Securities and Exchange Board of India (“SEBI”) convened its 205th meeting on April 30, 2024, and issued a Press Release referenced PR No. 08/ 2024. The intention of this compilation would be to summarise the key approvals provided by the Board in the meeting.

1. Update: To provide a framework for Unit Based Employee Benefit Schemes (“UBEB”), SEBI granted approval to make an amendment to SEBI (Infrastructure Investment Trusts) Regulations, 2014, as amended and SEBI (Real Estate Investment Trusts) Regulations, 2014, as amended.

   • Purpose: Approving a framework for Unit Based Employee Benefit Schemes (“UBEB”), for the employees of investment managers or managers of Infrastructure Investment Trusts (“InvIT”) or Real Estate Investment Trusts (“REIT”).
   • UBEB schemes are employee benefit schemes where employees receive units of a particular investment vehicle (herein InvIT/REIT) as part of their compensation.
   • Mechanism: Instead of receiving their management fees in cash, the investment manager or manager of InvIT/REIT may receive units of InvIT/REIT. These units will be earmarked for providing benefits under the UBEB schemes.
   • Allocation: the units received by the managers will be directed towards an Employee Benefit Trust to ensure that units issued are exclusively used for the UBEB schemes and is not diverted for other purposes.
   • Regulatory Compliance: This scheme likely adheres to regulatory requirements governing employee benefits, ensuring transparency and fairness in the allocation and management of units under the UBEB scheme.

2. Update: Flexibility for Venture Capital Funds under SEBI (Venture Capital Regulations), 1996 (“VCF Regulations”) to Migrate to Alternative Investment Funds regulated under SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”).

   • Purpose: The update aims to address challenges faced by Venture Capital Funds (“VCFs”) under the old regulations regarding unliquidated investments upon the scheme’s expiry.
   • Migration Option: VCFs registered under the old regulations have the option to migrate to the AIF Regulations.

   • Legal Concepts:

     1. Alternate Investment Fund (“AIF”): Regulation 2(1)(b) of AIF Regulations defines AIF as any privately pooled investment fund, in form of a trust or company or a body corporate or limited liability partnership. The source of this funding can be both Indian and international. AIFs are special category investment instruments which invest in private equity, venture capital, hedge funds, commodities, derivative etc.
     2. Venture Capital Fund: As defined under Regulation 2(m) of VCF Regulations, VCF refers to a fund established in the form of a trust or a body corporate and has been registered under the above referred VCF Regulations. VCF has a dedicated pool of capital, raised and invested in a manner specified by the VCF Regulations. It is primarily a private equity investment vehicle that provides capital to start ups in exchange of equity.

   • Salient Features:

     1. Creation of Sub-category: A new sub-category called “Migrated VCFs” will be created under Category I Alternative Investment Funds.
        
     2. Registration Process: VCFs can opt to register as Migrated VCFs without any application or registration fee.
     3. Investment Conditions: Migrated VCFs won’t face additional investment conditions compared to those under the old regulations.
     4. Flexibilities: Migrated VCFs can benefit from the flexibilities provided by AIF Regulations regarding extension of tenure, liquidation period, and Dissolution Period to manage unliquidated investments.
     5. Additional Liquidation Period: Schemes of VCFs that opt for migration upon expiry will be granted an additional one-year liquidation period, provided there are no investor complaints regarding non-receipt of funds or securities.
     6. Timeframe: The migration option will be available for 12 months from the date of notification of the amendment to AIF Regulations.

3. Update: SEBI approved amendments to SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (“NCS Regulations”)

   • Purpose: The amendments aim to modify provisions related to disclosure of financial results, record dates, due diligence certificates, and face value reduction of debt securities and Non-convertible Redeemable Preference Shares (“NCRPS”).
   • Disclosure of Financial Results: Listed entities with outstanding non-convertible securities can now disclose audited financials for the last three years in the offer document through a web-link and QR code, reducing the size of the document.
   • Standardization of Record Date: Record date for interest/dividend payment or principal repayment of debt securities/NCRPS will be set 15 days before the due dates, aiming for consistency and uniformity across issuers.
   • Harmonization of Due Diligence Certificate: Formats specified under SEBI Regulations will align with those specified in the Master Circular for Debenture Trustees, enhancing clarity and consistency.

