SEBI

SEBI’s Board Meeting – March 2023

Board Meeting

In its board meeting on March 29, 2023, Sebi adopted several initiatives to support India’s securities market and make doing business there easier. The Board Meeting’s announcements, which covered various important matters, were the most extensive in recent times. These actions will strengthen the market and have a long-term beneficial effect, despite the fact that they are being taken in the middle of a worldwide banking crisis and challenging macroeconomic conditions. Let us examine them in detail in this blog.

1). Balanced Framework for ESG Ratings, Disclosures, and Investing

To support a balanced approach to ESG, the Board meeting approved the regulatory framework for ESG (Environmental, Social, and Governance) Disclosures, Ratings, and Investing, as well as amendments to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 and SEBI (Mutual Funds) Regulations, 1996[1]. The following lists the Board’s major decisions in this regard:

Environmental, Social, and Governance (“ESG”) Norms Framework

ESG Disclosures

As part of ESG Disclosures, the Business Responsibility and Sustainability Report (BRSR) must currently require to be published. It is, however, highly comprehensive, making it challenging for businesses to comply. As a result, SEBI has proposed the idea of a “BRSR Core,” consisting of 49 key performance indicators and serving as the foundation for ESG regulations. Additionally, the companies must provide reasonable assurance and accuracy in their reporting.

Furthermore, disclosures for companies included in the company’s supply chain will be defined in accordance with particular thresholds. Additionally, a glide route for implementing these measures has been provided.

ESG Ratings

SEBI has attempted to accept the minimal standards rather than imposing any specific framework. In addition, SEBI has suggested alterations to the ESG framework for its application in India. It also suggests the appropriate standards for the same. Core ESG Ratings based on the ‘BRSR Core’ characteristics are also applicable.

ESG Investing

Several measures have been approved, including a minimum investment of at least 65% of AUM in entities that provide assurances on core BRSR, third-party assurance and certificates by boards of AMCs, disclosure of voting results, increased disclosures of scheme documents, publication of case studies, and introduction of a new scheme category.

This framework will aid in creating an entire ecosystem centred on ESG standards and attract investors to businesses that promote sustainability, social welfare, and good governance.

Framework for ESG Rating Providers: 

SEBI has established guidelines for ESG rating providers, requiring them to deliver transparent assessments free of conflicts of interest and based on reasonable certainty. The SEBI (Credit Rating Agencies) Regulations, 1999, would include the framework. The consultation paper’s framework took inspiration from the 2008 financial crisis and complied with the regulations set forth for credit rating agencies.

In response, SEBI has paved a rationalised glided path for disclosures through minimum standards for listed companies and established a regulatory framework for ESG agencies with ratings to avoid conflict of interests and provide reasonable assurances to the investor community. SEBI has taken cognisance of the importance of ESG ratings in the investment world.

2). ASBA-like facility for trading in the Secondary Market: Option to investors

The Board meeting authorised the general framework for the (ASBA) Application Supported by a Blocked Amount -like facility made available for secondary market trading to investors. The system is based on banning funds for UPI-based secondary market trade. Both investors and stock brokers will have the option to use the tool mentioned above.

The framework aims to accomplish the following advantages:

  • The client collects interest on the blocked funds in his savings account until the payment is deducted.
  • Direct settlement with Clearing Corporation (CC) enables client-level settlement visibility to CC, thereby minimising the danger of co-mingling clients’ funds and securities without passing through the intermediaries’ pool.
  • Without relying on reporting or allocation by members (Trading Member / Clearing Member), independent and reliable identification of ownership of cash collateral is provided to CCs, minimising the possibility of unintentionally false or fraudulent reporting by intermediaries.
  • Removal of the custody risk associated with customer collateral that is now held by the members and not transferred to CC.
  • Both options are unblocking customer cash without delay and returning or releasing securities in case of member default.
  • There are no adverse effects on client pay-outs, even if a member or another customer defaults.
  • Easy porting of non-defaulting clients to other members in the event of member default (because collateral wouldn’t need to be transferred from defaulting member to another member).

Additionally, it will increase efficiency in the secondary market ecosystem by allowing members to use the same blocked amount for margin and settlement obligations, reducing their need for working capital.

