SEBI Board Meet: FPI Framework Rationalised, Norms For Credit Rating Agencies Amended

CARE Ratings said that the amendments made for credit rating agencies will empower them to do their job better.

“We have two types of instruments we rate. Capital market instruments and bank loans. For capital markets, the information on defaults is well spread out. But there is a lot of information asymmetry in the bank loan market,” said TN Arun Kumar, interim chief executive officer of CARE Ratings.

The intention from the SEBI for better enforcement in insider trading matters is clear but some gaps on the protection side of the informants still remain, according to Moin Ladha, Partner at Khaitan & Co.

“The definition of the term informant though is very very broad,” he said. “While there are noble provisions for confidentiality, the protection against victimisation is only included as an obligation to be covered in the Code of Conduct—a document internal to organisations. So there may be a certain level of suspicion in protection that this Code will provide.”

SEBI’s deicision to completely do away with the broad-based eligibility for FPIs is a “pleasant surprise”, according to Richie Sancheti of Nishit Desai Associates.

“Clearly SEBI has been taking feedback on where the pain points for FPIs were. And there have been significant number of FPI clients, who we advise, who have struggled to meet the broad-based criteria,” he told BloombergQuint. “This is a very welcome move. We need to look at the fineprint on how this will be implemented.”

SEBI said that the current appraoch of allowing buybacks will continue if the post-buyback debt to equity ratio is not more than 2:1.

In case it is exceeding 2:1 on a consolidated basis then the buyback would only be permitted if:

• Post buyback the debt-to-equity ratio is not more than 2:1 on a consolidated basis after excluding subsidiaries that are NBFCs and HFCs regulated by RBI.
• All such excluded subsidiaries have a debt-to-equity ratio not exceeding 6:1 on a standalone basis.

SEBI has approved the SEBI (Prohibition of Insider Trading) (Third Amendment) Regulation, 2019.

Key features of the new norms:

• An informant will be a person voluntarily submitting a form that details credible, complete and original information regarding an act of insider trading.
• The informant will be mandated to disclose the source of original information and provide an undertaking that it was not sourced from any person employed with SEBI other regulator.
• The regulator will give a reward only if the information provided leads to a disgorgement of at least Rs 1 crore. The total monetary award will be 10 percent of the monies collected by shall not exceed Rs 1 crore. An interim reward not exceeding Rs 10 lakh may be given at the stage of issuance of the final order by the SEBI.
• The information provided by the informant will be exempted from disclosure under the Right to Information Act.
• An independent office separate from the investigation and inspection wings will be established by SEBI to devise a police relating to the receipt and registration of the Voluntary Information Disclosure Form and serve as a medium of exchange between the informant and Board. This will be the Office of Informant Protection.

The board also approved recommendations of working group constituted for reviewing SEBI's foreign portfolio investor regulations.

These amendments are meant to simplify and rationalise the existing regulatory framework for FPIs.

Some key aspects are:

• The broad based eligibility criteria has been done away with to simplify and expedite the registration process.
• FPIs may be re-categorise into two categories - Category I and II, instead of the present three categories.
• Registration of multiple investment manager structures has been simplified.
• Central banks that are not members of the Bank for International Settlement shall also be eligible for FPI registration.
• Entities in the international financial services center have been deemed to have met the jurisdiction criteria for FPIs.
• Documentation requirements for KYC have been simplified.
• FPIs will be permitted for off-market transfer of securities which are unlisted, suspended or illiquid, to a domestic or foreign investor.
• Offshore funds floated by Indian mutual funds will now be permitted to invest in India after registering as an FPI.
• Requirements for issuance and subscription of Offshore Derivative Instruments have been rationalised.

SEBI has amended norms for credit rating agencies to incorporate an enabling provision in the rating agreement between an agency and the client. This agreement will provide the credit rating agency explicit consent to obtain details of the existing and future borrowing of the issuer, its repayment and any delay or default in servicing of the borrowing.

The SEBI board decided to "give flexibility" to mutual funds to invest in unlisted non-convertible debentures up to a maximum of 10 percent of the debt portfolio of their scheme. This will be subject to investments in unlisted NCDs having simple structures that will be notified from time to time.

This will be implemented in a phased manner by June 2020.

The Securities and Exchange Board of India is expected to announce a slew of reforms for tighter scrutiny of credit rating agencies and for rewarding informants in insider trading cases at its board meeting today.

Officials told PTI that SEBI’s board is also likely to take up issues relating to mutual funds, startup listing platform and buybacks, among others.

Amid concerns over banks citing ‘client confidentiality’ to resist sharing of information on delayed loan repayments and possible defaults by their borrowers, the market regulator is planning to tighten its norms to make it mandatory for companies to provide these details to credit rating agencies.

Rating agencies have also come under the scanner for failing to flag potential credit risks of the securities and entities rated by them. SEBI may now propose to amend its regulations for rating agencies to ensure that any listed or unlisted entity, before getting rated, gives an explicit consent to obtain from their lenders and other entities full details about their existing and future borrowings as also their repayment and delay or default of any nature and provide the same to the rating agencies.

In another major proposal, SEBI plans to propose that an informant will get up to Rs 1 crore reward, a hotline for sharing details confidentially, and a possible amnesty or settlement for minor wrongdoings in return for cooperation in the probe.

SEBI is also planning to ease its norms for buyback of shares by listed companies, especially those having subsidiaries in housing finance and non-bank finance sectors.

The repurchase of shares by listed companies is governed by SEBI’s buyback regulations as well as by the Companies Act.

Among the main conditions that companies need to follow, the buyback offer cannot exceed 25 percent of the aggregate paid-up capital and free reserves of the company, but shareholders’ approval is required through a special resolution in case of the size exceeding 10 percent.

Also, a buyback is permitted only if the ratio of the aggregate of secured and unsecured debt owed by the company after the buyback is not more than twice the paid-up capital and free reserves, unless a higher debt-to-equity ratio is specified under the Companies Act.

SEBI’s proposal to amend its regulations will also follow a notification by the Corporate Affairs Ministry permitting government companies carrying out non-banking finance and housing finance activities to launch buybacks resulting in up to 6:1 debt-to-equity ratio post the share repurchase.

SEBI also wants mutual fund houses to shift all their investments to listed or to-be-listed equity and debt securities in a phased manner and reduce their exposure to unrated debt instruments from 25 percent to only 5 percent.

Exposure to risky debt securities has emerged as a major risk for investors, including those coming through the mutual fund space, and the regulator has been making efforts to enhance its safety net against such risks.

Also, mutual funds would be permitted to accept upfront fees with disclosure of all such fees to valuation agencies and standard methodology for treatment of such fees would be issued by the Association of Mutual Funds in India in consultation with SEBI.