SEBI, in its board meeting held on April 26, 2017, announced sweeping changes in norms relating to Mutual Funds, Public Issues, capital raising and Commodity Derivatives. It was SEBI Board's first meeting under new Chairman, Mr. Ajay Tyagi. The decisions taken by the SEBI Board have a significant impact on the market participants like compliance officers, Foreign Portfolio Investor, market intermediaries like Stock Brokers, Mutual Funds, Qualified Institutional Buyers, etc. This article is a summary and analysis of the decisions taken by the SEBI Board in its recently convened meeting.
Instant Access Facility in Mutual Funds & Use of e-wallet for investment in Mutual Funds
2. Summary of the decision: SEBI Board has permitted the Mutual Funds/Asset Management Companies ('AMCs') to offer instant access facility (i.e. through online mode) of upto INR 50,000 or 90% of folio value, whichever is lower. Such facility will be offered to only resident individual investors in liquid schemes. SEBI has clarified that for providing such facility, AMCs would not be allowed to borrow and the liquidity is to be provided out of the available funds from the Scheme. SEBI has further clarified that the AMCs are required to have a mechanism to meet the liquidity demands. SEBI has stated that this facility can also be used for investment in Mutual Funds through tie-ups with Payments Banks subject to necessary approvals to be taken from RBI. With respect to the present schemes providing such facility, SEBI has clarified that the limit be reduced to INR 50,000, immediately and other than liquid schemes providing such facility would completely stop this facility within one month from the date of circular.
SEBI has permitted investment of up to INR 50,000 per Mutual Fund per financial year using e-wallets. However, SEBI has clarified the following points:
(i) Redemption of investments (made though e-Wallet) can be made only to bank account of the unit holder,
(ii) E-wallet issuers must not offer any direct or indirect incentive such as cash back, for investing in Mutual Fund Scheme,
(iii) E-wallet's balance loaded through cash or debit card or net banking, can only be used for subscription to Mutual Funds Schemes,
(iv) E-wallet's balance loaded through credit card, cash back, promotional scheme etc. should not be allowed for subscription to Mutual Funds Schemes,
(v) Limit of INR 50,000 would be an umbrella limit for investment by an investor through e-wallet and/or cash, per Mutual Fund per Financial Year.
Analysis of the decision: With an objective to channelize households' savings into capital market and to promote digitalization in mutual funds, SEBI has allowed Instant Access Facility in Mutual Funds & use of e-wallet for investment in Mutual Funds. Till demonetization, e-Wallets were used by individuals for the purpose of cash-backs and incentives. However, post-demonetisation, taking into account the number of companies and banks that have ventured into e-wallet domain, the cash-backs and incentives reduced. Therefore, such restriction would not have a significant impact on the investment in Mutual Funds using e-wallets. Savings and investments should be through owned funds and not borrowed funds, therefore SEBI has prohibited investment in Mutual Fund Schemes using e-wallet's balance loaded through credit cards. However, in my view, it is difficult for AMCs to track and bifurcate the balance loaded through credit cards and balance loaded through owned funds. E-wallets and cash are considered at par for the purpose of investment in Mutual Funds, therefore there is combined cap of INR 50,000 per Mutual Fund per Financial Year. In my view, SEBI decision for allowing use of e-wallet for investment in Mutual Funds, will not have a very significant impact on the securities markets and participation of investors. However, taking into account the present 'e-wallet economy', the decision is innovative.
Inclusion of RBI-registered Systemically Important NBFCs in Category of 'Qualified Institutional Buyers' ('QIBs'):
3. Summary of the decision: Presently, Banks and Insurance Companies are categorised as Qualified Institutional Buyers ('QIBs') by SEBI. They are eligible for participation in IPOs with specifically earmarked allocations. SEBI Board sanctioned the proposal of including systemically Important NBFCs (registered with RBI) having a net worth of more than Rs. 500 crore in the category of QIBs.