Stock brokers will be able to settle brokerage with UPI clients under the proposed framework directly, or they can choose to use CC’s capacity to deduct regular rate brokerage from the UPI block of the clients. The framework will be introduced gradually to ensure a smooth transition in the market.

3). Upstreaming of Client Funds Placed with Stock Brokers and Clearing Members

The Board meeting adopted a proposal to implement a regulatory framework on upstreaming clients’ money by stock brokers and non-bank clearing members (CM) to clearing companies (CC) on an end-of-day basis to ensure that client’s funds are not kept by stock brokers or clearing members. According to this concept, the stock brokers will deposit all the clients’ funds with the CM and an allotment of collateral based on segments and Unique Client Codes. The CM would then transfer these amounts to the CC on behalf of the relevant client, designating them as cash collateral for those clients. Clients’ excess money that stock brokers receive can be withdrawn immediately; therefore, these should be deposited with the CC on an “as is” basis.

Further, any pay-out requests by clients made before 6 pm are to be honoured by the broker, CM and CC within the same day. Regarding the brokerage and other charges, the stock broker has to perform client-wise daily reconciliation now and deduct only the required respective brokerage and statutory charges before upstreaming clients’ funds to CC at the end of the day. The contract note sent to clients must mention all the relevant charges levied on the client.

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Additionally, the broker, CM, and CC must honour all client pay-out requests before 6 p.m. on the same day. The stock broker is now obligated to execute client-specific daily reconciliation and subtract just the necessary brokerage and statutory fees before upstreaming clients’ monies to the credit card at the end of the day. All applicable fees assessed to clients must be mentioned in the contract note issued to them.

The approved framework will help mitigate fund-related risk and investor misuse of funds by any intermediary by mandating upstreaming daily of all investor funds from stockbrokers and clearing members (CMs) to clearing corporations (CCs). The framework will be implemented in two phases. It shall not apply to Bank-Clearing Members, including the Bank’s custodian, and any segment’s proprietary funds of clearing members/ stock brokers.

The Board meeting agreed on framework mandates for daily upstreaming all investor funds from stockbrokers and CMs to CCs, reducing fund-related risk and preventing intermediaries from misusing investors’ cash. The framework will be implemented in two stages. It will not apply to Bank-Clearing Members, including Bank-Clearing Members’ proprietary funds or those of their Custodians or other clearing members in any market. 

4). Preventing and identifying stock broker fraud or market misuse

On February 7, 2023, SEBI published a consultation document outlining the need for intermediaries to have a system to guard against fraud and market abuse. For stock brokers, various measures have been approved by SEBI with the stated intent. Some of them include holding the stock broker’s senior management accountable, implementing a robust automated trade surveillance system, reporting suspicious trading activity, and having a whistle-blower policy without any consequences. There is also a suggested list of typical fraudulent practices and ways to stop them.

It is based on the best practices of the industry that stock brokers adhere to, starting with the client onboarding procedures, such as KYC procedures and ending with the execution of trades in a typical pattern. It will contribute to the elimination of widespread market misuse and fraud.

5). Regulations for Index Providers

The board meeting approved the establishment of a regulatory framework for index providers. The framework’s key components are mandatory adherence to the “Principles for Financial Benchmarks” published by the International Organisation of Securities Commissions (IOSCO) to promote the dependability of market indices, ensure quality, and outline governance mechanisms; having a minimum net worth of Rs. 25 crores; having a minimum track record of five years of index administration OR two employees having an experience of at least five years each of conducting the business of index provider; having a committee oversight for the review of existing index design, index methodology’s proposed changes, examination of whether the said methodology reflects the description of the supervision and index over audit results and implementation of observations, etc.

The Board Meeting resolution does not specify whether users who are unknown to index providers would also be taken into account for the determination of applicability, even if it proposes regulation for all index providers based on the location of the concerned index users. A minimum net worth requirement and regulation of international index providers may also adversely affect Indian investors’ access to low-cost investment products like exchange-traded funds or index funds.

6). Structure of the “Corporate Debt Market Development Fund” Specified Debt Funds’ Backstop Facility

SEBI originally came up with the concept for a “Corporate Debt Market Development Fund” (“CDMDF”) in 2020 after high-profile defaults shook the domestic debt market. In unpredictable and difficult situations like significant defaults or COVID-19, where default rates had increased to roughly 4.5%, providing liquidity is a welcome move. SBI Mutual Fund will be in charge of the AIF, which will be constructed as an AIF with contributions from various AMCs totalling a specific sum. Access to the fund would be proportional to the AMCs’ contribution.

