SEBI revises mutual fund circulars/guidelines

SEBI vide circular SEBI / IMD / CIR No 14 / 187175/ 2009 dated December 15, 2009 has amended the various existing SEBI circulars for mutual funds. This circular was issued as a part of SEBI’s continuing efforts in relation to investor protection, market development and effective regulation. The major changes effected by this circular are as follows: -

Payment of interest for delay in dispatch of dividend warrants

SEBI has stated that in the event of failure of dispatch of dividend warrant within the stipulated 30 day period, the AMCs should to pay interest @ 15 per cent per annum to the unit holders. Such incidents should also be reported to SEBI as a part of the compliance test reports.

Valuation of collateral securities for the participation by mutual funds in the securities lending scheme

Earlier in 1999 SEBI had issued detailed guidelines for the securities lending by mutual funds. Now SEBI has deleted clause 2 of these guidelines in relation to the ‘valuation of collateral securities’ and advised mutual funds to comply with guidelines issued in this regard by SEBI/ Stock Exchange from time to time.

Consolidation of schemes

In cases of merger or consolidation of schemes, mutual funds have to give the unit holders an option to exit the scheme at prevailing NAV without exit load. Now SEBI has mandated that a report in this regard containing information on total number of unit holders in the schemes and their net assets, number of unit holders who opted to exit and net assets held by them, and number of unit holders and net assets in the consolidated scheme, should be filed by the AMC with SEBI within 21 days from the date of closure of the exit option.

Launch of additional plan under existing schemes

SEBI has replaced its earlier circular on ‘launch of additional plan under existing schemes’ with a new circular. The highlights of the new circular are as follows:-

• Additional plans sought to be launched under existing open ended schemes which differ substantially from that scheme in terms of portfolio or other characteristics should be launched as separate schemes in accordance with the regulatory provisions.
  

• Additional plans which are consistent with the characteristics of the scheme may be launched as additional plans as part of existing schemes by issuing an addendum.

Guidelines for advertisement by mutual funds

The definition of ‘Tombstone advertisement’ has been changed and now this form of advertisement can only give basic information about a mutual fund registered with SEBI whose Statement of Additional Information has been filed with SEBI and has been uploaded on SEBI website.

A copy of the circular is available here.

SEBI says no to ‘NoC’ – Fund houses cannot insist on no-objection certificate for change of distributor

SEBI vide circular SEBI/IMD/CIR No./ 13/187052 /2009 dated December 11, 2009 has directed AMCs to change the fund distributor of an investor on receiving an instruction from investor informing his desire to change the existing distributor. AMCs cannot compel the investor to obtain an NoC from the existing distributor for this purpose. SEBI observed that the inconsistent practices prevailing in the industry is causing hardship to investors and AMCs should stop this practice immediately.

Earlier in September, 2007 Association of Mutual Funds of India (AMFI) had directed AMCs to end the practice of insisting an NoC from the existing distributor for change of distributor. However, fund houses have ignored AMFI’s circular, saying that this is not mandated by SEBI. Now SEBI has cleared the air by clarifying that AMCs cannot compel the investor to obtain an NoC from the existing distributor.

A copy of the circular is available here.

AMCs should maintain all the documentation (KYC, PoA etc.)

SEBI vide circular SEBI/IMD/CIR No.12 /186868 /2009 dated December 11, 2009 has reiterated that the requirements mentioned in the SEBI master circular on anti money laundering (covered in this blog here) are applicable to the Mutual Funds/ AMCs. Hence AMCs should maintain all the documentation pertaining to the unitholders/investor including Know your Client (KYC)details and Power of Attorney (PoA).

Recently SEBI had noticed that documentation related to the investor including Know your Client (KYC) and Power of Attorney (PoA) in respect of transactions/requests made through some mutual fund distributors is not available with the AMC/RTA of the AMC. AMCs stated that these documents are maintained by the respective distributors. It is in this context that SEBI has asked AMCs to maintain all the documents and advised them to take immediate steps to obtain all investor/ unit holders documents in terms of the AML/ CFT, including KYC documents / PoA as applicable. SEBI has also directed AMC’s to stop payment of any commissions, fees etc. to defaulting distributors till the full completion/compliance of the SEBI mandate.

A copy of the circular is available here.

ASBA Phase II – Facility extended to HNIs and corporate investors

SEBI vide PR No.386/2009 dated December 10, 2009 has extended the ASBA (Application Supported by Blocked Amount) facility to investor categories like High Networth Individuals (HNIs), corporate investors etc. (referred as ASBA Phase II). Thus all investors, except Qualified Institutional Buyers (QIBs) will be eligible to apply for public / rights issues using ASBA facility. The restrictions placed on investors under ASBA Phase- I viz. that only retail investors can apply and that too only at cut-off, that there shall be not more than one bid, that bids cannot be revised etc. will no longer be there under ASBA Phase II. ASBA Phase II will be applicable to all the issues opening on or after January 01, 2010.

SEBI in August, 2008 had introduced the new mode of payment in public issues called ASBA (now referred to as ASBA phase I), wherein the application money remains blocked in the bank account till allotment. Later in August, 2009 SEBI had extended the ASBA facility to rights issue. This decision was in furtherance of the SEBI’s decision to cut short the time period for allotment of shares in rights issue to 15 days from the previous 45 days. The application forms for this payment mode are to be submitted to banks whose names appear in the list of Self Certified Syndicate Banks on the SEBI website. Since the introduction of ASBA, it has been implemented in more than twenty issues.

A copy of the press release is available here.

Stock exchanges and members to preserve records for a longer period in specified cases

SEBI vide circular MRD/DoP/SE/Cir- 21 /2009 dated December 9, 2009 has asked stock exchanges and its members to preserve and maintain originals of documents (if a copy of such document has been collected by enforcement agencies like CBI, Police, Crime Branch etc. for the purpose of their investigation) till the trial or investigation proceedings have concluded. As per the current regulations every stock broker should preserve the specified books of account and other records for a period ranging from two to five years.

It should be also noted in this context that the Prevention of Money Laundering Act, 2002 requires stock brokers and sub brokers to maintain their records for a period of ten years from the date of cessation of transactions between clients and brokers / sub brokers.

A copy of the circular is available here.

SEBI amends client broker agreement

SEBI vide circular MIRSD/SE/Cir-19/2009 dated December 3, 2009 has come out with a new set of compliances for stock brokers to instill greater transparency and discipline in the dealings between the clients and the stock brokers.

Background

Clients contact a broker or a sub broker registered with SEBI for carrying out their transactions pertaining to the capital market. A broker is a member of a recognized stock exchange, who is permitted to do trades on the screen-based trading system of different stock exchanges. He is also enrolled as a member with the concerned exchange and is registered with SEBI.

Clients sign the ‘Member - Client agreement’ with the broker for the purpose of engaging that broker to execute trades on behalf of the clients from time to time. In case they are dealing through a sub-broker then the client will have to sign a ‘Broker - Sub broker - Client Tripartite Agreement’. These agreements contain clauses defining the rights and responsibility of Client vis-à-vis broker/ sub broker.

New compliances

• Stock brokers should maintain a book containing all the mandatory and non-mandatory documents required for registering a client. The folder/book should have an index page listing all the documents contained in it and indicating briefly significance of each document. Once the agreement is signed, a copy of the same shall be made available to the client.
• This book should mandatorily contain the member-client agreement, know your client (KYC) form and the risk disclosure document.
• The client should indicate in the agreement, the stock exchange as well as the market segment where he intends his trades to be executed.
• The existing KYC form should to suitably modified to capture the identity and the address of the introducer instead of his MAPIN/UID.
• Broker should also have documentary evidence of financial details provided by the clients who opt to deal in the derivative segment.
• Broker should mandatorily have documents containing policies and procedures for dealing with issues like refusal of orders for penny stocks, setting up client’s exposure limits, applicable brokerage rate, imposition of penalty/delayed payment charges by either party, the right to sell clients’ securities or close clients’ positions without giving notice to the client on account of non-payment of client’s dues etc.
• On running account authorisation, the regulator said the settlement of funds and securities should be done within 24 hours of the payout, unless otherwise specifically agreed to by the client. The authorisation should be renewed at least once a year and should be dated.

More compliances and a copy of the circular is available here.

SEBI amends listing agreement for debt securities

SEBI vide circular SEBI/IMD/DOF-1/BOND/Cir-5/2009 dated November 26, 2009 has amended the debt listing agreement for debt securities. Earlier in May, 2009 SEBI had issued a simplified listing agreement for debt securities (covered in this blog here). The major changes brought out by this circular (in the debt listing agreement) are as follows.

100% asset cover to be maintained for all issued debt securities

As per the amended listing agreement the issuer should maintain 100% asset cover sufficient to discharge the principal amount at all times for the debt securities issued. Earlier, only companies issuing secured debt securities were under an obligation to maintain 100% security cover as prescribed by SEBI. Now the issuer will have to maintain the prescribed asset cover at all times, even if the issued security is an unsecured debt security.

