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India – Capital Markets & Securities Snapshots.

28 January, 2014

 

  • The Securities and Exchange Board of India (‘SEBI’), pursuant to the Securities Laws (Amendment) Second Ordinance, 2013 (‘SL Ordinance’), has issued draft regulations dated November 14, 2013 (‘SL Regulations’), inviting comments from the public, specifying procedures and safeguards to be followed when undertaking search and seizure of persons or premises as part of an investigation. Pursuant to the SL Regulations, the investigating authority would be required to obtain a warrant of authority from the Chairman of SEBI to search any persons or premises, provided that such person or enterprise has satisfied certain prescribed criteria. The SL Regulations also provide various safeguards, which include protection of personal information, safe custody of documents and grant certain rights to persons being searched.

 

  • On October 10, 2013, SEBI placed a consultative paper and draft form of the SEBI (Real Estate Investment Trusts) Regulations, 2013 (‘REITs Regulations’) on its website, which will be finalised and notified upon receipt of public comments.

The REITs Regulations require real estate investment trusts (‘REITs’) set up under the provisions of the Indian Trusts Act, 1882 to undertake registration with SEBI (companies or limited liability partnerships have not been contemplated as REITs). The principal structure of a REIT will consist of the trustee, sponsor, manager and principal valuer, each of which is required to be a separate entity. The REITs Regulations provide that REITs can be set up for the purpose of investing in: (i) real estate assets in India; and/or (ii) securities of special purpose vehicles holding real estate assets in India, in each case, in accordance with the offer document/follow-on offer document. The REITs Regulations contain detailed provisions on the functioning of REITs, which inter alia include the nature of investments that can be made by REITs, the type and minimum number of investors from whom capital can be raised, the conditions of raising capital, eligibility criteria of a sponsor, manager and trustee of a REIT, minimum amount that the sponsor of a REIT is required to commit to a REIT to ensure “skin-in-the-game”, the manner and process in which the returns from such investments are to be returned to the investors, etc. News reports suggest that certain tax incentives are proposed to be provided to REITS, and the implementation of the REIT Regulations may be finalised once there is clarity on tax treatment.

 

  • On October 14, 2013, SEBI issued a consultation paper inviting submission of public comments on the draft of the SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2013 (‘Draft Regulations’) by October 30, 2013.

The Draft Regulations are proposed to supersede the existing guidelines for consent orders and composition of offences under the circulars issued by SEBI on April 20, 2007, and May 25, 2012 (‘Consent Scheme’). The Draft Regulations seek to confer wider powers on SEBI for settlement of administrative and civil proceedings, pursuant to the SL Ordinance, which confers powers on SEBI to settle administrative and civil proceedings under the Securities and Exchange Board of India Act, 1992 (‘SEBI Act’), the Securities Contracts (Regulation) Act, 1956 and the Depositories Act, 1996.

It may be noted that the legality of the consent guidelines was challenged in a Public Interest Litigation (‘PIL’) before the Delhi High Court. While the PIL was disposed off, the consent orders of SEBI under the existing guidelines have not been free from scrutiny. It appears that in order to overcome such challenges, the SL Ordinance has now inserted Section 15JB of the SEBI Act, which expressly grants statutory powers to SEBI to settle civil and administrative proceedings. Interestingly, the Draft Regulations clarify that applications pending under the existing consent guidelines will be dealt with in accordance with the corresponding provisions of the Draft Regulations. This would effectively give the Draft Regulations retrospective effect.


The Draft Regulations provide that cases already pending before a court or tribunal cannot be settled. The list of violations that cannot be settled has also been expanded to include failure to make disclosures under any regulations framed by SEBI dealing with issue and listing of securities, which in the opinion of SEBI, materially affects the right of the investors and raising of monies by issuance of securities or pooling of funds in violation of securities laws. The Draft Regulations prescribe a limitation period, as well as restrictions on an applicant who has previously settled defaults.


On January 9, 2014, SEBI notified the SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2013 (‘Settlement Regulations’) with retrospective effect from April 20, 2007. The Settlement Regulations are along the same lines as the Draft Regulations.

 

  • On October 8, 2013, SEBI amended the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (‘ICDR Regulations’), by notifying the SEBI (Listing of Specified Securities on Institutional Trading Platform) Regulations, 2013 (‘ITP Regulations’). Under the ITP Regulations, SEBI has permitted public companies, being small and medium enterprises (‘SMEs’), which do not have their securities listed on any recognised stock exchanges to list their securities exclusively on the institutional trading platform of an SME exchange (‘ITP’).

An SME will be eligible for listing its securities on the ITP if it satisfies certain prescribed criteria.


