SEBI

Key Highlights of SEBI Board Meeting Dated 20th December 2022

The SEBI is established with the main aim of protecting the interests of investors and regulating the securities instruments in the market. As per the SEBI act, the board must meet at such intervals and times as may be required to discuss the recent changes and developments in the securities market to serve the interests of the investor. Further, as per the SEBI (Procedure for Board Meeting) Regulations 2021, the board shall be convened at least once in each quarter of the year by the chairman and in the absence of the member nominated by the chairman. Based on the express provision of the act and regulation, one such SEBI board meeting, in consequence of which the press release was issued on 20^th December 2022. The present article will enlist the decision taken by the board members in the meeting.

I. Strengthening the Governance Mechanism in Market Infrastructure Institutions (MIIs)

The market infrastructure institutions such as stock exchanges, clearing corporations and depositories are the key pillars of the securities market, and any lapse in their governance process may weaken the investor’s trust in the market. Henceforth, under the board meeting, the SEBI did a comprehensive review of the structure and devised to strengthen the governance of the MIIs. The regulatory changes are expected to bring transparency and accountability to the functioning of the MII. Therefore, the board has approved various amendments to the regulation of MIIs, among which some of the key decisions are:

1. Structure

The functions of the MII will be categorised into 3 verticals:

• Critical Operations
• Regulatory, Risk Management and Compliance, including the role of MIIs as first-level regulators of intermediaries and listed entities and investor grievance redressal.
• other functions

Under the said verticals, the KMPs of the first two verticals will be at par with the KMP heading the first vertical, but MII shall give first priority in the resource allocation towards the first two functions in the vertical.

2. Board Governance

The board has made the following decision in the board meeting:

• The process of appointment of PID (Public Interest Directors) is to be done by mapping their skills and expertise because it is necessary to appoint the PIDs with the background and expertise in the field of technology, law and regulation, finance & accounts and capital markets. The PID is further required to meet every 6 months and file a report to the Board of the MII and SEBI after the meeting.
• There will be an internal evaluation of the MII and its statutory committees conducted every year, along with an external evaluation which is to be undertaken by an independent entity once in every 3 years.
• The MII will set up an investment committee as a statutory committee which will be responsible for evaluating investments such as capital expenditure, CSR activities and investment into other companies.
• The agendas and minutes of the governing board of the MII with regard to regulatory, compliance and risk management aspects are to be disclosed on the website of MII.

3. Accountability of KMPs

The board has made the following decision in the board meeting:

• The definition of KMPs will include the employees based on the importance of their activities and their related hierarchy within the MII. Further, the MII will determine the roles and responsibilities of identified KMPs within each function to improve overall accountability.
• The Nomination and Remuneration Committee (NRC) will be responsible for the appointment and removal of KMPs.
• The MII will appoint a separate risk officer who will be responsible for handling risks associated with the MII.
• The performance of KMPs will be evaluated every 6 months.
• The Chief Regulatory officer or compliance officer will submit a quarterly report to SEBI on non-compliances.
• No employee of the MII will be simultaneously permitted to be an employee of a subsidiary of MII.

4. Code of Conduct

The board has made the following decision in the board meeting:

• The stricter code of conduct will apply to MII, governing board, the director, KMPs and committee members.
• The Board members and KMPs will be responsible if they know what is wrong and do not report the same.

5. Policy on Data Sharing

The MIIs are required to frame internal policies for sharing and monitoring data which will determine the means and manner of data sharing, escalation matrix for data sharing, types of data that can be shared etc.

II. Amendment to SEBI (Buy-Back of Securities) Regulations 2018

The board members in the board meeting have provided the following amendments to the regulations after receiving the reply from various stakeholders regarding the buyback of shares.

1. Buy Back through Stock Exchange

The changes brought are:

• The buyback through the stock exchange route shall be phased out in a gradual manner.
• The minimum utilisation amount for buyback through the stock exchange route is increased from 50% to 75%.
• A separate window is created on the stock exchange for undertaking buyback till the time buyback through an exchange is permitted.

2. Buy Back through Tender Offer Route

The changes brought are:

• The removal of the requirement for filing a draft letter of offer with SEBI and the reduction of the duration of the tendering period and period made available for payment of consideration to the shareholders has reduced the timeline for completion of the buyback by 18 days.
• It is permitted to increase the buyback price until one working day before the record date.
• It is made mandatory to place the relevant documents with regard to buyback, such as Public announcement, offer letter etc., on the respective website of the stock exchange, merchant banker and the company for better dissemination of the information to the shareholders.