Submission of certificate on maintenance of security

SEBI has also mandated issuers to submit half yearly certificates regarding maintenance of 100% asset cover, and the time limit of submission in respect of the last half year has been aligned with the option provided for submission of annual audited results at a later date.

Statement on deviations in use of issue proceeds

A new clause has been introduced in the listing agreement whereby issuers should furnish a statement of deviations in use of issue proceeds, if any, to the stock exchange on a half yearly basis. This should also be published in the newspapers simultaneously with the half-yearly financial results. This requirement is adopted from the equity listing agreement prescribed by the SEBI. Under the equity listing agreement the issuer has to furnish this information to the stock exchange on a quarterly basis.

Deposit of 1% of issue proceeds with exchange

Another clause has been introduced which requires issuer to deposit an amount with the Exchange calculated at 1% of the amount of debt securities offered for subscription to the public, as a condition precedent for issuance of debt securities. This requirement is also adopted from the equity listing agreement prescribed by the SEBI.

A copy of the circular is available here.

SEBI notifies SEBI (Stock Brokers and Sub- Brokers) (Amendment) Regulations, 2009

SEBI has notified the SEBI (Stock Brokers and Sub- Brokers) (Amendment) Regulations, 2009 with effect from November 19, 2009. The changes brought about by the amendment regulations are as follows:-

• SEBI has extended the deadline for trading members (in the currency derivative segment) to get their approved user and sales personnel to pass the certification programme prescribed by SEBI. The extended deadline for compliance by members is February 11, 2009.
• A trading or clearing member of any derivatives segment (other than currency derivative segment), who has been allowed by SEBI to trade or clear in the currency derivatives segment, should also pay the fees prescribed by SEBI.

A copy of the regulations is available here.

Stock Exchanges free to set expiry date for F&O

SEBI vide Circular SEBI/DNPD/Cir-48/2009 dated November 13, 2009 has decided to allow flexibility to the Stock Exchanges to set the expiry date / day for equity derivative contracts. SEBI has advised stock exchanges to ensure that there is no change in the contract specifications or the risk management framework, while doing so.

Currently equity derivative contracts expire on the last Thursday of every month or a day earlier if the last Thursday is a holiday.

A copy of the circular is available here.

SEBI notifies SEBI (Substantial Acquisition of Shares and Takeovers) (Third Amendment) Regulations, 2009

SEBI has notified the SEBI (Substantial Acquisition of Shares and Takeovers) (Third Amendment) Regulations, 2009. The provisions of these amendment regulations came to force on November 6, 2009. This gives effect to the decisions taken by the SEBI Board on September 22, 2009 (covered in this blog here). The major changes brought about by these amendment regulations are the following.

ADR and GDR under the purview of takeover regulations
SEBI has amended regulation 3(2) of the Takeover regulations in relation to the acquisition of Global Depository Receipts (GDR) or American Depository Receipts (ADR). Now acquisition of GDRs and ADRs would come under the purview of takeover code if the holder: -

• Become entitled to exercise voting rights, in any manner whatsoever, on the underlying shares; or
• Exchange such depository receipts with the underlying shares carrying voting rights.

Clarity in ‘creeping acquisition’ provision
SEBI has amended regulation 11 of takeover code by inserting the following lines ‘with post acquisition shareholding or voting rights not exceeding fifty five per cent’ and the amended regulation reads as follows: -

“11. (1) No acquirer who, together with persons acting in concert with him, has acquired, in accordance with the provisions of law, 15 per cent or more but less than fifty five per cent (55%) of the shares or voting rights in a company, shall acquire, either by himself or through or with persons acting in concert with him, additional shares or voting rights entitling him to exercise more than 5% of the voting rights, with post acquisition shareholding or voting rights not exceeding fifty five per cent in any financial year ending on 31st March unless such acquirer makes a public announcement to acquire shares in accordance with the regulations”. It means that an eligible acquirer can acquire upto 5% in any financial year without making a public announcement, provided the post acquisition shareholding or voting rights does not exceed 55% in any financial year ending on 31st March.

A copy of the gazette notification is available here.

No eligibility norms for SME exchange listed companies, pure auction in follow-on public offers and fewer requirements for fast track issues

SEBI vide press release PR No.344/2009 dated November 9, 2009 has announced the decisions taken by SEBI Board in its meeting held on the same day. The key decisions are the following: -

SME Exchange/ Platform
SEBI has decided that companies listed on the SME exchanges would be exempted from the eligibility norms applicable for IPOs and FPOs prescribed in the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR). The norms prescribed by SEBI are as follows: -

• In order to have informed, financially sound and well-researched investors with a certain risk taking ability, a minimum IPO application size of Rs. 1 lakh would be prescribed.
  The minimum trading lot would be Rs. 1 lakh. An upper limit of Rs. 25 crore paid-up capital would be prescribed for a company to be listed on the SME platform/exchange and a minimum paid-up capital of Rs. 10 crore would be prescribed for listing on the main boards of the NSE and the BSE.


• If the follow on offer/rights issue results in triggering of the limit of Rs. 25 crore, then the company would have to migrate to the main board.


• The offer document will have to be filed with SEBI and the exchange. No observations would be issued by SEBI on the offer documents filed by the Merchant Bankers (MBs).


• The MB to the issue will bear the responsibility for market making for a minimum period of three years. MBs would be allowed to do market making along with a disclosed nominated investor (like PE, VC, HNI and QIB). Under this arrangement, all the stock being bought and sold as part of market making will ultimately get transferred to the disclosed nominated investor with whom the Merchant Banker has a contractual agreement. Merchant Banker would have to disclose their intention of this arrangement and have it approved by stock exchanges where the issuer SME is listed.

QIB status to insurance funds set up by army forces
SEBI Board decided to accord QIB (Qualified Institutional Buyer) status to insurance funds set up by armed forces such as Army Group Insurance Fund.

Reservation to employees in Public Issues
Currently the ICDR regulations permit reservation upto 10% of issue size to employees in public issues. However, there is no ceiling on number of shares that could be allotted. The Board decided to put a ceiling of Rs.1 lakh on the value of allotment that can be made to an employee under employee reservation category and to permit reservation upto 5% of the post issued capital instead of 10% of issue size.

Voluntary adoption of IFRS by listed entities having subsidiaries
The board decided to provide an option to all listed entities with subsidiaries to submit their consolidated financial statements as per the International Financial Reporting Standards (IFRS).

Introduction of pure auction as an additional book building mechanism
SEBI decided to introduce a new form of book-building in follow-on public offers for qualified institutional buyers. Under the new method, qualified institutional buyers will be free to bid for shares at any price above the floor price. On the other hand, retail investors will get shares only at the floor price.

Requirements for Fast Track Issues
In order to enable well established and compliant listed companies to access Indian primary market in a time effective manner through follow-on public offerings and rights issues, SEBI introduced the concept of Fast Track Issues (FTIs) in November 2007. SEBI Board on a review decided to relax certain requirements of FTIs such as reducing the average market capitalization of public shareholding of the issuer to five thousand crore rupees from ten thousand crore rupees, pegging the annualized trading turnover to free float for companies whose public shareholding is less than 15 percent of the issued capital. The Board also decided that incase the clause relating to composition of Board of Directors has not been complied with in one or more quarters, it need not be deemed as non compliance, provided the company is in compliance in this regard at the time of filing the offer document with stock exchange/ ROC and adequate disclosures are made in the offer document in this respect.

A copy of the press release is available here.

SEBI allows market access to clients through authorised persons

SEBI vide Circular MIRSD/ DR-1/ Cir- 16 /09 dated November 06, 2009 has decided to allow SEBI registered stock brokers (including trading members) of stock exchanges to provide access to clients through authorised persons. This decision by the regulator was based on the recommendations made by the Secondary Market Advisory Committee of SEBI and discussions with major stock exchanges. It aims at expanding the reach of the markets for exchange traded products.

‘Authorised Persons’ under the SEBI framework

Any person (individual, partnership firm, LLP or body corporate) subject to the eligibilty criteria specifed by the SEBI can be appointed by a stock broker as an authorised person. A stock broker can appoint one or more authorised person(s) after obtaining specific prior approval from the stock exchange concerned for each such person. The approval as well as the appointment shall be for specific segment of the exchange. SEBI also clearly states that the stockbroker will be responsible for all acts of omission and commission of the authorised person. The authorised person should have the necessary infrastructure such as adequate office space, the necessary equipment and manpower to effectively discharge the activities on behalf of the stock broker.

‘Sub-Broker’ and ‘Authorised Persons’ compared

A sub-broker of the main broker has to get registered with SEBI, while the authorised person appointed by the stockbroker has to just get a prior approval of the stock exchange to provide trading access to the clients. This provision would cut for brokers to enter the broking business as, unlike sub-brokers, authorised persons would only need approval of the stock exchange and would not have to wait for SEBI approval. It takes a sub-broker between four weeks and two months to get registered with SEBI, said a compliance officer with a broking firm.

A copy of the Circular is available here.

