce a regulatory framework for “Execution Only Platforms” (EOP) for direct plans of Mutual Fund schemes.

This will help board in achieving Convenience to investors in making investments through EOPs, Appropriate investor protection mechanisms and Ease of doing business for the EOPs.

7. SEBI introduces Platform for Risk Reduction Access to investors in case of disruption of trading services by Stock Broker

Presently, In the event of disruption of trading services provided by a Broker, clients face significant risk if they are unable to square off their open positions and / or cancel orders pending at the stock exchange, particularly when the markets are volatile.

Now, to provide such clients a facility to reduce the risk of open positions / pending orders during periods of disruption in services of their broker, it has been decided that stock exchanges shall introduce an Investor Risk Reduction Access Platform. A detailed framework for the platform shall be issued by way of Circular.

8. SEBI notifies Enhanced risk management framework for stock brokers designated as Qualified Stock Brokers

Certain Stock Brokers in the market handle a very large number of clients, very large amount of client funds and very large trading volumes. Possible failure of such brokers has the potential to cause widespread impact on investors and reputational damage to the Indian securities market.

To mitigate this risk, the Board approved amendments to the SEBI (Stock Brokers) Regulations, 1992 to designate such stock brokers, based on identified parameters, as Qualified Stock Brokers (QSBs). QSBs would need to comply with enhanced risk management practices/ requirements. Also, there would also be enhanced monitoring of such QSBs by SEBI/Market Infrastructure Institutions (MIIs).

9. SEBI amends procedure for registration of Foreign Portfolio Investors in order to facilitate ease of doing business.

SEBI, in order to further reduce the time taken for granting registration to FPIs, has approved certain procedural requirements for on-boarding FPIs. Now, registration can be granted on the basis of scanned copies of application forms / supporting documents and activation of trading post verification of physical documents. Also, digital signatures by FPIs to be accepted.

Further, SEBI has also permitted verification of PAN by DDPs through the Common Application Form (CAF) module available on the websites of the Depositories. Also, use of SWIFT mechanism for certification, by authorized bank officials, of copies of original documents submitted by FPIs to DDPs has been permitted.

10. SEBI enhances the scope of definition of green debt security to facilitate sustainable finance while safeguarding against ‘greenwashing’

With the sudden increase in interest in sustainable finance in India as well as around the globe, SEBI undertook a review of the regulatory framework for green debt securities. It has been decided that definition of green debt security shall include new modes of sustainable finance in relation to pollution prevention and control, eco-efficient products, etc.

Also, SEBI Introduces the concept of blue bonds (related to water management and marine sector), yellow bonds (related to solar energy) and transition bonds as sub categories of green debt securities.

11. AIFs can now participate in Credit Default Swaps, not only as protection buyers, but also as protection sellers.

To provide greater investment flexibility to Managers of AIFs and to facilitate deepening of the domestic Corporate Bond market, SEBI has been decided to permit AIFs to participate in Credit Default Swaps (‘CDS’), not only as protection buyers, but also as protection sellers, subject to conditions for risk mitigation. The Board has approved the certain types of transactions in CDS by AIFs. Hedging, Purchase CDS, and Sell CDS norms had been provided.

12. AOA of the company to include provisions w.r.t appoint the nominee of Debenture Trustee (DT) as a director in the event of default.

With a view to better protect the interests of debenture holders, SEBI has decided that, Issuers of listed debt securities shall incorporate suitable provisions in their Articles of Association, to cast obligation on the Board of Directors of the issuer to appoint the person nominated by its Debenture Trustee (DT) as a director in the event of default.

Also, Corresponding amendments are to be made in the Debenture Trust Deed. The existing listed debt issuers are required to do the needful by September 30, 2023. Further, public issue of Debt Securities and NCRPS shall now be kept open for subscription for a minimum period of three working days and maximum period of ten working days.

13. Corporate Governance norms shall also be applicable on REITs and InvITs

With the intention to introduce governance norms for REITs and InvITs in line with SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, Board has prescribed applicability of corporate governance norms applicable for listed companies to REITs and InvITs, irrespective of whether any debt security was issued by them.

14. SEBI streamlines provisions related to tenure of auditor, computation of leverage, etc. for REITs & INVITs.

Now, the Tenure of auditor to be till the conclusion of the fifth annual general meeting of unit holders. The Statutory auditor of REIT/ InvIT shall undertake limited review of audit of all the entities or companies whose accounts are to be consolidated. Further, investment in overnight fund to be considered as cash and cash equivalent, for the purpose of computation of leverage. Also, Unclaimed / unpaid distributions for REIT/ InvIT to be transferred to the ‘Investor Protection and Education Fund’ constituted by SEBI.

15. SEBI approves Framework for Adoption of Cloud Services by SEBI Regulated Entities.

The Board approved the framework for adoption of cloud services by SEBI Regulated Entities (REs). The framework is a principle-based framework containing nine broad principles which must be followed by REs for deploying cloud services. The Framework highlights certain aspects associated with adoption of cloud services such as Risk Assessment, Regulatory and Legal Compliances, etc.