   • Reduction in Face Value:

     1. Issuers can now reduce the face value to Rs. 10,000 for privately placed debt securities/NCRPS, aiming to increase participation of non-institutional investors while ensuring the appointment of a Merchant Banker.
     2. These instruments must be plain vanilla, interest/dividend bearing, with permitted credit enhancements.

        In this update, the focus is on amendments to regulations governing non-convertible securities, which are financial instruments that cannot be converted into equity shares. These amendments aim to streamline processes, enhance transparency, and facilitate investor participation in the market.

4. Update: SEBI approved amendments to SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

   • Purpose: The amendments aim to provide flexibility for entities that have listed only Non- Convertible Securities (“NCS”) regarding the publication of financial results in newspapers.

   • Publication Flexibility:
     

     1. Entities with only listed NCS now have the option to give an intimation (via a window advertisement) in newspapers regarding financial results, instead of disclosing full financial results.
     2. The intimation will include a reference to a QR code and a link to the website of the listed entity and the stock exchange.

   • Exercise of Publication Facility Option:

     1. For outstanding NCS, the listed entity must obtain prior approval from the Debenture Trustee to exercise this option.
     2. For future issuances, the listed entity must either disclose this option in the offer document or obtain prior approval from the Debenture Trustee.

        In this update, the focus is on providing flexibility to entities that have only listed NCS regarding the publication of financial results in newspapers. The amendments aim to reduce compliance costs for such entities while ensuring transparency and accessibility of financial information to stakeholders.

5. Update: Flexibility for Increased Participation by Non-Resident Indians (“NRIs”), Overseas Citizens of India (“OCIs”) and Resident Indian (“RIs”) individuals in SEBI registered Foreign Portfolio Investors (“FPIs”) based out of International Financial Services Centres (“IFSCs”) in India and regulated by the International Financial Services Centres Authority (“IFSCA”).

   • Regulatory Framework Approval: The SEBI Board approved a regulatory framework to enhance the contribution NRIs, OCIs, and RI individuals in certain FPIs based in IFSCs in India regulated by IFSCA. This flexibility aims to boost participation while managing regulatory risks.

   • Contribution Limits:

     1. FPIs can contribute up to 100% subject to certain conditions.
     2. Submission Requirements: FPIs must submit copies of PAN cards of all their NRI, OCI, and RI individual constituents to the Designated Depository Participant (“DDP”).
     3. Economic Interest Disclosure: Along with PAN cards, FPIs must disclose the economic interest of these individuals in the FPI.
     4. Alternative for Constituents without PAN: If any constituent lacks a PAN card, the FPI must provide a suitable declaration along with copies of prescribed identity documents such as Indian passport, OCI Card, Aadhaar, etc.
     5. Disclosure for Indirect Holdings: Similar disclosure requirements apply in cases of indirect holding in the FPI through non-individual constituents that are majority contributed to/owned/controlled by NRI/OCI/RI individuals on a look-through basis.
   • Conditions for Funds in IFSC: Funds in IFSC regulated by IFSCA, aiming for 100% aggregate contribution from NRIs/OCIs/RI individuals, must meet certain conditions:
     1. Pooling: All investors’ contributions pooled into one FPI without side-vehicles.
     2. Pari-passu and Pro-rata: Common portfolio with equal rights for all investors.
     3. Diversification of Investors: Minimum 20 investors with no one contributing over 25% to the corpus.
     4. Diversification of Investments: Maximum 20% of corpus in Indian listed equity shares.
        
     5. Independent Investment Manager: Investors have no say in investment decisions; Investment Manager (“IM”) is independent.
     6. IM Criteria: IM should be an Asset Management Company of a SEBI-registered Mutual Fund sponsored by RBI-regulated Bank or its IFSC-based subsidiary/branch.
   • Disclosure Obligations: Besides existing SEBI (FPI) Regulations, these FPIs must fulfill disclosure obligations regarding entities holding ownership, economic interest, or control on a look-through basis if certain thresholds are met:
     1. Holding more than 33% of Indian equity AUM in a single Indian corporate group.
     2. Holding more than INR 25,000 crore of equity AUM in Indian markets.