In addition to increasing investor trust, it would give corporates who lack the means to reduce rollover risk during the re-issuance of these bonds. By supplying the market with this liquidity, the market for corporate bonds might expand and help to avoid bond price crashes.

7). The Role and Responsibilities of Mutual Funds Trustees and the Board of Asset Management Companies of Mutual Funds 

As part of their core duties, the Trustees of MFs are required by SEBI to conduct independent reviews and due diligence on a variety of issues, including the fairness of the AMC’s fees and expenses, the sponsor’s and associates’ undue influence, misselling to increase AUM, the AMC’s valuation, and others. It was suggested that Trustees might rely on legal firms, audit firms, etc., to carry out due diligence on their behalf for matters about the policy of empanelment of the stock broker by the AMC, determining whether the AMC is managing the operations of MF, etc.

At the same time, Trustees would have to devote their attention and time to fulfilling their core responsibilities, whether MF operations are managed by the AMC apart from other activities, etc. In addition, it was suggested that the trustee’s corporate structure be used instead of the Board of Trustees structure. Enhancing the AMC Board’s accountability and creating a “Unitholder Protection Committee” under the control of the AMC Board are two further recommendations.

While it is a good idea to highlight the primary duties of the Trustees, it is also advisable to include “valuation of securities,” especially debt instruments, in this list. In addition, the list of trustee duties for which third-party fiduciaries may provide their services could be widened to include obligations like monitoring potential conflicts of interest between AMC associates and unitholders, making sure that no misselling is done to boost the AMC’s assets under management and valuation, etc.

8). Review of the Regulatory Framework for Mutual Fund Sponsors

In recent years, private equity players (PEs) have been permitted to take up sponsoring roles in several industries, including the insurance sector and real estate investment trusts. PEs have substantial resources that they can use to fund innovation and expansion, which will foster healthy competition in the MF sector. The board meeting has proposed an alternative eligibility criterion requiring a sponsor to capitalise the AMC so that the AMC’s positive liquid net worth is not less than Rs. 150 Crores to facilitate the entry of PEs into the MF market. As an additional requirement, the AMC must maintain a minimum positive liquid net worth of Rs. 100 crores till it has five years of profitable operations. In addition, a minimum of 40% of the sponsor stake and contributed cash would need to be locked in for a minimum of five years.

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Although SEBI’s proposal to make the MF business more inclusive is commendable, on the other hand, the net worth-based eligibility requirements set forth by SEBI frustrate this goal by necessarily creating high entry hurdles for prospective players.

Additionally, SEBI’s Board Meeting noted that as MFs develop, AMCs become self-sufficient and mature in managing their operations in the best interests of the unitholders, gradually lessening the liabilities of the sponsors. In light of this, SEBI has suggested lowering the sponsor’s existing required shareholding in the AMC from 40% over time and has floated the notion of a self-sponsored AMC without a sponsor.

A decrease in the sponsor’s ownership of the AMC will make room for other sizeable investors, who will contribute talent, inclusiveness, and strategic leadership to the MF sector’s growth and innovation. Overall, SEBI’s suggestions will significantly help to achieve new capital injection, promote competition and innovation, allow new players to enter the MF industry, and give sponsors of AMCs an exit option.

9). Amendments made to the SEBI (Listing Obligations and Disclosure Requirements) Regulations to allow for more thorough and prompt disclosures.

To promote transparency and fairness in the market, listed businesses must guarantee proper and prompt disclosure of material information/events to investors. However, SEBI has been receiving more complaints about businesses’ non-compliance and inadequate or delayed disclosures.

In general, SEBI has decided to

  • Increase the list of events that are deemed material and must be disclosed;
  • Offer various timelines for disclosing events, and
  • Limit the discretion currently enjoyed by companies in determining whether a specific piece of information or event would be material enough to be disclosed to the public.

