SEBI Sets The Ball Rolling, Down Three Lanes
The Securities and Exchange Board of India’s board meeting earlier this week set in motion a number of interesting developments. Steered by an extensive agenda, the outcome of such meetings is often hard to catalogue thematically. But the overall thrust of the Sept. 28 meeting can be somewhat neatly slotted into three key categories (i) simplify deal-making, (ii) keep corporate governance reforms on the boil, and (iii) explore new asset classes.
Pursuant to recommendations of a sub-group of the primary market advisory committee, SEBI released a consultation paper earlier this year that mooted the idea of simplifying the process of delisting in control transactions. First envisaged by the TRAC committee back in 2012, this proposal has been a long time coming.
Currently, the law requires any acquirer attempting a delisting to first satisfy the minimum public shareholding of 25% (should the open offer result in a breach of these limits) and then attempt a delisting. Aptly described by the consultation paper as “directionally contradictory” transactions, the same acquirer is today required to first make an offer to buy as part of the open offer, then sell to meet public shareholding thresholds, only to buy again to go private. The SEBI board has now approved amendments which, once operationalised, will allow for two prices to be put forth by an acquirer who announces his intention to delist upfront- the open offer price and the delisting price (which will be higher, due to control premium being built-in). Where the 90% delisting threshold is met, tendering shareholders are paid the delisting price and if not, then the open offer price is paid to all public shareholders who tender their shares. By making this process more predictable and less tedious, SEBI is looking to cast off a significant gating item for acquirers looking to take listed companies private and helpfully steer such delistings away from the reverse book-building process.
This amendment also alludes to an overall regulatory approach that seeks to balance public shareholders’ expectations with that of the enterprise.
Once the fine print is out, it will be interesting to see if SEBI can resist the temptation to prescribe broad parameters for computation of the premium that must be built into the delisting offer price, or if it remains content with this being a purely commercial, market-driven decision.
Across most of its meetings this year, the SEBI board has consistently retained at least one or more agenda items focused on corporate governance and enhanced disclosures by listed companies. In its latest board meeting, SEBI has approved modifications to the existing related-party framework, in line with suggestions made by the SEBI Working Group in January 2020, and has re-drawn the definition of both related parties and their inter se transactions.
The framework broadens the term ‘related party’ to encompass any person/entity within the promoter or promoter group, without ascribing a shareholding threshold, as is the requirement today. Any entity/person with a direct or indirect shareholding of 20% or more in a listed company in the immediately preceding financial year (with effect from April 1, 2022) or 10% (with effect from April 1, 2023) will also come within the fold of the new related-party definition.
Related-party transactions have also assumed a more holistic definition to include those between a listed entity or its subsidiary with their related parties. Sealing in a long-standing gap, the definition will now cover transactions between listed entities or their subsidiary with any other party, where the purpose and effect of such a transaction are to benefit a related party of the listed entity or its subsidiaries.
The SEBI board has also suggested recasting the definition of material related-party transactions such that transactions of Rs 1,000 crore or 10% of the consolidated annual turnover of the listed entity (whichever is lower) now require shareholder approval. It has also proposed enhanced disclosure and reporting requirements to the audit committee, board as well as shareholders. The press release is not clear on the exact form or frequency of such enhanced disclosures, but the intent is clearly to ensure that such data must be publicly available, to allow stakeholders to readily discern corporate behavioural patterns.
Overall, the audit committee’s review of related-party transactions, its fastidiousness in ascertaining the “purpose and effect” of a transaction and continuing efforts to maintain the rigour of scrutiny over the entire group’s transactions will be important to the success of these changes.
Nestled behind the glare of some of these grander reforms is the intriguing reference in the SEBI board minutes to overhauling the “fit and proper” test. An abiding feature in the lifetime of any licensed intermediary, its directors or key management, the fit and proper test operates as a sine qua non in the securities market and is a pre-condition to obtaining registrations, continue business, or in the case of individuals, occupy positions of responsibilities within market intermediaries or listed companies. The extant regulations are principle-based and revolve around three main criteria- reputation, financial solvency, and net worth, and absence of convictions, restraint orders, or willful defaulter declarations.
The SEBI board has now suggested a two-pronged, principle-based “and/or” rule-based assessment of the term “fit and proper”, but the extract of the board minutes is unclear on the manner in which this will be made applicable.
Inferring from the language in the press release, it seems that the principle-based approach will be relevant for license applicants and intermediaries, in which individuals will be examined against more measurable rules.
The SEBI board minutes reiterate the principle-based criteria of integrity, reputation, etc., while adding that the rule-based test must now include disqualifications for persons against whom an order has been passed by SEBI or any other financial sector regulator.
If notified, this will be quite significant in terms of its impact on individuals against whom penalties or substantive restrictions are issued by regulators and their ability to continue to occupy positions of responsibility. Even where parties procure a stay at the appellate forum on such directions, the observations and findings in such orders may, until fully set aside, weigh heavily on decisions taken by boards and internal committees on the suitability of their key personnel. SEBI should consider deliberately the finer points of this proposal and also ensure that the final guidelines keep settlement or compounding orders passed by SEBI/RBI, expressly out of its scope.
Goldspotting And New Platforms
The SEBI board also announced a social stock exchange and flagged off the setup of a market for spot trading in gold. Notified as the regulator for gold exchanges in India in terms of the union budget earlier this year, SEBI released a consultation paper in May 2021 on its proposal to permit trading of gold through Electronic Gold Receipts or EGRs which will be notified as ‘securities’ under the Securities Contracts (Regulation) Act, 1956 and be subject to the securities transaction tax. The introduction of gold spot exchanges complements the existing bouquet of gold ETFs and mutual fund products and is aimed at aiding better price discoverability in the spot market for gold.
This ambitious project will require a seamless interface across vault managers, depositories, stock exchanges, and clearing corporations and while designating SEBI as the regulator will surely increase confidence in this market, managing and supervising the back-end logistics of vault managers, inspecting them, and learning from India’s previous experiences in the spot market will be key to the sustainability of this opportunity.
The idea of a social stock exchange has also been in the works for a while and following from SEBI’s Working Group as well as Technical Committee reports, the SEBI board has now approved the creation of a social listing board as a separate segment within existing stock exchanges. This will allow entities engaged in activities across the 15 broad categories of social and educational services, in both profit and not-for profit, to raise funds for their operations and growth. An excellent way to create access routes into the growing world of impact investing, operationalising this platform will require amendments to a host of regulations including the ICDR Regulations to modify listing criteria. The interplay between entities listed on this segment with the Foreign Contribution Regulation Act, which currently regulates the flow of foreign funds into non-profit activities will be critical to solve.
With SEBI’s consultation paper excluding entities with religious and political objectives from raising funds on this social segment, exchanges will need to sensibly define their eligibility criteria when this rolls out, to ensure that any such exclusions are based only on objective demarcations and verifiable metrics.
Shruti Rajan is a Partner in the Mumbai office of Trilegal, and a regulatory and enforcement lawyer in the financial services space. Riya Chopra, Associate at Trilegal also assisted with this piece.
The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its editorial team.