An SME complying with the prescribed criteria may apply to a recognised SME exchange for listing of its specified securities on the ITP on the basis of an information document, containing certain prescribed disclosures. The issuance of an in-principle approval by the SME exchange to the SME will amount to a waiver from the requirements of offering and allotting at least 25% or 10%, as the case may be, of that class or kind of security, to the public, by way of an offer document pursuant to the Securities Contracts (Regulation) Rules, 1957 (‘SCRR’), as well as maintenance of the minimum public shareholding threshold prescribed under the SCRR. Furthermore, the ITP Regulations impose liability on any person who has authorised the issue of the information document in the event of any misstatement or omission in the information document.


Listing of specified securities on the ITP cannot be accompanied by an issue of securities to the public in any manner.


The ITP Regulations provide for the circumstances in which an SME may exit voluntarily from the ITP and when an SME is required to exit from an SME exchange.

In addition to the above, the ITP Regulations set out the circumstances in which an SME is liable to be delisted and permanently removed from the ITP.

 

  • As per the ICDR Regulations, with respect to disclosures in abridged prospectuses, information included in an offer document, which is of a generic nature and not specific to an issuer, is required to be brought out in the form of a general information document (‘GID’), as specified by SEBI.

On October 23, 2013, SEBI prescribed the generic disclosures to be included in a GID, which are applicable to all red herring prospectuses/prospectuses filed with the Registrar of Companies after October 23, 2013. In this regard, it may be noted that:


i. the number of GIDs printed must not be less than the lower of 5% of the total abridged prospectuses/application forms printed, or 50,000;

ii. a GID is to be provided to an investor upon request, in a form and manner requested by the investor; and

iii. the GID is to be made available on the websites of the stock exchange(s) where the securities are proposed to be listed and the websites of the lead manager(s) to the issue.

 

  • On October 21, 2013, SEBI issued new formats for disclosures required to be made under inter alia Regulation 31(1) and (2) (‘New Formats’) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (‘Takeover Regulations’).

Under Regulations 31(1) and (2) of the Takeover Regulations, the promoter of every target company is required to disclose in the prescribed formats, any encumbrances on the shares held by him or persons acting in concert, and any invocation or release of such encumbrances.


On its website on December 12, 2011, SEBI has clarified that in the event non-disposal undertakings (‘NDUs’) are entered into along with side agreements, e.g., powers of attorney, which could result in shares held by the promoters being sold or otherwise dealt with by third parties, each such NDU constituted an encumbrance on such shares, and were required to be disclosed. However, NDUs without side agreements given by promoters were not covered by such disclosure requirements under the Takeover Regulations.


However, the New Formats specifically provide for NDUs to be disclosed as encumbrances on shares of promoters without going into the issue of whether such NDUs are accompanied by side agreements that enhance the risk of shares held by promoters being appropriated or sold by third parties.

 

  • The high level committee to review the SEBI (Prohibition of Insider Trading) Regulations, 1992 constituted under the Chairmanship of Justice N.K. Sodhi (‘Committee’), submitted its report to SEBI on December 7, 2013 (‘Report’). The Committee has made a range of recommendations regarding the legal framework on prohibition of insider trading and has invited comments on the proposed regulations from the public. The Committee has also suggested that each regulatory provision be backed by a note on the legislative intent with a view to set out the principles on which the regulation is based. Some of the salient features of the proposed regulations are set out below:

 

    • The definition of the term “insider” has been enlarged, and includes any person who is: (i) a connected person; or (ii) any person in possession of “unpublished price sensitive information” (‘UPSI’). The proposed regulations provide that any person who has been a connected person during the six-month period prior to an act of trading would be deemed to be a connected person. Additionally, if despite the passage of six months from the relevant act of trading, it could be demonstrated that contact amongst such persons had existed, it would lead to a reasonable prospect of UPSI having been accessed, and the consequences of trading when in possession of UPSI would follow. The term “connected person” also explicitly includes public servants who handle UPSI relating to listed companies. Further, “immediate relatives” are presumed to be connected persons, with a right to rebut the presumption.

 

    • The proposed regulations provide greater clarity on what constitutes UPSI by defining what constitutes “generally available information”.

 

    • Insiders are prohibited from communicating, providing or allowing access to UPSI unless required for discharge of their duties. A general prohibition is imposed on all persons from procuring and causing communication of UPSI unless required by law.

 

    • The Committee in its drafting of the proposed regulations has used the term “trading” instead of “dealing” to ensure that the provisions are made precise and to prevent penalising of routine bona fide transactions.

 

    • Conducting due diligence on listed companies would be permissible for purposes of transactions entailing an obligation to make an open offer under the Takeover Regulations. In all other cases, due diligence would be permissible subject to making the diligence findings that constitute UPSI generally available at least two days prior to the proposed trading. In all cases, the board of directors would need to opine that permitting the conduct of due diligence is in the best interests of the company, and would also have to ensure execution of non-disclosure and non-dealing agreements.

 

    • Under the proposed regulations, any trading in listed securities when in possession of UPSI is prohibited. However, the proposed regulations provide for various specific defences for such trading, including, inter alia, the relevant trades being contrary to the nature of trades pursuant to UPSI, the insider being an innocent recipient of UPSI etc.