Discussion Paper on guidelines for execution of Power of Attorney by clients favoring Stock Brokers/Depository

SEBI has put out on its website a discussion paper on the guidelines for incorporating conditions/clauses in the Power of Attorney (PoA) given by clients to their Stock Brokers and/or Depository Participants in the context of possible risks for the clients in this regard. The proposed guidelines for execution of PoA by clients favoring Stock Brokers/Depository will be open for comments from the public till November 30, 2009.

It should be noted in this context that the misuse of client’s funds by brokers are troubling the regulators in India as well as worldwide. Earlier this year, NSDL (the largest depository in India)made ‘SMS alerts’ (alerts sent by way of SMS from the depository to the client whenever a debit or credit happens in the account of the client) mandatory for all accounts operated through a PoA. This was aimed at preventing the broker from making unauthorized credits or debits from the client’s account. As a part of its efforts to create awareness among the investors, National Stock Exchange (NSE) also started an education series on the importance of Power of Attorney, last month. These advertisements appeared in major business newspapers.

A copy of the Discussion paper is available here.

SEBI directs stock exchanges, depositories and registered intermediaries to implement the UAPA (Unlawful Activities (Prevention) Act, 1967) Order

The Unlawful Activities (Prevention) Act, 1967 (UAPA) was enacted for the prevention of certain unlawful activities of individuals and associations and for matters connected therewith. UAPA has been amended by the Unlawful Activities (Prevention) Amendment Act, 2008. The Government issued an Order dated August 27, 2009 detailing the procedure for implementation of Section 51A of the UAPA, relating to the purpose of prevention of, and for coping with terrorist activities. In terms of Section 51A, the Central Government is empowered to freeze, seize or attach funds and other financial assets or economic resources held by, on behalf of or at the direction of the individuals or entities Listed in the Schedule to the Order, or any other person engaged in or suspected to be engaged in terrorism and prohibit any individual or entity from making any funds, financial assets or economic resources or related services available for the benefit of the individuals or entities listed in the Schedule to the Order or any other person engaged in or suspected to be engaged in terrorism.

SEBI vide circular ISD/AML/CIR-2/2009 dated October 23, 2009 has directed stock exchanges, depositories and registered intermediaries to ensure expeditious and effective implementation of the procedure laid down in the UAPA Order dated August 27, 2009.

The procedure to be followed by Stock Exchanges and Intermediaries

(1) Ministry of External Affairs will sent the updated list of individuals/ entities (designated individuals/ entities) subject to UN sanction measures to SEBI.

(2) SEBI will forward the same to stock exchanges, depositories and registered intermediaries.

(3) Stock exchanges, depositories and registered intermediaries will have to maintain an updated list of designated individuals/ entities in electronic form based on the list sent by SEBI. They should run a check on the given parameters on a regular basis to verify whether designated individuals/ entities are holding any funds, financial assets or economic resources or related services held in the form of securities with them.

(4) If the particulars of any of customer/s match with the particulars of designated individuals/entities, stock exchanges, depositories and intermediaries should immediately, not later than 24 hours from the time of finding out such customer, inform full particulars of the funds, financial assets or economic resources or related services held in the form of securities, held by such customer on their books to the Joint Secretary (IS.I), Ministry of Home Affairs, at Fax No.011-23092569 and also convey over telephone on 011-23092736. The particulars apart from being sent by post should necessarily be conveyed through e-mail at jsis@nic.in. Stock exchanges, depositories and registered intermediaries should also file a Suspicious Transaction Report (STR) with FIU-IND covering all transactions in these accounts. In case the details of any of the customers match the particulars of designated individuals/entities beyond doubt, stock exchanges, depositories and registered intermediaries should prevent designated persons from conducting financial transactions, under intimation to Joint Secretary (IS.I), Ministry of Home Affairs, at Fax No. 011-23092569 and also convey over telephone on 011-23092736. The particulars apart from being sent by post should necessarily be conveyed through e-mail at jsis@nic.in.

(5) Stock exchanges, depositories and registered intermediaries should send the particulars of the communication through post/fax and through e-mail (sebi_uapa@sebi.gov.in) to the UAPA nodal officer of SEBI, Officer on Special Duty, Integrated Surveillance Department, Securities and Exchange Board of India, SEBI Bhavan, Plot No. C4-A, “G” Block, Bandra Kurla Complex, Bandra (E), Mumbai 400 051 as well as the UAPA nodal officer of the state/UT where the account is held, as the case may be, and to FIU-IND.

Earlier, SEBI had issued a Master Circular on Anti-Money Laundering (covered in this blog here) and an updated list of individuals and entities (covered in this blog here) which are subject to various sanction measures such as freezing of assets/accounts, denial of financial services etc., as approved by UN Security Council Committee.

A copy of the circular is available here.

SEBI allows extended trading hours

SEBI vide circular SEBI/DNPD/Cir-47/2009 dated October 23, 2009 has permitted the Stock Exchanges to set their trading hours (in the cash and derivatives segments) between 9 AM and 5 PM. It also states that the exchanges should have in place risk management system and infrastructure commensurate to the trading hours. The markets are currently open from 9:55 AM to 3:30 PM.

A brief history

Earlier this year, SEBI had published a discussion paper on the 'Increase in market hours of trading in exchanges'. SEBI observed that 'while the Asian markets are ahead of Indian time zone, the European and American markets extend much beyond the Indian market timings. Some of the exchanges in these countries have adopted longer trading hours, sometimes even extending up to 23 hours. This has facilitated market participants in these countries to hedge their risk that might arise due to global information flow'. Extending the trade timings of the domestic exchanges may, therefore, enable the domestic market participants to take advantage of such global information flows. Additionally, Indian markets have been in the pursuit of matching the best international standards and practices, and the extension of market hours would, perhaps, be a further step in this direction.

Need for increased market hours (based on SEBI discussion paper)

1. With the increased integration of the global markets, information originating from one country / market has a bearing on the markets in other country / market and India is no exception to this phenomenon. It is important to align Indian markets, as far as possible, with those of the international markets to facilitate the assimilation of any economic information that may flow in from other global markets. One such alignment could be in the area of market timing.


2. Quick and effective assimilation of information makes markets more efficient in terms of better price discovery, reduction in volatility and impact cost. The extension of market hours may help in effectively assimilating information and thereby make Indian markets efficient, benefiting Indian investors.


3. In a world where different exchanges are competing with each other to increase participation, it is imperative that the Indian markets align themselves to global markets to attract such trading interest. Extension of market hours would enable market participants to execute trading strategies in Indian markets based on information flowing in, which otherwise would have been executed outside India.


4. The extension in market hours enables participants to take positions over a longer time window. This enables them to take advantage of market movements overseas.
   

Effect on traders

The good news is that intraday traders will have more time to play with the market volatility. But on the other side the bad news for stock brokers is that they will have to stay for more hours before they can go home.

A copy of the circular is available here.

Clearing and Settlement of trades in Corporate Bonds through Clearing Corporations

SEBI vide Circular SEBI/IMD/DOF-1/BOND/Cir-4/2009 dated October 16, 2009 has announced that all trades in corporate bonds between specified entities, namely, mutual funds, foreign institutional investors/ sub-accounts, venture capital funds, foreign venture capital investors, portfolio mangers, and RBI regulated entities as specified by RBI shall necessarily be cleared and settled through the National Securities Clearing Corporation Limited (NSCCL) or the Indian Clearing Corporation Limited (ICCL). This will be applicable to all corporate bonds traded Over the Counter (OTC) or on the debt segment of Stock Exchanges on or after December 01, 2009. However, the provisions of this circular shall not be applicable to trades in corporate bonds that are traded on the Capital Market segment/ Equity Segment of the Stock Exchanges and are required to be settled through clearing corporations/ clearing houses of Stock Exchanges.

History

In December 2005, the High Level Expert Committee on Corporate Bonds and Securitization submitted its report recommending the development of the corporate bond and securitization markets in India. The Government had set up this committee to look into legal, regulatory, tax and market design issues in the development of the corporate bond and securitization markets.

In February 2006, Finance Minister in his Budget speech of 2006-07 announced that the Government has accepted the recommendations of the Report of the High Level Expert Committee on Corporate Bonds and Securitization and that steps would be taken to create a single, unified exchange traded market for corporate bonds.

In December 2006, Government issued clarifications on regulatory jurisdiction over corporate bond market as the confusion over the same was attributed to be a reason for slow progress in implementation of the High Level Expert Committee’s recommendations. After hearing the views of RBI and SEBI and perusing the provisions in SCRA, SEBI Act and the RBI Act, Finance Minister said that the necessary clarifications may be provided to RBI and SEBI so that they could implement expeditiously the announcement in the Budget that steps would be taken to create a single, unified exchange traded market for corporate bonds.

In order to implement the Union budget proposal on creation of a unified platform for trading of Corporate Bonds, SEBI vide circular No. SEBI/CFD/DIL/ BOND/1/2006/12/12 dated December 12, 2006 authorized Bombay Stock Exchange Limited (BSE) to set up and maintain a corporate bond reporting platform to capture all information related to trading in corporate bonds as accurately and as close to execution as possible. In January 2007, BSE started its reporting platform to capture information related to trading in corporate bond market. In March 2007, SEBI permits NSE also to set up and maintain a reporting platform on the lines of BSE. In March 2007, NSE starts its reporting platform for corporate bonds and starts disseminating information as desired by SEBI.