Analysis of the decision: With an objective to strengthen IPO market and channelize more investments, the Finance Minister in his recent Budget Speech proposed to allow systemically important NBFCs (regulated by RBI) and above a certain net worth, to be categorised as QIBs. Taking into account Finance Minister's announcement, SEBI has now included RBI's systemically important NBFCs in category of QIBs. As NBFCs are well regulated entities, classifying such NBFCs under the definition of QIBs will give Issuer companies access to a larger pool of funds. Taking into account SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, provisions relating to restrictions on allotment, minimum number of allottees, eligibility for listing on the Institutional Trading Platform, allocation of net public offer, underwriting will be applicable. Therefore, at the time of public issue, the inter-se allocation and subscription to the issue will have to undergo a change.
Exemption under SEBI (ICDR) Regulations, 2009, relating to preferential allotments, to be extended to Scheduled Banks and Financial Institutions:
4. Summary of the decision: SEBI noted that under the extant public issue Regulations, the Issuer Company is prohibited from making preferential issue to any person who has sold any equity shares of the issuer during the 6 months preceding the relevant date. The Regulations also provides that the entire pre-preferential allotment shareholding of the allottees, if any, shall be locked-in from the relevant date upto a period of 6 months from the date of trading approval. However, Mutual Funds and Insurance Companies are exempted from the said requirements.
SEBI noted the present economic scenario and observed that there are many instances where the Banking sector is exposed to the risk of significantly high Non-Performing Assets ('NPAs'). The Banks have been advised by RBI to reduce NPAs and to initiate stringent actions to recover the dues from the borrowers. SEBI noted that many Banks will go aggressively for recovering their dues and Banks may opt for CDR/SDR or bilateral restructuring. With an objective to take action against the listed company w.r.t. the recovery money, Banks or Financial Institutions have sold equity shares of Issuer Company during preceding 6 months. SEBI noted that such Banks/Financial Institutions may also be one of the allottees of the specified securities of Issue Company pursuant to CDR approved scheme under preferential issue route. Taking this economic scenario into consideration, SEBI approved the proposal for extending the relaxation to the Scheduled Banks and Public Financial Institutions.
Analysis of the decision: SEBI's decision relating to the exemption from provisions of preferential issue would require necessary amendments to SEBI (ICDR) Regulations, 2009. Sale of equity shares by the Bank/Financial Institutions as a part of CDR/SDR or bilateral restructuring will expedite the recovery of money due to Bank/Financial Institutions. However, the proposed exemption would be applicable in cases where the Bank/Financial Institutions is one of the allottee to the securities of the issuer company pursuant to CDR approved scheme under preferential issue route. It means that if the Issuer Company has failed to effectively utilize the funds raised by preferential issue route, the allottee (i.e. Bank/Financial Institutions) can sell the allotted shares within a period of 6 months. Though such decision is taken by SEBI considering the present economic scenario and RBI guidelines, in my opinion, it is very difficult to come to a conclusion that the Issue Company has effectively utilized the funds which would ultimately increase its revenue in a period of 6 months. However, the proposed provision provides for a mechanism and gives a right to Bank/Financial Institutions to sell the securities.
Strengthening Monitoring of Utilisation of Issue Proceeds
5. Summary of Decision: Pursuant to the extant provisions in SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, there is a requirement of mandatory appointment of 'Monitoring Agency' if the issue size of specified securities exceeds Rs. 500 Crore. SEBI considered and approved certain proposals to strengthen the monitoring of issue proceeds raised in IPOs/FPOs/Rights Issues. SEBI approved the following key proposals:
(i) Mandatory appointment of Monitoring Agency where the issue size is more than Rs. 100 Crore,
(ii) Enhancing the frequency of submission of Monitoring Agency Report i.e. from half-yearly to quarterly,
(iii) Introduction of maximum timeline of 45 days for submission of Monitoring Agency Report from end of the quarter in conjunction with the submission of quarterly results,
(iv) Mandating the disclosure of Monitoring Agency Report on Company's website in addition to submitting it to Stock Exchange(s) for wider dissemination,
(v) Introduction of "Comments of Board of Directors and Management" on the findings of Monitoring Agency.