III. Execution Only Platforms for Direct Plans of MF Schemes

The members observe in the board meeting that several entities, including such as Investment Advisers and stock brokers, offer direct execution service in the direct plan of Mutual Funds Schemes through digital mode, and there is no regulatory framework put in place to facilitate the provision of such “execution only services” in the direct plans. In this regard, the board has decided to introduce a regulatory framework for “Execution Only Services” (EOP) for direct plans of MF schemes for achieving the following objectives:

• Providing convenience to investors for investing through EOPs.
• Establish a proper investor protection mechanism
• Facilitating ease of doing business for the EOPs through mandating only such regulatory requirements as are necessary.

Further, under the framework, the EOPs will be granted registration under 2 categories:

1. Category-I EOP as an agent of AMCs, registered with the AMFI
2. Category-II EOP as an agent of investor registered as a stockbroker

IV. Investor Risks Reduction Access Platform

It has been observed that with any disruption in the broker’s trading services, the client faces significant risk if they cannot square off their open positions or cancel pending orders at the stock exchange, particularly when the markets are volatile. Henceforth it is decided that the stock exchange should introduce an Investor Risk Reduction Access Platform in order to reduce the risk of the open position and cancel pending orders. Further, it was decided in the board meeting that the Investor Risk reduction Access Platform is expected to be available from the 3^rd quarter of the financial year 2023-2024.

V. Enhanced Risk Framework for Stock Brokers Designated As Qualified Stock Brokers (QSBs)

There are certain stock brokers in the market that handles a very large number of clients, their funds and trading volumes. This increases the possibility of failure of such brokers, which causes a direct impact on the investors and cause reputational damage to the Indian Securities Market. Henceforth in order to mitigate such risk, the members at the board meeting have approved the amendments to the SEBI (Stock Brokers) Regulations 1992 to designate the stockbroker as Qualified Stock Brokers (QSBs). The Qualified Stock Brokers must comply with the enhanced risk management practices or requirements. Further such QSBS will be subject to the enhanced monitoring system by the SEBI or Market Infrastructure Institutions (MIIs).

VI. Improved Registration Requirements for FPIs

It is observed by the board members in the board meeting that there is a need to reduce the time taken for grating registration to FPIs. Henceforth, it is decided to bring the following procedural requirements for onboarding FPIs and to provide more clarity on the various timelines mentioned under the SEBI (FPI) Regulations 2019:

• The registration could be granted based on scanned copies of application forms or supporting documents, and trading could be activated post-verification of physical documents.
• The use of a digital signature could be accepted as per the provisions of the IT Act 2000^[1] for the execution of registration-related documents.
• The SWIFT mechanism could be used to certify copies of original documents submitted by Foreign Portfolio Investors to Designated Depository Participants. This would reduce the time taken for registration and the movement of physical documents.
• The verification of PAN by DDPs could be done through the Common Application Form module present on the websites of depositories.
• The FPI applicants could submit the unique investor group ID in lieu of complete details of the group constituents.

VII. Amendment in SEBI (NCS Regulations)

i. Facilitating Sustainable Finance

It is observed by the members in the board meeting that there is an increase in interest in sustainable finance in India and around the world. Hence, there is a need to align the extant framework for green debt securities with the updated Green Bond Principles (GBP) recognised by the IOSC. In light of this, the SEBI has reviewed the regulatory framework for green debt securities. Based on this review, the members of the board have decided on the following measures:

• The definition of Green Debt Securities is to be amended to include new modes of sustainable finance with regard to pollution prevention and control, eco-efficient products etc.  
• To introduce new concepts of bonds as green debt securities such as:
  • Blue Bonds for Water Management and Marine Sector
  • Yellow Bonds for Solar Energy
  • Transition Bonds

The SEBI will further be responsible for the basic DOs & Don’ts relating to green debt securities to address issuers against “greenwashing” related risks. 

ii. Streamline the Appointment of Nominee Directors and Specify Public Issue Timelines

The member of the board meeting has decided to bring certain regulatory changes to the corporate bond market:

• In order to protect the debenture holder’s interest, it is decided that issuers of listed debt securities shall cast an obligation on the Board of Director’s sot appoint a person nominated by the Debenture trustee as a director in the event of default. It is further required such an obligation shall be suitably incorporated under the Article of Association. Further, the corresponding amendments will be made during the Debenture Trust deed.
• Since there are no stipulations with respect to the duration for which the public issue of non-convertible Redeemable Preference Shares or debt securities, it is decided that the public issue of debt securities and NCRPS must be kept open for a period of 3-10 working days.