In April 2007, SEBI permitted both BSE and NSE to have in place corporate bond trading platforms to enable efficient price discovery and reliable clearing and settlement facility in a gradual manner. To begin with, the trade matching platform shall be order driven with essential features of OTC market. It is also announced that eventually a system of anonymous order matching shall be established. BSE and NSE were advised to make use of the existing infrastructure available with them for operating the trade matching platforms for corporate bonds with necessary modifications. The exchanges were also advised that on the stabilization of the trade matching system, they may move to an anonymous order matching system for trading of bonds within an appropriate period of time. Accordingly, both the exchanges will indicate to SEBI an expected date on which they could move to anonymous order matching system for trading in corporate bonds. With the introduction of anonymous order matching platform, the clearing and settlement facility would be provided by BSE and NSE with a multilateral netting facility for trades executed on the platform. It is also simultaneously decided that orders executed through trading platforms of either BSE or NSE need not be required to be reported again on the reporting platforms. SEBI also advised that the stock exchanges may provide their services for clearing and settlement of corporate bonds traded or the entities trading in listed corporate debt securities may settle their trades bilaterally.

More details on development in the Corporate Bonds are available here.
A copy of the Circular is available here.

New 'Code of Conduct' for agents and distributors of Mutual Funds

SEBI vide Circular SEBI/IMD/CIR No. 8/174648/2009 dated August 27, 2009 has come out with a new Code of Conduct for Intermediaries of Mutual Funds. Earlier in June, 2002, SEBI vide MFD/CIR/ 06/210/2002 dated June 26, 2002 had issued a Code of Conduct for Intermediaries of Mutual Funds. Taking into account the new regulatory developments (like ban on entry load) AMFI has revised the existing code for intermediaries (agents and distributors) and has come out with the new Code. SEBI states that if any intermediary does not comply with the code of conduct, the mutual fund should report it to AMFI and SEBI. It also states that mutual funds should not deal with those intermediaries who do not follow code of conduct. 

The additional obligations on intermediaries as per the new Code are the following: -

• Intermediaries should be fully conversant with the key provisions of the Scheme Information Document (SID), Statement of Additional Information (SAI) and Key Information Memorandum (KIM) as well as the operational requirements of various schemes.
• Intermediaries should disclose to the investors all material information including all the commissions (in the form of trail or any other mode) received for the different competing schemes of various Mutual Funds from amongst which the scheme is being recommended to the investors.
  

A copy of the Circular is available here.
A copy of the old Code is available here.

Anchor investors facility extended to issue of IDRs, ADR/GDR to trigger open offer in specified cases

SEBI vide its Press Release PR No.300/2009 has announced the decisions taken by the SEBI Board on September 22, 2009.

• Facility of anchor investors extended to issue of Indian Depository Receipts (IDRs): - SEBI decided to extend the facility of anchor investors to issue of IDRs on similar terms as applicable to public issues made by domestic companies. It also decided that at least 30% of issue size of the IDRs be reserved for allocation to retail individual investors, who may otherwise be crowded out.
• ADR & GDR under the purview of Takeover Code: - In cases where ADR/ GDR holders are entitled to exercise voting rights on the shares underlying GDRs / ADRs by virtue of clauses in the depositary agreement or otherwise, open offer obligations shall be triggered upon crossing the threshold limits set out under Chapter III of the Regulations. Earlier Takeover Code was not applicable to the acquisition of GDR or ADR so long as they are not converted into shares carrying voting rights (Regulation 3 (2).
• Disclosure of sale/ purchase by acquirer under Regulation 7 (1A) of Takeover Code: - SEBI has decided that any acquirer holding shares / voting rights between 15-75% should disclose purchase or sale aggregating two percent or more of the share capital. Earlier the regulation required disclosures on (+ /-) 2% acquisition / divestment by the acquirers holding shares / voting rights between 15-55%.
• Amendment to Regulation 11(1) of Takeover Code to allow creeping acquisition beyond 55%: - Regulation 11(1) would be amended to clarify that under Regulation 11 (1), the creeping acquisition of 5% would be available subject to the condition that post-acquisition, the shareholding / voting rights of the acquirer together with persons acting in concert with him, shall not increase beyond 55%. However, such acquisition up to 55% under Regulation 11(1) shall not be a bar on further acquisition up to 5% as envisaged under the second proviso to Regulation 11 (2). This means that acquirer can acquire without making a public announcement additional shares or voting rights entitling him upto 5% voting rights in the target company subject to the conditions mentioned in Regulation 11 (2) (i) & (ii).
• Compliance with applicable Accounting Standards: - SEBI decided that a listed company undergoing corporate restructuring under a scheme of arrangement should submit an auditors’ certificate to the stock exchange to the effect that the accounting treatment followed in respect of financials contained in the scheme is in compliance with all the applicable accounting standards. This requirement will be prescribed through amendments to listing agreement. In case of an unlisted company undergoing similar corporate restructuring and proposing to make an IPO should make disclosures in the DRHP in terms of AS 14. This will be mandated through the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.

A copy of the Press Release is available here.

SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 replaces SEBI (DIP) Guidelines, 2000

SEBI vide Circular SEBI/CFD/DIL/ICDRR/1/2009/03/09 dated September 3, 2009 has informed about the notification of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009. SEBI has rescinded the SEBI (DIP) Guidelines, 2000 and the new ICDR Regulations replaces it. ICDR Regulations have been made primarily by conversion of the DIP guidelines. While most of the provisions of rescinded DIP Guidelines have been incorporated into the new ICDR Regulations, certain changes have been made by removing the redundant provisions, modifying certain provisions on account of changes necessitated due to market design and bringing more clarity to the provisions of the rescinded Guidelines.

Consequential amendments have also been made to the Equity Listing Agreement and SEBI (ESOS and ESPS) Guidelines, 1999 through Circulars issued by SEBI. The old DIP Guidelines contained a provision relating to compliance of listing conditions by a listed issuer. The same has now been included in the equity listing agreement by inserting a sub-clause in Clause 19 - “(d) that in case of a further public offer to be made through the fixed price route, the company shall notify the stock exchange, at least 48 hours in advance, of the proposed meeting of its Board of Directors convened for determination of issue price.” Further, the ESOPS Guidelines contained certain provisions which were required to be complied with by an unlisted issuer at the time of making an initial public offer. These provisions have now been incorporated in the ICDR Regulations and removed from ESOPS guidelines.

SEBI also has informed that any offer document, filed under the old Guidelines and pending will be deemed to have been filed or made under the corresponding provisions of the new ICDR Regulations

A copy of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 is available here.

A comparative analysis between the old DIP guideline v/s new ICDR Regulations is available here.

SEBI issues additional Anti Money Laundering (AML) and Combating Financing of Terrorism (CFT) requirements for Intermediaries

SEBI vide its Circular ISD/AML/CIR-1/2009 dated September 01, 2009 has prescribed additional requirements/obligations to be fulfilled by all registered intermediaries with regard to AML/CFT.

This circular clarifies a few aspects covered under the master circular issue by SEBI in December 2008 (covered in this blog here). It also stipulates the name screening requirement before opening an account. The circular is applicable to all the intermediaries registered with SEBI under section 12 of the SEBI Act, 1992.

A copy of the Circular is available here.

A copy of the Master Circular on Anti Money Laundering (AML) and Combating Financing of Terrorism (CFT) is available here.

SEBI amends rights issue norms: ASBA introduced and Minimal disclosure

SEBI vide its Circular SEBI/CFD/DIL/DIP/38/2009/08/20 dated August 20, 2009 has amended the SEBI (DIP) Guidelines, 2000 and effected the following changes. The new amendment that has been brought in follows SEBI’s decision of late last year to cut short the time period for allotment of shares in rights issue to 15 days from the previous 45 days.

Rationalized the disclosure requirements for rights issues: The reason being rights issues are further issuances of capital made by listed entities to existing shareholders who are in possession of basic information about the issuer company. According to the norms issuer companies are required to disclose only minimum information that will help in making the issuance process faster and also help in reducing cost.
Applications Supported by Blocked Amount (ASBA) in rights issues: SEBI extended the facility of ‘application supported by blocked amount’ (ASBA) to all rights issue which enables an investor to apply for an issue without making payment. Instead, the amount is blocked in investor’s personal account with the designated syndicate bank and only the required funds will be debited from the account upon allocation of shares. Currently SEBI had enabled the facility for applying through ASBA only in case of an initial public offer (IPO).
Utilisation of issue proceeds after finalization of the basis of allotment in the issue: Issuer company can now utilise the issue proceeds only after the basis of ‘allotment of rights share’ is finalised. Earlier, the issuer company was allowed to utilise the rights issue proceeds after satisfying the designated stock exchange that it’s rights offer had received minimum 90% subscription’.

A copy of the Circular is available here.
A copy of the amended DIP guidelines is available here.

Clarifications on parity in exit load

SEBI vide its Circular SEBI/IMD/CIR No. 7/173650/2009 dated August 17, 2009 has issued clarifications with regard to bringing parity in exit load among all classes of unit holders.