Analysis of Decision: SEBI's decision relating to strengthening the monitoring of utilization of issue proceeds would require necessary amendments to SEBI (ICDR) Regulations, 2009. The purpose of the proposed amendments is to ensure that there is adequate supervision on the utilization of the funds raised by a company by way of IPOs/FPOs/Rights Issues. By the proposed amendments, SEBI is enhancing the accountability and responsibilities of the Monitoring Agency, which includes reducing the threshold for mandatory appointment and increasing the frequency of Report submission. Pursuant to the extant provisions of SEBI (ICDR) Regulations, 2009, the Monitoring Agency is required to submit its report to Issuer Company in prescribed format on half yearly basis, till the proceeds of the issue have been fully utilised. Pursuant to the proposed amendment, as approved by SEBI, the Monitoring Agency would be required to submit its Report on quarterly basis. Presently, there are adequate provisions w.r.t. the disclosures in Prospectus, but there is no efficient mechanism for monitoring the utilization of issue proceeds. In my view, this step is in the right direction.
Integration of broking activities in Equity Markets and Commodity Derivatives Markets under single entity
6. Summary of the Decision: SEBI Board noted that consequent to FMC-SEBI merger, the commodity derivatives brokers are also being regulated by SEBI. However, as per extant Regulations, a stock broker/clearing member dealing in commodity derivatives cannot deal in other securities or vice versa, except by setting up of a separate entity. On this background, SEBI approved the proposal of integrating broking activities in Equity Markets and Commodity Derivatives Markets under single entity.
Analysis of the Decision: The integration of stock brokers in equity and commodity derivative markets will have many synergies in terms of trading and settlement mechanism, risk management, redressal of investor grievances, etc. Such synergies would benefit the investors, brokers, Stock Exchanges and SEBI as the same would help to:
(i) Enhance the economic efficiency in terms of meeting the operational as well as compliance obligations at a Member level resulting in ease of doing business
(ii) Provide for efficient use of capital for the investors
(iii) Widen the market penetration leading to greater financial inclusion for participants across all market segments.
(iv) Facilitate effective regulatory oversight by Stock Exchanges and SEBI
The cost of incorporation, administrative cost and the cost of compliance would be significantly reduced. It would be more cost-efficient and investor friendly if these benefits are passed onto retail investors/small investors.
Compilation & Analysis of other decisions taken by the SEBI Board
7. SEBI noted that while presenting the Union Budget for FY 2016-2017, the Honourable Finance Minister made an announcement for permitting new derivative products in the commodity derivatives market. With an objective to enable the Commodity Derivatives Exchanges to organize trading of 'options', SEBI Board approved the proposal to amend relevant Regulations. SEBI in due course will issue detailed guidelines for trading in 'option' on commodity derivatives exchanges. With an objective to increase the liquidity in secondary market, SEBI considered and approved the proposal for consolidation and re-issuance of debt securities. SEBI also cleared the proposal of amending SEBI (Foreign Portfolio Investor) Regulations, 2014. It is proposed that a provision will be introduced whereby Resident Indians/NRIs or the entities which are beneficially owned by Resident Indians/NRIs are prevented from subscribing to Offshore Derivative Instruments i.e. Participatory Notes. SEBI approved the proposal of amending SEBI (Debenture Trustee) Regulations, 1993. The purpose of such amendment is: (i) To streamline the existing provisions in the said Regulations with the provisions of the Companies Act 2013, Companies (Share Capital and Debentures) Rules, 2014, (ii) To strengthen the existing provisions in the said Regulations to enable the debenture trustees to perform the task of securing the interest of the investors.
Conclusion
8. In the first Board Meeting, under the Chairmanship of Mr. Ajay Tyagi, the SEBI has taken proposed significant changes in the dynamics of securities market. The proposed amendments will have an impact, direct or indirect, on each and every market participant. The use of e-wallet for investment in Mutual Funds was one of the most deliberated issues in the recent past. The topic was discussed in the industry much before Govt. introduced demonetization on November 8, 2016. In the near future, SEBI will either float Consultation Papers or issue Circular or Notification to amend the necessary regulations under securities law.