Disclosure of Significant Information or Events by Listed Entities:

The Board meeting has adopted the modifications to the LODR Regulations that are detailed below to increase transparency and guarantee that listed entities promptly disclose material events or information:

  • Introduction of a quantitative criterion for determining the ‘materiality’ of events or information.
  • Stricter deadlines for the disclosure of significant occurrences or information for which a board of directors decision has been made (within 30 minutes) and which originates from within the listed entity (within 12 hours).
  • The top 100 listed entities by market capitalisation, starting on October 1, 2023, and the top 250 listed entities, starting on April 1, 2024, will verify, confirm, deny, or clarify the market rumours as applicable.
  • Information about specific sorts of contracts involving specified entities.

Empowering Shareholders to improve corporate governance at listed companies:

The Board meeting approved changes to the LODR Regulations to improve disclosure and give shareholders more power by strengthening corporate governance at listed businesses. These changes include:

  • To address the question of the perpetuity of special rights, shareholders of a listed corporation must periodically approve every special right granted to a shareholder
  • Strengthening the current process for a listed entity to sell, lease, or dispose of a project outside the “Scheme of Arrangement” framework.
  • The practice of permanent board seats must be discontinued by the periodic approval of shareholders for each director serving on the Board of a listed firm.

Simplifying the procedure for newly listed firms to submit their initial financial results

To overcome the difficulties in the initial submission of financial results following listing and ensure that everything is transparent in filing financial results, the schedule for the first financial results submission by newly-listed firms has been shortened.

Timeline to fill up the vacancy of Directors

Listed entities must fill open positions for Directors, Compliance Officers, Chief Executive Officers, and Chief Financial Officers within three months of the date of the vacancy to ensure critical positions remain filled.

10). Process streamlining and transparency improvements to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR Regulations”).

Process of underwriting public issues

For any issue, two underwriting types occur: “soft” and “hard.” Complicated underwriting refers to underwriting for under-subscription because of a shortage in demand, whereas soft underwriting is related to technical rejections. The ICDR framework currently needs to distinguish between the two, and investors are not required to be informed about the underwriting agreements.

As a result, SEBI has given the go-ahead to alter the ICDR Regulations so that there is now a distinction between underwriting done for technical reasons and under-subscription reasons. Additionally, it has been suggested that the underwriting agreements be made publicly available along with a description of their terms when the red-herring prospectus is filed.

Conditions before a listed entity can announce a bonus issue and its issuance in demat form

Several issuers announced bonus offerings even before receiving in-principle clearance for listing from SEBI and trading authorisation from stock exchanges. It becomes a problem for upcoming issuances due to a discrepancy between issued and listed shares. As a result, the in-principle permission that was required for a bonus issuance has been approved. Additionally, it is now required that all bonus issues be generated in a dematerialised form solely because nearly 99 per cent of bonus issues be made in the demat mode. 

11). Proposed amendments to the NCS Regulations include introducing the General Information Document (GID) and Key Information Document (KID) concepts, the requirement to include debt securities of listed firms and other changes.

According to SEBI, issuers spend a lot of time, money, and effort creating lengthy/comprehensive placement memoranda for numerous issues in the same year, discouraging investors from using the securities market. Thus, SEBI recommended adopting the concepts of (GID) General Information Document and (KID) Key Information Document to eliminate the redundancy in filing placement memoranda and improve the ease of doing business.

A GID must have the information and disclosure outlined in the schedule, be filed with the stock exchanges during the first issuance, and have a one-year validity period. Only a KID containing the relevant changes must be filed with the stock exchange for subsequent filings made during the validity period.

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Additionally, it was suggested that a common schedule be issued to mandate disclosure of the expenses incurred in issuing debt securities and non-convertible redeemable preference shares, whether issued on a public issue process or through a private placement basis, in accordance with the NCS Regulations and circulars issued. It was done to bring parity and ensure standardisation in the process.

These suggestions will make business more accessible by saving time, money, and effort. The informational discrepancy between disclosures in a private placement document and a public issue document is also closed by this judgement. There must be no information vacuum, and debt issuances must be conducted more effectively in light of the recent rise in investors signing up on online bond platforms to purchase bonds.

12). Large Corporations’ Compliance Period to Meet Their Financing Needs

Up to a consecutive block of two financial years, large corporations were required to satisfy their financing needs via the debt markets by issuing debt instruments to the extent of 25% of their incremental borrowings. The SEBI’s Board meeting has now chosen to make this “comply or explain” phase last for a continuous three-year period.