AMCs while bringing parity in exit load have to comply with the following requirements: -

• The principle laid down in the SEBI circular No. SEBI/IMD/CIR No. 5/126096/08 dated May 23, 2008 (clause 16 of the standard observations) that “any imposition or enhancement in the load shall be applicable on prospective investments only” should be followed.
• The parity among all classes of unit holders in terms of charging exit load should be made applicable at the portfolio level.

A copy of the Circular is available here.

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Exit load - Parity among all classes of unit holders

SEBI vide its Circular SEBI / IMD / CIR No. 6 /172445/ 2009 dated August 7, 2009 has decided that no distinction among unit holders should be made by Mutual Funds based on the amount of subscription while charging exit loads. 

SEBI has observed that the mutual funds are making distinction between the unit holders by charging differential exit loads based on the amount of subscription.

A copy of the Circular is available here.

Commission should be paid to Self Certified Syndicate Banks (SCSBs) under ASBA process

SEBI vide its Circular SEBI/CFD/DIL/MB/IS/5/2009/05/08 dated August 5, 2009 has clarified that both ASBA and non ASBA process should be treated on par and commission should be paid self certified syndicate banks (SCSBs) under ASBA process. SEBI also noted that one of the reasons for poor response to ASBA was the lack of incentive for Self Certified Syndicate Banks (SCSBs) to do the assigned task of accepting ASBAs, uploading details in the bidding system and blocking or unblocking of the account.

A copy of the Circular is available here.

SEBI issue clarifications on creeping acquisition

SEBI vide its Circular CFD/DCR/TO/Cir-01/2009/06/08 dated August 6, 2009 has issued clarifications regarding the applicability of the Regulation 11 (2) of the Takeover Code. In October 2008, this regulation was amended to increase the creeping acquisition limit from 55% to 75%. Now SEBI has issued clarifications with regard to this. The clarifications are as follows: -

• The acquisition, within the limit of five per cent (5%) under the second proviso to sub-regulation (2) of regulation 11, may be made by an acquirer who, together with persons acting in concert with him, holds fifty five percent (55 %) or more but less than seventy five per cent (75 %) of the shares or voting rights in the target company ;
• The acquirer together with persons acting in concert with him, holding shares or voting rights as specified at (a) above, may acquire additional shares or voting rights upto a maximum of five per cent (5 %) voting rights in the target company in one or more tranches, without any restriction on the time-frame within which the same can be acquired;
• The aforesaid acquisition of five per cent (5 %) shall be calculated by aggregating all purchases, without netting the sales.
• Consequent to such acquisition, the percentage of shareholding / voting rights of the acquirer, together with persons acting in concert with him, in the target company, shall not increase beyond seventy five per cent (75 %). This limit is applicable irrespective of the level of minimum public shareholding required to be maintained by the target company in terms of clause 40A of the Listing Agreement.

A copy of the Circular is available here.

SEBI issues clarifications on insider trading amendments

A brief history

Earlier, SEBI had amended certain provisions of SEBI (Prohibition of Insider Trading) Regulations, 1992 vide notification dated November 19, 2008 (covered in this blog here). One of the major changes it introduced was that the directors/officers/designated employees, who buy or sell shares, cannot carry out a reverse transaction for six months. In the case of subscription in the primary market (initial public offers), the above mentioned entities should hold their investments for a minimum period of 30 days. The holding period would commence when the securities are actually allotted. Earlier there existed no restriction on entering into an opposite transaction in six months. The only restriction, which existed before, required that the security should be held for a minimum period of 30 days. This amendment tried to introduce the “Short-Swing Profit Rule” in India. SEC’s “Short-Swing Profit Rule” requires company insiders to return any profits made from the purchase and sale of company stock if both transactions occur within a six-month period. In India, as per the terms of the present amendment, the insider is not required to return profits to company but it just prohibit such transactions.  

The Clarifications

SEBI had received a few queries on the amended regulations and it has now issued clarifications in form of an FAQ. They are as follows: -

1. Does the six month restriction also apply to the exercise of ESOPs and the sale of shares received?

2. If an employee has sold shares on 10th February 2009, can he subscribe to ESOPs on 11th March 2009?

Clarification: Restriction in Clause 4.2 is intended for transactions in the secondary market and hence is not applicable for the exercise of ESOPs and sale of these shares. In the above example, the employee can subscribe to the ESPOs even if he has sold shares during the previous six months. However, it may be noted that once shares acquired through ESOPs are sold in the market, the restriction on buying would become applicable for next six months. Also, while exercising ESOPs, the code of conduct framed by the company and the fundamental principles for prohibition of insider trading as specified in the Regulations must be complied with.

 
3. If an employee has purchased 100 shares on 1st February 2009 and then again purchased 400 shares on 15th March 2009, when will he be able to sell the shares purchased on 1st February 2009? Will it be after 1st August or 15th September?

Clarification: The restriction of six months on sale of shares would apply from the date of the last purchase and not the first purchase. In the above example he can sell the shares after 15th September. The same is true in case of sale of shares on two different dates i.e. the restriction of six months on purchase of shares would apply from the date of the last sale.

 
4. The clause 4.2 stipulates that, no opposite transaction can be entered into for a period of 6 months from the date of prior transaction by a designated employee. Whether the same shall be applicable for shares held on the date of the notification. For example, a designated person has purchased 100 shares on 01.11.2008. Can he sell these shares on 22.12.2008?

Clarification: As the shares were acquired before the amendments to the Regulations were notified, the designated person may be allowed to sell the shares if it is permitted under the code of conduct of the company 

 
5. Clause 4.2 of Part A, Schedule I of the Regulations, provides for holding period of 30 days in case of acquiring shares through IPO. Can the company apply the minimum holding period of 30 days as applicable to IPOs even for bonus issues, ESOPs, rights issues etc.?

Clarification: Under the existing Regulations, 30 day holding period restriction is applicable for IPOs. In case of issues as referred to above, the company may decide about the holding period as specified in its code of conduct.

 
6. Clause 4.3 of Part A, Schedule I of the Regulations provides that in case the sale of securities is necessitated by personal emergency, the holding period may be waived by the compliance officer after recording in writing his / her reasons in this regard. Can the Compliance Officer extend the waiver clause to the restrictions on opposite transactions?

Clarification: Yes. The waiver may be applied for sale of shares by personal emergencies after recording the reasons in writing and ensuring that there is no element of insider trading.


7. Can a designated employee continue to deal in NIFTY / SENSEX index futures?

Clarification: There is no restriction under the Regulations for dealing in NIFTY / SENSEX index futures by the designated employees subject to their compliance of code of conduct.


8. For a designated employee already holding derivative positions in the company’s shares, is it required for them to liquidate the positions before maturity or it necessary to hold till maturity?

Clarification: As the position in derivatives was taken before the notification of Regulations, the company may take a view about liquidating the derivative position or holding it till maturity.

A copy of the communication from SEBI is available here.

SEBI amends listing agreement – Listing companies prohibited from issuing shares with superior rights

SEBI vide its Circular SEBI/CFD/DIL/LA/2/2009/21/7 dated July 21, 2009 has amended the Equity Listing Agreement to prohibit listed companies from issuing shares with superior rights as to voting or dividend vis-à-vis the rights on equity shares that are already listed. This amendment gives effect to an important decision taken by the SEBI Board on June 18, 2009. A new clause 28A has been inserted in the equity listing agreement to this effect.

A copy of the Circular is available here.

SEBI abolishes no-delivery period for all types of corporate actions

SEBI vide its Circular MRD/DoP/SE/Cir-07/2009 dated July 21, 2009 has abolished ‘no-delivery period’ for all types of corporate actions in respect of the scrips which are traded in the compulsory dematerialized mode. Accordingly, short deliveries, if any, of the shares traded on cum-basis should be directly closed out. In case of such direct close-out, the mark-up price would be as stated in SEBI Circular no. SMD/POLICY/Cir-08/2002 dated April 16, 2002. 

A copy of the Circular is available here.

SEBI amends DIP Guidelines

SEBI vide its Circular SEBI/CFD/DIL/DIP/36/2009/09/07 dated July 9,2009 has amended the SEBI (Disclosure and Investor Protection) Guidelines, 2000. These amendments give effect to important decisions taken by the SEBI Board on June 18, 2009, including the introduction of 'Anchor Investor' in public issue. The key amendments are summarised below: -

1. An unlisted company making an IPO should compulsorily list its securities on at least one stock exchange having nationwide trading terminals (i.e. BSE or NSE)
2. Concept of 'Anchor Investor' is introduced in public issues through book building. Keys points in relation to 'Anchor Investor' concept are as follows: -  

• 30% of QIP reservation may be allocated to Anchor Investors
• The minimum application size - Rs.10 crores. 25 % payable on application – balance within 2 day of closure of issue
• If price determined in IPO is greater than the price paid by AI, AI will be required to pay the difference to the company
• One-third of the Anchor Investor portion shall be reserved for domestic mutual funds
• Bidding for to open one day before the issue opens and shall be completed on the same day.
• Allocation to Anchor Investors - minimum 2 investors for upto Rs.250 crs. and 5 for more than Rs.250 crores
• Shares shall be in a lock-in of 30 days from the date of allotment in the public issue

A copy of the Circular is available here.