Instant Access Facility in Mutual Funds & Use of e-wallet for investment in Mutual Funds
2. Summary of the decision: SEBI Board has permitted the Mutual Funds/Asset Management Companies ('AMCs') to offer instant access facility (i.e. through online mode) of upto INR 50,000 or 90% of folio value, whichever is lower. Such facility will be offered to only resident individual investors in liquid schemes. SEBI has clarified that for providing such facility, AMCs would not be allowed to borrow and the liquidity is to be provided out of the available funds from the Scheme. SEBI has further clarified that the AMCs are required to have a mechanism to meet the liquidity demands. SEBI has stated that this facility can also be used for investment in Mutual Funds through tie-ups with Payments Banks subject to necessary approvals to be taken from RBI. With respect to the present schemes providing such facility, SEBI has clarified that the limit be reduced to INR 50,000, immediately and other than liquid schemes providing such facility would completely stop this facility within one month from the date of circular.
SEBI has permitted investment of up to INR 50,000 per Mutual Fund per financial year using e-wallets. However, SEBI has clarified the following points:
(i) Redemption of investments (made though e-Wallet) can be made only to bank account of the unit holder,
(ii) E-wallet issuers must not offer any direct or indirect incentive such as cash back, for investing in Mutual Fund Scheme,
(iii) E-wallet's balance loaded through cash or debit card or net banking, can only be used for subscription to Mutual Funds Schemes,
(iv) E-wallet's balance loaded through credit card, cash back, promotional scheme etc. should not be allowed for subscription to Mutual Funds Schemes,
(v) Limit of INR 50,000 would be an umbrella limit for investment by an investor through e-wallet and/or cash, per Mutual Fund per Financial Year.
Analysis of the decision: With an objective to channelize households' savings into capital market and to promote digitalization in mutual funds, SEBI has allowed Instant Access Facility in Mutual Funds & use of e-wallet for investment in Mutual Funds. Till demonetization, e-Wallets were used by individuals for the purpose of cash-backs and incentives. However, post-demonetisation, taking into account the number of companies and banks that have ventured into e-wallet domain, the cash-backs and incentives reduced. Therefore, such restriction would not have a significant impact on the investment in Mutual Funds using e-wallets. Savings and investments should be through owned funds and not borrowed funds, therefore SEBI has prohibited investment in Mutual Fund Schemes using e-wallet's balance loaded through credit cards. However, in my view, it is difficult for AMCs to track and bifurcate the balance loaded through credit cards and balance loaded through owned funds. E-wallets and cash are considered at par for the purpose of investment in Mutual Funds, therefore there is combined cap of INR 50,000 per Mutual Fund per Financial Year. In my view, SEBI decision for allowing use of e-wallet for investment in Mutual Funds, will not have a very significant impact on the securities markets and participation of investors. However, taking into account the present 'e-wallet economy', the decision is innovative.
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| SEBI Allows e-Wallet for Mutual Funds |
Inclusion of RBI-registered Systemically Important NBFCs in Category of 'Qualified Institutional Buyers' ('QIBs'):
3. Summary of the decision: Presently, Banks and Insurance Companies are categorised as Qualified Institutional Buyers ('QIBs') by SEBI. They are eligible for participation in IPOs with specifically earmarked allocations. SEBI Board sanctioned the proposal of including systemically Important NBFCs (registered with RBI) having a net worth of more than Rs. 500 crore in the category of QIBs.