 

    • Entities that have issued securities which are listed on a stock exchange or that are intended to be so listed (including mutual funds whose units are traded in the market) will be required to formulate and publish a Code of Fair Disclosure governing disclosure of events and circumstances that would impact price discovery of its securities.

 

    • All listed companies and market intermediaries are required to formulate a Code of Conduct to regulate, monitor and report trading in securities by its employees and other third party connected persons.

 

  • SEBI published a Consultation Paper on the draft SEBI (Research Analyst) Regulations, 2013 (‘RA Regulations’), inviting public comments. The RA Regulations have been framed to address conflicts of interest for analysts and aim to increase transparency in security research.

The RA Regulations propose to register and regulate: (i) independent research analysts; (ii) intermediaries that employ research analysts and issue research reports; and (iii) research analysts giving recommendations vide public media such as television channels, radio and print. Investment Advisers, Asset Management Companies, fund managers of Alternative Investment Funds (in each case registered with SEBI) and Proxy Advisory Service providers providing research services to their unit holders will not be required to be registered under the Regulations. However, if they (or their employees or directors) make commentaries or recommendations through public media, they are required to comply with the RA Regulations.

 

  • SEBI by its circular dated April 15, 2010, had mandated all Foreign Institutional Investors/ Sub Accounts to submit certain ‘Declarations and Undertakings’ with regard to opaque structures such as Protected Cell Companies (‘PCC’), Multi Class Share Vehicles (‘MCV’) or equivalent structures, and the broad based status of such Foreign Institutional Investors/ Sub Accounts. Subsequently, SEBI by its circular dated December 19, 2013, has specified that if any applicant is required by its regulator or under any law to ring fence its assets and liabilities from other funds/ sub-funds, such applicant will not be treated as having an opaque structure, provided the applicant satisfies prescribed criteria.

 

  • In January 2013, SEBI issued a circular, inter alia, prohibiting secondary market acquisitions by employee welfare trusts. On November 20, 2013, SEBI issued a discussion paper on ‘Review of guidelines governing stock related employee benefit schemes’, whereby it decided to review the existing framework in this regard. The key recommendations by SEBI in this regard, inter alia, include routing all secondary market purchases through trusts, and making such purchases subject to safeguards including (i) independent trustees; (ii) shareholder approved ceilings on purchases through the secondary market; and (iii) minimum holding periods.

 

  • SEBI, on November 26, 2013, issued a paper seeking public comments on proposals for allowing certain classes of companies to file shelf prospectuses for public issues of non-convertible debt securities.

As per Section 31 of the Companies Act, 2013, which has been notified, any class or classes of companies, as specified by SEBI, may file a shelf prospectus with the relevant Registrar of Companies.


A shelf prospectus is filed at the time of the first offer of securities and will be valid for a period of up to one year commencing from the date of opening of the first offer of securities under that shelf prospectus. Any company filing such a shelf prospectus is not required to file a fresh prospectus during the validity of the shelf prospectus. There is no requirement of filing a shelf prospectus in respect of a second or a subsequent offer, within the period of validity of such prospectus.


A company filing a shelf prospectus is required to file an information memorandum containing all material facts relating to new charges created, changes in the financial position of the company and such other changes as may be prescribed by the Central Government in this regard, with the Registrar of Companies, prior to a subsequent offer of securities pursuant to the shelf prospectus. Where an information memorandum is filed in relation to an offer of securities, such information memorandum together with the shelf prospectus will be deemed to be a prospectus. Further, the information memorandum/ tranche prospectus must also contain a “summary term sheet”, as specified in the SEBI (Issue and Listing of Debt Securities) Regulations, 2008.

 

It is currently proposed to allow the following companies/entities to file shelf prospectuses:


i. Public financial institutions and Scheduled Banks;

ii. Issuers authorised by the notification of Central Board of Direct Taxes to make public issues of tax free secured bonds, with respect to such tax free bond issues;

iii. Infrastructure Debt Funds by Non-Banking Financial Companies regulated by the
Reserve Bank of India (‘RBI’);

iv. Entities that have listed their shares/debentures on the stock exchanges for at least three years;

v. Other Non Banking Financial Companies (‘NBFC’), registered with the RBI, and listed issuers complying with certain specified criteria.


AZB

 

For further information, please contact:

 

Zia Mody, AZB & Partners
zia.mody@azbpartners.com

 

Abhijit Joshi, AZB & Partners 
abhijit.joshi@azbpartners.com


Shuva Mandal, AZB & Partners 
shuva.mandal@azbpartners.com

 

Samir Gandhi, AZB & Partners
samir.gandhi@azbpartners.com


Percy Billimoria, AZB & Partners 
percy.billimoria@azbpartners.com

 

Aditya Bhat, AZB & Partners 
aditya.bhat@azbpartners.com

 

AZB & Partners Capital Markets Practice Profile in India

 

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