A copy of the amended SEBI (Disclosure and Investor Protection) Guidelines, 2000 is available here.

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Sebi asks for firm commitment from foreign venture capital investors

SEBI vide its Circular IMD/DOF-1/FVCI/CIR. No. 1/2009 dated July 3, 2009 has made it mandatory for foreign venture capital investors (FCVI) to obtain a firm commitment from their investors for contribution of at least $1 million (about Rs 5 crore) for registration with the market regulator.

With the change in the legal framework of SEBI (Foreign Venture Capital Investors) Regulations, 2000, the regulator has now brought about parity between FVCIs and domestic venture capital funds (VCF). 

A copy of the Circular is available here.

Ban on entry load effective from August 1st, 2009

Brief History
• Most equity mutual funds charge retail investors an entry load of 2.25% on their investments. This entry load is mandatorily payable irrespective of an investor's mode of entry.
• The total amount collected as load for each scheme, as per SEBI stipulations, has to be maintained in a separate account by AMCs and can be utilised to meet selling and distribution expenses. As per industry practice, the load is normally utilised for paying the agent/ distributor's commission.
• SEBI had earlier decided that there will be no entry load for the schemes, existing or new, of a mutual fund. The upfront commission to distributors should be paid by the investor to the distributor directly. Moreover, the distributors should disclose the commission, trail or otherwise, received by them for different schemes/ mutual funds which they are distributing or advising the investors.
• MF distributors are against this because its gives investors the right to negotiate commissions while buying MF products through them.
• MFs are against this because entry load helped it to meet selling and distribution expenses.

Ban on entry load effective from August 1st, 2009
Now, SEBI vide its Circular SEBI/IMD/CIR No. 4/168230/09 dated June 30, 2009 has given effect to this decision. The major points in this circular are summarized below: -
• There shall be no entry load for all mutual fund schemes.
• The scheme application forms should carry a suitable disclosure to the effect that the upfront commission to distributors will be paid by the investor directly to the distributor, based on his assessment of various factors including the service rendered by the distributor.
• Of the exit load or CDSC charged to the investor, a maximum of 1% of the redemption proceeds should be maintained in a separate account which can be used by the AMC to pay commissions to the distributor and to take care of other marketing and selling expenses. Any balance should be credited to the scheme immediately.
• The distributors should disclose all the commissions (in the form of trail commission or any other mode) payable to them for the different competing schemes of various mutual funds from amongst which the scheme is being recommended to the investor.

All these decisions are applicable to investments in and redemptions from mutual fund schemes from August 1st, 2009. New mutual fund schemes and Systematic Investment Plans (SIP) launched on or after August 1, 2009 will also have to comply with these rules.

A copy of the circular is available here.

SEBI appoints members of the Advisory Committee for the SEBI Investor Protection and Education Fund

Earlier on May 19, 2009, SEBI had notified the SEBI (Investor Protection and Education Fund) Regulations, 2009. It was done with a view to strengthen its activities for investor protection. SEBI stated that the fund will be used for the protection of investors and promotion of investor education and awareness. This includes educational activities, awareness programs, aiding investor associations etc. The sources of the fund include contribution made by the SEBI to the fund, grants and donations given to the fund by the Central Government and such other sources mentioned in regulation 4. 

Under the regulations, SEBI had to constitute a seven-member advisory committee for recommending investor education and protection activities. Today, SEBI has announced the members of the Advisory Committee for the SEBI Investor Protection and Education Fund. Shri R. K. Nair, Executive Director, SEBI, will be the convener of the committee. Other members are Shri S. G. Kale, Shri Sanjay Sehgal, Ms. D. N. Raval, Smt. Mala Banerjee, Shri A. K. Narayan, Shri G. P. Garg and Shri Suresh Menon. 

A copy of the communication from SEBI is available here.
A copy of SEBI (Investor Protection and Education Fund) Regulations, 2009 is available here. 

SEBI allows managers to keep funds of all clients in one account

SEBI on 23rd June, 2009 has issued two important clarifications. They are summarized below: -

Maintenance of Clients’ Funds in a separate Bank Account by Portfolio Managers
SEBI has clarified that portfolio managers may keep the funds of all clients in a separate bank account maintained by the portfolio manager subject to some conditions. These conditions include clear segregation of each client’s fund through proper and clear maintenance of back office records, maintaining an accounting system containing separate client-wise data etc. It is also specified that Portfolio Managers should not use the funds of one client for another client.

A copy of the Circular is available here.

Applicability of SEBI Regulations/ Circulars on Initial and Continuous Disclosures for Convertible and Non-Convertible Debt
Earlier in May 2009, SEBI had introduced a simplified listing agreement for issue of privately placed debt securities and listing of such securities on the exchange. This has created some confusion regarding the applicability of disclosure norms for issue and listing of convertible debt securities.

SEBI has clarified that issue of debt securities that are convertible, either partially or fully or optionally into listed or unlisted equity shall be guided by the disclosure norms applicable to equity or other instruments offered on conversion in terms of the Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000. Issue and listing of non-convertible debt securities, whether issued to the public or privately placed, is to be done in accordance with the provisions of the Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008.

A copy of the Circular is available here.

'Anchor Investor’ allowed in public issues, Simplified disclosure norms for rights issues and Removal of the entry load on investors in MF schemes

SEBI vide its press release PR No.192/2009 dated June 18, 2009 has announced the decisions took by SEBI Board on the same day. Major decisions are as follows:-
1. ‘Anchor Investor’ allowed in public issues
An issuer making a public issue of shares through book building may allocate on a discretionary basis up to 30% of the QIB portion of the issue to anchor investors (AIs), who is a QIB. The minimum size of application by AIs would be Rs. 10 crore. There will be a lock-in of 30 days on the shares allotted to these investors from the date of allotment. No person related to the promoter/promoter group/BRLMs can apply as anchor investor. 
2. Simplified disclosure norms for rights issues
Since rights issues are made to existing shareholders, who are in possession of basic information about the company and have been receiving reports regarding major developments in the company on a continuous basis, it has been decided to rationalize disclosures in rights issue offer document by doing away with or modifying existing disclosure requirements. Disclosures that have been done away with include summary of the industry and business of the issuer company, promise vs. performance with respect to earlier/ previous issues, ‘Management discussion and analysis’. The disclosures relating to financial statements, litigations, risk factors, etc. have been simplified. 
3. Removal of entry load for the schemes, existing or new, of a Mutual Fund 
4. Holding period for equity shares which are received on conversion of fully paid compulsorily convertible securities – Explained 
Current guidelines state that a shareholder can make an offer for sale of the equity shares if he has held them for a period of at least one year. Board decided that in case equity shares which are received on conversion of fully paid compulsorily convertible securities, including depository receipts are being offered for sale, the holding period of such convertible securities as well as that of resultant equity shares together would be taken into account for the purpose of eligibility.
5. IPOs of unlisted companies should be listed on stock exchange with nationwide trading terminals
An unlisted company making an IPO should list the securities on at least one stock exchange having nationwide trading terminals. This aims at providing a liquid trading platform to investors in securities of the company.
6. Listed company cannot issue shares with superior voting rights
This is to avoid the possible misuse by the persons in control to the detriment of public shareholders.
7. Other decisions
• Measures to improve transparency in payment of commission to Mutual Fund distributors
• Rationalization of the fees of various intermediaries

A copy of the press release is available here.

SEBI and RBI to introduce Interest Rate Futures in India

Last year on February 28, 2008, SEBI and RBI in a joint meeting had decided to constitute a RBI-SEBI Standing Technical Committee on Exchange-Traded Currency and Interest Rate Derivatives. The Committee submitted its Report on Exchange-Traded Currency Futures on May 29, 2008.Now the RBI-SEBI standing technical committee on exchange interest rate futures has come up with the operational guidelines for the introduction of physically settled interest rate futures contract based on 10-year notional coupon bearing Government of India (GoI) security. Members registered with the Securities and Exchange Board of India (SEBI) for trading in currency/ equity derivatives will be eligible to trade in interest rate derivatives also, subject to meeting the balance sheet networth requirement of Rs 1 crore for a trading member and Rs 10 crore for a clearing member. 

Why Interest Rate Futures?

The report also states that the need for Interest Rate Futures arise from the fact that banks, insurance companies, primary dealers and provident funds bear a major portion of the interest rate risk on account of their exposure to government securities. As such these entities need a credible institutional hedging mechanism. In this context, therefore, it is important that the financial system provides interest rate risk management tools through Exchange-Traded interest rate derivatives.

Benefits: - 

The committee has identified the following as the benefits of Exchange-Traded Interest Rate Derivatives

· Standardization – Through standardization, the Exchanges offer market participants a mechanism for gauging the utility and effectiveness of different positions and strategies.

· Transparency – Transparency, efficiency and accessibility is accentuated through online real time dissemination of prices available for all to see and daily mark-to-market discipline.