Analysis of the decision: With an objective to strengthen IPO market and channelize more investments, the Finance Minister in his recent Budget Speech proposed to allow systemically important NBFCs (regulated by RBI) and above a certain net worth, to be categorised as QIBs. Taking into account Finance Minister's announcement, SEBI has now included RBI's systemically important NBFCs in category of QIBs. As NBFCs are well regulated entities, classifying such NBFCs under the definition of QIBs will give Issuer companies access to a larger pool of funds. Taking into account SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, provisions relating to restrictions on allotment, minimum number of allottees, eligibility for listing on the Institutional Trading Platform, allocation of net public offer, underwriting will be applicable. Therefore, at the time of public issue, the inter-se allocation and subscription to the issue will have to undergo a change.
Exemption under SEBI (ICDR) Regulations, 2009, relating to preferential allotments, to be extended to Scheduled Banks and Financial Institutions:
4. Summary of the decision: SEBI noted that under the extant public issue Regulations, the Issuer Company is prohibited from making preferential issue to any person who has sold any equity shares of the issuer during the 6 months preceding the relevant date. The Regulations also provides that the entire pre-preferential allotment shareholding of the allottees, if any, shall be locked-in from the relevant date upto a period of 6 months from the date of trading approval. However, Mutual Funds and Insurance Companies are exempted from the said requirements.
SEBI noted the present economic scenario and observed that there are many instances where the Banking sector is exposed to the risk of significantly high Non-Performing Assets ('NPAs'). The Banks have been advised by RBI to reduce NPAs and to initiate stringent actions to recover the dues from the borrowers. SEBI noted that many Banks will go aggressively for recovering their dues and Banks may opt for CDR/SDR or bilateral restructuring. With an objective to take action against the listed company w.r.t. the recovery money, Banks or Financial Institutions have sold equity shares of Issuer Company during preceding 6 months. SEBI noted that such Banks/Financial Institutions may also be one of the allottees of the specified securities of Issue Company pursuant to CDR approved scheme under preferential issue route. Taking this economic scenario into consideration, SEBI approved the proposal for extending the relaxation to the Scheduled Banks and Public Financial Institutions.
Analysis of the decision: SEBI's decision relating to the exemption from provisions of preferential issue would require necessary amendments to SEBI (ICDR) Regulations, 2009. Sale of equity shares by the Bank/Financial Institutions as a part of CDR/SDR or bilateral restructuring will expedite the recovery of money due to Bank/Financial Institutions. However, the proposed exemption would be applicable in cases where the Bank/Financial Institutions is one of the allottee to the securities of the issuer company pursuant to CDR approved scheme under preferential issue route. It means that if the Issuer Company has failed to effectively utilize the funds raised by preferential issue route, the allottee (i.e. Bank/Financial Institutions) can sell the allotted shares within a period of 6 months. Though such decision is taken by SEBI considering the present economic scenario and RBI guidelines, in my opinion, it is very difficult to come to a conclusion that the Issue Company has effectively utilized the funds which would ultimately increase its revenue in a period of 6 months. However, the proposed provision provides for a mechanism and gives a right to Bank/Financial Institutions to sell the securities.
Strengthening Monitoring of Utilisation of Issue Proceeds
5. Summary of Decision: Pursuant to the extant provisions in SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, there is a requirement of mandatory appointment of 'Monitoring Agency' if the issue size of specified securities exceeds Rs. 500 Crore. SEBI considered and approved certain proposals to strengthen the monitoring of issue proceeds raised in IPOs/FPOs/Rights Issues. SEBI approved the following key proposals:
(i) Mandatory appointment of Monitoring Agency where the issue size is more than Rs. 100 Crore,
(ii) Enhancing the frequency of submission of Monitoring Agency Report i.e. from half-yearly to quarterly,
(iii) Introduction of maximum timeline of 45 days for submission of Monitoring Agency Report from end of the quarter in conjunction with the submission of quarterly results,
(iv) Mandating the disclosure of Monitoring Agency Report on Company's website in addition to submitting it to Stock Exchange(s) for wider dissemination,
(v) Introduction of "Comments of Board of Directors and Management" on the findings of Monitoring Agency.