        This update aims to facilitate increased participation by NRIs, OCIs, and RIs in SEBI registered FPIs based in IFSCs, promoting investment while ensuring regulatory compliance and transparency.

6. Update: Streamlining Prudential Norms for Passive Mutual Fund Schemes

   • Current Limitation:
     1. Mutual fund schemes are currently restricted from investing more than 25% of their net asset value (NAV) in group companies of the sponsor.
     2. This restriction hampers passive funds’ ability to replicate the underlying index effectively, particularly when the sponsor’s group companies constitute over 25% of the index.
     3. It also puts Asset Management Companies (AMCs) with sponsor group companies exceeding 25% in the index at a relative disadvantage compared to other AMCs.
   • Proposed Amendment:
     1. The SEBI Board approved an amendment to the SEBI (Mutual Funds) Regulations, 1996 to streamline this norm and ensure a level playing field for all AMCs.
     2. Under the amendment, equity passive schemes, tracking indices specified by SEBI, can now invest up to the weightage of the constituents in the underlying index.
     3. However, this exposure is subject to an overall cap of 35% investment in the group companies of the sponsor.

        The amendment seeks to create a fair playing field for all AMCs by relaxing prudential norms for passive mutual fund schemes. While maintaining a cap on investment in sponsor group companies, the amendment allows passive funds to better replicate underlying indices, promoting efficiency and competitiveness within the mutual fund industry.

7.  Update: Institutional Mechanism for Deterrence of Market Abuse: Recent front-running instances observed by SEBI prompted amendments to SEBI (Mutual Funds) Regulations, 1996.

   • Purpose: The aim is to enhance the regulatory framework by requiring Asset Management Companies (“AMCs”) to establish a structured institutional mechanism.

   • Mechanism:

     1. Enhanced Surveillance Systems: Implementation of advanced monitoring systems.
     2. Internal Control Procedures: Establishment of internal controls to detect and prevent misconduct.
        
     3. Escalation Processes: Defined procedures for identifying, monitoring, and addressing specific types of misconduct such as front-running, insider trading, and misuse of sensitive information.
   • Responsibility and Accountability: Amendments enhance responsibility and accountability of AMC management for maintaining the institutional mechanism. AMCs are required to implement a whistle-blower mechanism to foster transparency.
   • Framework and Standards: SEBI will specify the broad framework of the institutional mechanism. The Association of Mutual Funds in India (“AMFI”), in consultation with SEBI, will define detailed standards for the mechanism.
   • Exemption from Recording Requirement: Exemption granted from recording face-to- face communication, including out-of-office interactions, during market hours. Effective after implementation of the institutional mechanism by the AMCs.

     The amendments aim to strengthen the regulatory framework for mutual funds by introducing an institutional mechanism to deter market abuse, enhance transparency, and improve accountability within the industry. SEBI’s oversight and the collaboration with AMFI ensure comprehensive standards are set, balancing regulatory requirements with operational efficiency for AMCs.

8. Update: Ease of Doing Business for Market Infrastructure Institutions (“MIIs”)

   • Objective: The aim is to ease compliance requirements and remove redundant provisions applicable to Market Infrastructure Institutions (MIIs) under Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018.
   • Shareholding Pattern Disclosure: MIIs can now disclose their shareholding pattern using the format applicable to listed companies. There is no longer an additional requirement to disclose it in a separate format.

   • Other Decisions for Ease of Business:

     1. Issuance of Consolidated Account Statement in electronic form by default.
     2. Rationalization of inspection period of commodity warehouses.
     3. These decisions will be communicated through circular(s).

        The approval of various proposals by the Board aims to streamline compliance requirements for MIIs, fostering an environment conducive to ease of doing business. By aligning shareholding pattern disclosure formats with those applicable to listed companies and introducing measures like default electronic Consolidated Account Statements, regulatory burdens are reduced, promoting efficiency within the market infrastructure sector. The issuance of circulars for additional decisions ensures clarity and uniform implementation across MIIs.