· Counter-party Risk – The credit guarantee of the clearing house eliminates counter party risk thereby increasing the capital efficiency of the market participants.

Product design and other details:-

The notional coupon on the underlying 10-year GoI security would be 7 per cent with semi-annual compounding. The size of the interest rate futures contract would be Rs 2 lakh and the maximum maturity of the contract would be 12 months. The contract cycle would consist of four fixed quarterly contracts for the entire year, expiring in March, June, September and December.

A copy of the report is available here.

SEBI eases listing norms for potential issuers from IOSCO countries

SEBI vide its Circular SEBI/CFD/DIL/IDR/1/2009/16/06 dated June 16, 2009 has simplified the listing agreement for Indian Depository Receipts (IDRs) for potential issues from countries, which are part of the International Organization of Securities Commission (IOSCO). Accordingly, SEBI has drafted a model listing agreement for IDR issuers having its registered office situated in a country, the securities market regulator of which is a signatory to MMOU of IOSCO. With respect to most of the provisions especially Corporate Governance requirements and disclosure of periodical results, the issuer is allowed to follow the home country requirements provided equitable treatment is given to the IDR holders vis-à-vis holders of equity shares. For the issuing companies from other jurisdictions, the existing model listing agreement for IDRs shall continue to apply till further advice in this regard. This is part of the market regulator’s attempts to reduce additional regulatory requirements and lower costs.  

A copy of the Circular is available here.

SEBI changes debt fund valuation norms for Mutual Funds

SEBI vide its SEBI / IMD / CIR No. 2/166256/ 2009 dated June 12, 2009 has changed the norms for valuation of debt securities held by mutual funds. Now the fund houses would be needed to value their funds nearer to market levels. SEBI has now shifted back to its valuation norms practiced till October last year, when it had allowed the fund houses to use a wider margin in valuing their debt securities. With this change in the permissible mark-up and mark-down levels -- the margins allowed above and below the exact market value -- the fund houses would be allowed lesser margin levels. As per the new norms, Mutual Funds would be allowed a mark-up (the upward permissible margin) of 100 basis points and a mark- down of 50 basis points (the downward margin) for rated debt securities with maturity duration of up to two years. Earlier in October 2008, SEBI had raised the mark-up and mark-down for such securities to 500 basis points and 150 basis points, respectively.

A copy of the circular is available here.

SEBI issues Delisting Regulations, 2009

SEBI on 10th June, 2009 has notified the SEBI (Delisting of Equity Shares) Regulations, 2009. 

What is delisting of securities?

Delisting of securities means permanent removal of securities of a listed company from a stock exchange. As a consequence of delisting, the securities of that company would no longer be traded at that stock exchange.

History of delisting regulations in India

Every company that issues shares to the public is required to have its shares listed on a recognised stock exchange. Initially The Controller of Capital Issues (CCI) fixed the price of shares issued by any company. In 1992 the CCI guidelines were abolished and SEBI was constituted. SEBI opened up the market to the Issuers and regulated the issue process by providing for full safeguards and transparency through disclosure of all relevant information by the issuers so that the investor can make an informed decision.  Companies issuing shares became free to fix the premium provided adequate disclosure is made in the offer documents. This resulted in many IPOs and a huge number of companies got listed on stock exchanges. Later it became necessary for many companies to delist their shares due to reasons like hitting the delisting limits. This resulted in the appointment of a Committee by SEBI and finally the SEBI (Delisting of Securities) Guidelines, 2003. SEBI (Delisting of Securities) Guidelines, 2003 provided an exit mechanism, whereby the exit price for voluntary delisting of securities is determined by the promoter of the concerned company which desires to get delisted, in accordance to book building process. SEBI on 10th June, 2009 has notified the SEBI (Delisting of Equity Shares) Regulations, 2009.

SEBI (Delisting of Equity Shares) Regulations, 2009

Kinds of delisting 

 (1) Voluntary delisting means delisting of equity shares of a company voluntarily on application of the company under Chapter III of these regulations. 
(2) Compulsory delisting means the delisting of equity shares of a company by a recognised stock exchange under Chapter V of these regulations. It states that a recognised stock exchange may, by order, delist any equity shares of a company on any ground prescribed in the rules made under section 21A of the Securities Contracts (Regulation) Act, 1956. This is a penalizing measure at the behest of the stock exchange for not making submissions/complies with various requirements set out in the Listing agreement within the time frames prescribed.

Voluntary Delisting 

Delisting of securities is not permitted in certain circumstances which are explained in Regulation 4. It states that a company cannot delist pursuant to a buy back of equity shares by the company; pursuant to a preferential allotment etc. It is also clarified that a company cannot delist its convertible securities.

Two types of voluntary delisting

Delisting where no exit opportunity is required. These are cases where even after the delisting from any one or more recognised stock exchanges, the equity shares would remain listed on any recognised stock exchange which has nationwide trading terminals. In this scenario exit opportunity should not be given to all the public shareholders with Chapter IV. Procedure to be followed is mentioned in regulation 7. 
Delisting where exit opportunity is required. This can happen in two cases, Firstly in cases where the company delists its equity shares from all recognised stock exchanges and secondly in cases after the proposed delisting, the equity shares would not remain listed on any recognised stock exchange having nation wide trading terminals. In these scenarios exit opportunity should be given to all the public shareholders with Chapter IV. . Procedure to be followed is mentioned in regulation 8. 

The procedure for providing exit opportunity is detailed in Chapter IV of the Regulations. It includes public announcement, opening of an escrow account, dispatching letter of offer, price determination through book building process etc. There is also a prescribed minimum number of equity shares to be acquired while providing this exit opportunity.  

Compulsory Delisting

This is a penalizing measure at the behest of a recognised stock exchange for not making submissions/complies with various requirements set out in the Listing agreement within the time frames prescribed. Procedure for the same is detailed in Chapter V of the Regulations. This is different from voluntary delisting in many ways. For example, the stock exchange should appoint an independent valuer or valuers for determining the fair value of the delisted equity shares. Then the promoter of the company should acquire delisted equity shares from the public shareholders by paying them the value determined by the valuer, subject to their option of retaining their shares.

Special provisions for small companies and delisting by operation of Law

Company having paid up capital up to one crore rupees and its equity shares were not traded in any recognised stock exchange in the one year immediately preceding the date of decision, such equity shares may be delisted from all the recognised stock exchanges where they are listed, without following the procedure in Chapter IV. Provisions are also provided for delisting in case of winding up, derecognition of companies.

Copy of the Regulations is available here.

Shri C B Bhave elected as the Chairman of the Asia- Pacific Regional Committee of IOSCO

SEBI vide its press release (PR No.184/2009) dated June 9, 2009 has announced the election of Shri C B Bhave, Chairman, SEBI as the Chairman of the Asia- Pacific Regional Committee of the International Organisation of Securities Commissions (IOSCO), at the 34th Annual Conference of IOSCO. IOSCO is recognized as the international standard setter for securities markets. The Organization's wide membership regulates more than 90% of the world's securities markets and IOSCO is the world's most important international cooperative forum for securities regulatory agencies. IOSCO members regulate more than one hundred jurisdictions.

Press release is available here.

www.iosco.org

Copies of gazette notifications of SEBI (Mutual Funds) (Amendment) Regulations 2009

SEBI vide its circular SEBI / IMD / CIR No. 1/ 165935 / 2009 dated June 9, 2009 has issued copies of gazette notifications of SEBI (Mutual Funds) (Amendment) Regulations 2009 and SEBI (Mutual Funds) (Second Amendment) Regulations 2009. The key changes brought about by these amendments are as follows: - 

SEBI (Mutual Funds) (Second Amendment) Regulations 2009

· Mutual fund scheme cannot invest more than thirty percent of its net assets in money market instruments of an issuer. The limits do not cover government bonds, treasury bills and collateralized borrowing and lending obligation. (Notified on June 5, 2009 and is effective from that date).

 
SEBI (Mutual Funds) (Amendment) Regulations 2009

· Notified on April 8, 2009 and is effective from that date. 
· The AMC should obtain, wherever required under the regulations, prior in-principle approval from the recognised stock exchange(s) where units are proposed to be listed.
· Every close ended scheme, other than an equity linked savings scheme, should be listed on a recognised stock exchange within such time period and subject to such conditions as specified by the Board. But close ended scheme launched prior to the commencement of these amendment regulations need not be compulsorily listed if it qualifies certain conditions mentioned in the regulations.
· Units of a close ended scheme, other than those of an equity linked savings scheme, launched on or after the commencement of the Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations, 2009 should not be repurchased before the end of maturity period of such scheme.
· AMC should issue to the applicant whose application has been accepted, a statement of accounts specifying the number of units allotted to the applicant as soon as possible but not later than thirty days from the date of closure of the initial subscription list and/or from the date of receipt of the request from the unit holders in any open ended scheme.

SEBI clarifies that Mutual Funds can invest in Indian Depository Receipts

SEBI vide its circular SEBI / IMD / CIR No. 1/ 165935 / 2009 dated June 9, 2009 has clarified that mutual funds can invest in Indian Depository Receipts. 