Analysis of Decision: SEBI's decision relating to strengthening the monitoring of utilization of issue proceeds would require necessary amendments to SEBI (ICDR) Regulations, 2009. The purpose of the proposed amendments is to ensure that there is adequate supervision on the utilization of the funds raised by a company by way of IPOs/FPOs/Rights Issues. By the proposed amendments, SEBI is enhancing the accountability and responsibilities of the Monitoring Agency, which includes reducing the threshold for mandatory appointment and increasing the frequency of Report submission. Pursuant to the extant provisions of SEBI (ICDR) Regulations, 2009, the Monitoring Agency is required to submit its report to Issuer Company in prescribed format on half yearly basis, till the proceeds of the issue have been fully utilised. Pursuant to the proposed amendment, as approved by SEBI, the Monitoring Agency would be required to submit its Report on quarterly basis. Presently, there are adequate provisions w.r.t. the disclosures in Prospectus, but there is no efficient mechanism for monitoring the utilization of issue proceeds. In my view, this step is in the right direction.
Integration of broking activities in Equity Markets and Commodity Derivatives Markets under single entity
6. Summary of the Decision: SEBI Board noted that consequent to FMC-SEBI merger, the commodity derivatives brokers are also being regulated by SEBI. However, as per extant Regulations, a stock broker/clearing member dealing in commodity derivatives cannot deal in other securities or vice versa, except by setting up of a separate entity. On this background, SEBI approved the proposal of integrating broking activities in Equity Markets and Commodity Derivatives Markets under single entity.
Analysis of the Decision: The integration of stock brokers in equity and commodity derivative markets will have many synergies in terms of trading and settlement mechanism, risk management, redressal of investor grievances, etc. Such synergies would benefit the investors, brokers, Stock Exchanges and SEBI as the same would help to:
(i) Enhance the economic efficiency in terms of meeting the operational as well as compliance obligations at a Member level resulting in ease of doing business
(ii) Provide for efficient use of capital for the investors
(iii) Widen the market penetration leading to greater financial inclusion for participants across all market segments.
(iv) Facilitate effective regulatory oversight by Stock Exchanges and SEBI
The cost of incorporation, administrative cost and the cost of compliance would be significantly reduced. It would be more cost-efficient and investor friendly if these benefits are passed onto retail investors/small investors.
Compilation & Analysis of other decisions taken by the SEBI Board
7. SEBI noted that while presenting the Union Budget for FY 2016-2017, the Honourable Finance Minister made an announcement for permitting new derivative products in the commodity derivatives market. With an objective to enable the Commodity Derivatives Exchanges to organize trading of 'options', SEBI Board approved the proposal to amend relevant Regulations. SEBI in due course will issue detailed guidelines for trading in 'option' on commodity derivatives exchanges. With an objective to increase the liquidity in secondary market, SEBI considered and approved the proposal for consolidation and re-issuance of debt securities. SEBI also cleared the proposal of amending SEBI (Foreign Portfolio Investor) Regulations, 2014. It is proposed that a provision will be introduced whereby Resident Indians/NRIs or the entities which are beneficially owned by Resident Indians/NRIs are prevented from subscribing to Offshore Derivative Instruments i.e. Participatory Notes. SEBI approved the proposal of amending SEBI (Debenture Trustee) Regulations, 1993. The purpose of such amendment is: (i) To streamline the existing provisions in the said Regulations with the provisions of the Companies Act 2013, Companies (Share Capital and Debentures) Rules, 2014, (ii) To strengthen the existing provisions in the said Regulations to enable the debenture trustees to perform the task of securing the interest of the investors.
Conclusion
8. In the first Board Meeting, under the Chairmanship of Mr. Ajay Tyagi, the SEBI has taken proposed significant changes in the dynamics of securities market. The proposed amendments will have an impact, direct or indirect, on each and every market participant. The use of e-wallet for investment in Mutual Funds was one of the most deliberated issues in the recent past. The topic was discussed in the industry much before Govt. introduced demonetization on November 8, 2016. In the near future, SEBI will either float Consultation Papers or issue Circular or Notification to amend the necessary regulations under securities law.