VIII. Participation of AIFs in Credit Default Swaps

The members decide in the board meeting that greater flexibility be provided to the managers of AIFs. Henceforth, it is decided that permission be further given to the AIFs to participate in the Credit Default Swaps (CDS) as protection buyers and protect sellers for further facilitating the Deepening of the domestic corporate bond market. Further, the board has approved the following types of transactions for CDS by AIFs:

• Category I AIFs Hedging: Purchase CDS on underlying investment in Debt Securities.
• Category II AIFs: a. Hedging: Purchase CDS on underlying investment in debt Securities

b. Sell CDS: Unencumbered Government Bonds or Treasury Bills equal to the amount of CDS exposure to be earmarked against the CDS.

• Category III AIFs: a. Purchase CDS: For Hedging or otherwise with permissible leverage.

b. Sell CDS:  within permissible leverage. Selling of CDS will not imply undertaking leverage as long as unencumbered Government Securities or Treasury Bills equal to the amount of CDS exposures are kept earmarked against the CDS.

IX. Introduction of Grievance norms for REITs and InvITs in line with SEBI (LODR) Regulations, 2015

With the aim to introduce governance norms for REITs and InvITs in line with SEBI (LODR) Regulations 2015, it is decided by the members in the board meeting that the amendments be made in the SEBI (Real Investment Trusts) Regulations 2014, SEBI (Infrastructure Investment Trusts) Regulations 2014 and SEBI (LODR) Regulations 2015. The corporate governance norms applicable to listed companies shall apply to REITs and InvITs irrespective of whether they issued any debt security.

X. Streamline tenure of auditor, Computation of Leverage, unclaimed or unpaid distribution and other provisions of REITs and InvITs

The members of the board meeting have decided to streamline the tenure of auditor, computation of leverage, unclaimed or unpaid distribution etc., by making amendments is the SEBI (REIT) Regulations 2014 and SEBI (IIT) Regulations 2014. The following are the amendments brought by the board are:

• The auditor’s tenure will be till the end of the 5^th AGM (Annual General Meeting) of the unit holders.
• The statutory auditor of REIT or InvIT will undertake a limited review of audit of all the entities or companies whose accounts are to be consolidated.
• The overnight investment fund is considered cash or its equivalent for computing the leverage.
• Unclaimed or unpaid distributions of REIT or InvIT are to be transferred to IPEF or Investor Protection and Education Fund.

XII. Framework for Cloud Services

The members of the board meeting have approved the framework for the adoption of cloud services by SEBI Regulated Entities (REs). The framework will contain 9 broad principles that the Regulated Entities must follow for deploying cloud services. The framework highlights the aspects associated with the adoption of cloud services:

• Risk Assessment
• Regulatory & legal compliance
• Rights, Responsibilities & Accountabilities of RE
• Mandatory Security Measures and Controls
• Rights of SEBI and other Government agencies

The framework will help the Regulated entities in cloud computing and develop a new approach to deal with various issues related to cloud services, such as country risks, sensitive information, concentration risk, disaster recovery etc.

Conclusion

The members at the board meeting have made significant changes in the MIIs, buyback through stock exchanges, SEBI NCS Regulations, participation of AIFs in the Credit Default Swaps, the introduction of grievance norms, framework for cloud services etc. The SEBI, in order to ease the regulatory process and facilitate the ease of transactions in the securities market, is regularly making changes in the existing regulations and introducing new regulations. Further, in order to strengthen the governance structure of the MII, necessary changes are made to strengthen its governance process, the limit of buyback. However, the stock exchange is increased from 50% to 75%, Execution only platforms are introduced for direct plans for the MF schemes, enhance risk framework is introduced for stock brokers acting as the Qualified Stock Broker.

Read Our Article: Key highlights of the SEBI Board Meeting held on 30th September 2022