13). Corporate Governance Guidelines for a High-Value Debt-Listed Entity

By way of a notification dated September 7, 2022, the LODR Regulations were made applicable to HVDLEs, or listed entities with non-convertible debt securities that have been listed and have an outstanding value of at least Rs. 500 crore. The HVDLEs in question were established on March 31, 2021. According to the LODR regulations, if a business reaches the required threshold throughout a year, it must achieve compliance with corporate governance standards within six months after the trigger date. Up to March 31, 2023, the provisions above were made applicable on a “explain or complex” basis, and after that, they became mandatory. The ‘comply or explain’ term for the HVDLEs concerning corporate governance norms (i.e., regulations 16 to 27 of the LODR Regulations) has been extended by SEBI until March 31, 2024, per a decision made at its Board Meeting on March 29, 2023.

14). Reforming the Alternative Investment Funds (AIFs) Regime

Several initiatives have been suggested to simplify and make it easier to use AIFs to invest in India:

Valuation Policies

When valuing the assets of an AIF, there is no established valuation policy or method. The adoption of IPEV Guidelines, which are the most often utilised in the sector, was suggested by SEBI in the consultation document. SEBI has also accepted the eligibility requirements for the recruitment of independent valuers. Additionally, Cat III AIFs, unlisted equities, and listed debt securities are now required to use an independent valuer. Last but not least, the investment managers have been given the duty of carrying out the value of securities and giving proper disclosures, drawing inspiration from the MF Regulations.

Investor Consent for Investment in Associates

To avoid conflicts of interest and put AIF unit holders in charge of the fund’s decisions, SEBI has established a requirement that 75% of investors must consent before investing in associate entities, schemes managed or sponsored by those entities, or by investors who own more than 50% of the scheme’s corpus.

Dematerialisation of AIF units

SEBI has allowed the dematerialisation of AIF units for those AIF schemes with a corpus of more than Rs. 500 crores to simplify administrative and operational processes and prevent fraud or theft of AIF units.

Key Investment Team Manager and compliance officer eligibility requirements for an AIF

The SEBI has given the go-ahead to replace the current minimum experience criteria with a detailed certification requirement for the core investment team members managing an AIF to promote new talent. Additionally, the Board meeting has authorised certification standards for compliance officers to clarify their eligibility conditions.

15). Using online dispute resolution processes to strengthen the investor complaint process in the Indian securities market

By utilising online dispute resolution tools, SEBI has chosen to improve the current process for resolving complaints in the Indian securities market. To address any concerns about the digital divide, including a lack of access to appropriate devices for starting such procedures, slow internet, a lack of digital literacy, etc., SEBI suggested that it may be desirable to mention the availability of a hybrid alternative (a combination of online and offline).

In addition, it was determined that a single arbitrator, rather than a panel, would resolve every dispute, regardless of the claim size. The appellate arbitration system will also be abandoned. These changes will help lower the expenses for the parties, make assembling a panel easier or eliminate coordination problems, and make it possible to resolve matters.

The Board meeting supported the proposal to use the Online Dispute Resolution (ODR) mechanism in light of the rise in investor involvement in the Indian securities market and the introduction of technology-aided dispute resolution frameworks by:

  • Extending the MII administered conciliation and arbitration mechanism to registered intermediaries / regulated entities and their investor’s clients,
  • Holding proceedings in a hybrid mode, 
  • Increasing the MII-administered conciliation and arbitration mechanism’s capacity with the help of ODR institutions, and IV. Streamlining the dispute resolution procedure and adopting additional measures to strengthen enforcement of awards.

Making online dispute resolution available to the investor community will increase access to justice and allow people to promptly, reasonably, and effectively settle complaints and disagreements. Therefore, this choice by the board meeting is appreciated because it will aid in the faster processing of disputes.

Conclusion

In addition to the topics above, the SEBI Board meeting also focused on other areas to increase market reliability and transparency, including giving shareholders more information and empowering them. Also, the Board meeting approved the SEBI Budget for the financial year 2023–2024. Even while the board meeting’s outcome may not have met all expectations, it has undoubtedly caused investors to reflect on the direction SEBI wishes the Indian capital markets to go. 

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