Copy of the Circular is available here. 

Simplified Listing Agreement for Debt Securities

SEBI vide its circular SEBI/IMD/BOND/1/2009/11/05 dated May 11, 2009 has come out with a new simplified listing agreement for Debt Securities. This is a part of the SEBI’s continuous efforts to rationalize the disclosure norms for listing of debt issuances. The new listing agreement is based on the following principles.

• Where the equity of an issuer is listed, and such an issuer seeks listing of debt securities (whether by way of a public issue or a private placement), minimal incremental disclosures related to the debt security issuance would be sufficient, since large amount of information is already in public domain and material developments are disclosed under the equity Listing Agreement on a nearly continuous basis. Part A of the Listing Agreement prescribes only incremental disclosures which are relevant for debt securities of such issuers whose equity shares are listed on the Exchange.
• Where the equity of an issuer is not listed, and such an issuer seeks listing of debt securities (whether issued by way of a public issue or a private placement), detailed disclosures, fewer than those made under the equity Listing Agreement, would need to be made. Part B of the Listing agreement is applicable to issuers whose equity shares are not listed on the Exchange, prescribes detailed disclosures.

Copy of the circular is available here.

Discussion Paper on Simplification and Uniformity in the process of weeding out/ rejection of applications in primary market transaction

SEBI has published on its website, a discussion paper containing proposals to simplify and to bring about uniformity in the process of weeding out/ rejection of applications in primary market transactions using PAN. The proposals contained in this paper are placed for public comments for a period of 15 days.

Earlier in 2007, SEBI has stipulated that applicants in public issue should disclose their PAN in the application form, irrespective of the amount for which application/bid is made, failing which the application would be rejected. But different practices were followed by market participants in this regard. Usually the Registrar to the issue carries on the process of identifying rejections, based on the grounds of rejection disclosed in the offer document. The basis of weeding out of multiple applications involves cross checking a number of fields by the Registrar, such as name of the applicant, age, PAN, address of the applicant, DP ID, Client ID, fathers/husband’s name and finally the signatures.

For the purpose of simplifying the weeding out process and to bring about uniformity across procedures adopted in rejection of applications in primary market transactions, the following proposals are being considered by SEBI for implementation:

• The Registrar shall validate PAN, DP ID and Client ID available in the application form with the said data available in the depositaries database. If these data do not match, such application shall be rejected and not be considered for allotment.


• Applications made in public, preferential issue and in Qualified Institutional Placements (QIP) without mentioning PAN or with invalid or incorrect PAN shall be rejected.
  
  A copy of the discussion paper is available here.

SEBI amends Equity Listing Agreement

SEBI vide its circular SEBI/CFD/DIL/LA/1/2009/24/04 dated April 24, 2009 has amended certain clauses in the Equity Listing Agreement. This aims to enhance disclosures regarding shareholding pattern in a listed company and also to bring more transparency and efficiency in the governance. The highlights are as follows: -

• A uniform procedure has been prescribed for dealing with unclaimed shares i.e., shares which could not be allotted to the rightful shareholder due to insufficient/incorrect information or any other reason
• Notice period for Record Date and Board Meeting has been reduced to 7 working days and 2 working days respectively
• Listed companies should declare their dividend on per share basis only
• An additional format for disclosures of voting rights pattern in the company has been provided

More details are available here. www.sebi.gov.in/circulars/2009/circfd04.pdf

Sebi announces takeover norms for companies like Satyam

SEBI vide a notification dated 13th February, 2009 has amended the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 and has made the following changes:

· SEBI has stated that Chapter III of the Takeover Code will be relaxed by the Board in certain cases where the following conditions are satisfied, on an application made by the target company. (1) The Central Government or State Government or any other regulatory authority has removed the board of directors of the target company and has appointed other persons as directors. (2) Such directors have devised a plan which provides for transparent, open, and competitive process for continued operation of the target company in the interests of all stakeholders in the target company and the conditions and requirements of the competitive process are reasonable and fair.

· SEBI has also stated that no public announcement for a competitive bid should be made after an acquirer has already made the public announcement pursuant to relaxation granted by the Board in terms of regulation 29A.

SEBI Board meeting held on February 2, 2009

SEBI vide a press release PR No. 73/2009 dated February 2, 2009 has published the decisions taken by the SEBI Board in its meeting. The highlights are as follows: -

1. It has been decided that listed companies should declare dividend on per share basis only. Related amendments will be made in the listing agreement. This aims at bringing uniformity in declaration of dividend.
2. Timelines for bonus issues have been reduced to 15 days where no shareholders’ approval is required as per articles of association and to 60 days where shareholders’ approval is required as per Articles of Association. DIP guidelines will be amended accordingly.
3. Time frame for announcing the price band for Initial Public Offering (IPO) have been shortened and now issuer company can declare the floor price/ price band at least two working days before the date of opening of IPO (earlier this was two weeks). This would help companies in the present volatile market conditions.
4. The upfront margin to be paid by allottees of equity warrants has been raised to 25% from the present 10%.
5. It was decided that appropriate amendments will be made in the regulations / guidelines to enable a transparent process for arriving at the price for the acquisition of Satyam Computers Services Limited.
6. Board also approved regulations for governance of Investor Protection and Education Fund (IPEF). This includes the details relating to the sources or contributions to the fund and the approved end uses of the fund.

SEBI unveils norms for disclosure of pledged shares

Following its decision at a board meeting held on January 21, SEBI, vide a notification dated 28th January, 2009, has come out with the norms for disclosure about pledged promoter shares. Certain amendments have been made to the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

The promoter should within seven working days of commencement of this amendment, should disclose the details of shares of that company pledged by him, if any, to that company.
The promoter should within 7 working days from the date of creation of pledge on shares of that company held by him or from the date of invocation of pledge on shares of that company pledged by him, inform the details of such pledge of shares to that company.
Companies should disclose all the details pertaining to the promoters’ share pledge, if at the end of any quarter, the total number of such pledged shares exceeds 25,000 or one percentage of the total shareholding, whichever is lower.

Updated SEBI (Foreign Institutional Investors) Regulations 1995 is now available for download

Securities And Exchange Board Of India (Foreign Institutional Investors)Regulations 1995 [updated upto 28.01.09]is now avialable for download at SEBI website. CLICK HERE

SEBI makes it mandatory to disclose details of shares pledged by the promoters

SEBI vide a press release PR No.58/2009 dated January 21, 2009 has made it mandatory for promoters to disclose details of shares pledged by them.
• It makes it mandatory on the part of promoters (including promoter group) to disclose the details of pledge of shares held by them in listed entities promoted by them.
• Disclosures shall be made as and when the shares are pledged (“event based disclosure”) as well as by way of periodic disclosures.
• Details of pledge of shares and release/ sale of “pledged shares” shall be made to the company and the company shall in turn inform the same to the public through the Stock Exchanges.
• Necessary amendments in the regulations and listing agreement will be made soon.
In the US, SEC mandates the disclosure of shares pledged by directors of a company. In the UK, this is covered under Insider Trading Regulations. The pledging of shares is subject to the same disclosure requirements by insiders as other dealings in shares. The UK definition of insider trading says that ‘dealing’ in shares includes “using as security, or otherwise granting a charge, lien or other encumbrance over the securities of the company”. This unambiguously places pledging (of any form) as being part of insider trading for which disclosure has to be made. Now SEBI has placed Indian regulations at par with the International best practices.

Earlier, the PMAC (Primary Market Advisory Committee) of SEBI had proposed that promoters should make disclosure whenever they raise funds using their holding in listed companies as collateral. SEBI has now accepted this recommendation and the details of these disclosure requirements will be known in few days.

SEBI imposes new restrictions on Mutual Funds

SEBI vide circulars SEBI/IMD/CIR No. 14/151044/09 dated January 19, 2009 and SEBI/IMD/CIR No.13/150975 / 09 dated January 19, 2009 have effected the following changes in Mutual Fund rules.
• An investment made by liquid fund schemes and plans is subject to the following conditions. Earlier definitions are withdrawn.
(1) With effect from February 01, 2009, funds should make investment in /purchase debt and money market securities with maturity of upto182 days only.
(2) With effect from May 01, 2009, funds should make investment in /purchase debt and money market securities with maturity of upto 91 days only.
(3) Inter-scheme transfers of securities having maturity upto 365 days and held in other schemes as on February 01, 2009 shall be permitted till October 31, 2009. From November 1, 2009 the new requirements shall apply to such inter-se scheme transfers also.
• SEBI also discontinued the use of the term “Liquid plus Scheme” as it gives a wrong impression to the investors about an added liquidity. Mutual funds should carry out this change and confirm the compliance to SEBI within 30 days from the date of this circular.
• SEBI prohibited the practice of Mutual Funds offering indicative portfolios and indicative yields in their debt /fixed income products as it may be misleading to investors. This is applicable to any communication in any manner issued by (1) any Mutual Fund or (2) distributors of its products. Compliance shall be monitored by the AMC and Trustees and reported in their respective reports to SEBI.
• Economic times and Business standard.