Put/Call Options & Mandatory Buyback are invalid

SEBI's has recently issued an informal guidance stating that a pre-agreed buyback of shares from an investor through put/call option is not legal/valid under the Securities Contracts (Regulation) Act, 1956 ("SCRA"). SEBI has stated that since these options would be exercised on a future date, such transactions would not qualify as spot delivery contracts as defined in section 2(i) of SCRA. These put/call options would not qualify as valid derivative contracts as per section 18A of the SCRA as these are exclusively entered into between two parties and not traded on stock exchanges and settled on the clearing house of the recognised stock exchanges. This informal guidance from SEBI reaffirms the view taken by it in Vedanta-Cairn deal wherein it repudiated the call/put/pre-emptive rights in their share purchase agreement citing its illegality.

SEBI (Issue of Capital and Disclosure Requirements) (Fourth Amendment) Regulations, 2010 notified

SEBI has notified the SEBI (ICDR) (Fourth Amendment) Regulations, 2010, amending the SEBI (ICDR) Regulations, 2009. This amendment regulations came into effect from November 12, 2010. The major changes made to ICDR regulations by this amendment regulations are the following:

1.                  Investment limit for retail investors has been raised from the current Rs 1 lakh to Rs 2 lakh. (see previous post)

2.                  Insurance funds, set up and managed by department of posts, to be recognised as a QIBs.

3.                  Issuers coming out with public offer to make a simultaneous public announcement (in newspapers) about the filing of draft offer document with SEBI.

4.                  The merchant bankers to submit a compliance certificate in the specified format to SEBI certifying as to whether the contents of the news reports appearing after filing of draft offer document are supported by disclosures in the offer document or not.

Amendment in relation to conditions for initial public offer

SEBI has also amended regulation 26(5) of the ICDR Regulations. The amended regulation reads as follows:

“No issuer shall make an initial public offer if there are any outstanding convertible securities or any other right which would entitle any person with any option to receive equity shares.”

The regulation originally read as follows:

“No issuer shall make an initial public offer if [as on the date of registering the prospectus with the Registrar of Companies] there are any outstanding convertible securities or any other right which would entitle any person any option to receive equity shares [after the initial public offer].”  The words “as on the date of registering the prospectus with the Registrar of Companies” and “after the initial public offer” has now been deleted.

The implication of this amendment is that the issuing company should not have any outstanding convertible securities at the time of filing red herring prospectus/ prospectus with the ROC. This is evident from the second amendment made in the same regulation. A new proviso (c) has been added to regulation 26(5) wherein SEBI exempts fully-paid up outstanding convertible securities which are required to be converted on or before the date of filing of the red herring prospectus (in case of book-built issues) or the prospectus (in case of fixed price issues) from the purview of the above mentioned rule. This means the following:

1. An issuer company can have certain outstanding convertible securities at the time the time of filing the draft red herring prospectus with the SEBI, provided that (a) such securities are fully paid up and (ii) such securities are required to be converted on or before the date of filing of the red herring prospectus/ prospectus with the Registrar of Companies.

2. An issuer company cannot have:
(a) any partly paid up outstanding convertible securities; or
(b) fully paid up outstanding convertible securities which are required to be converted at a date after the filing of the red herring prospectus/ prospectus with the Registrar of Companies,
 at the time of filing of the draft red herring prospectus/ draft prospectus with the SEBI.

[Apologies for certain typos in the original post. They are now corrected. - Emil]

A copy of the amendment regulations is available here.

SEBI allows stock exchanges to offer European style options

[The following post has been contributed by Vaibhav Kumar, who is an Associate at the law firm, Desai & Diwanji, Mumbai.]

In a significant development, SEBI by a circular dated 27th October has provided the Stock Exchanges with the flexibility of offering either European Style or American Style Stock Options. At present, it is only American style options which are allowed as per the SEBI circular of 20th June, 2001.

Simply stated, a stock option is a right but not an obligation to buy (call) or sell (put) a stock at a specified price on or before a given date in future. In an option contract, there are two parties- the buyer/holder/owner who takes a long position, and the seller/writer who takes a short position. The American Style options are those which can be exercised at any time during the subsistence of the contract, whereas, the European style options can be exercised only on the date of expiry of the option, i.e. on the agreed date.

As per the circular, after opting for a particular style, a stock exchange shall offer options contracts of the same style on all eligible stocks. It further directs the stock exchanges to put in place the systems, procedures, rules and regulations required for the introduction of European style options. Stock exchanges are to notify all the market participants, including general public at least one month in advance of implementing the switchover in the exercise style.

The interesting part of the circular is the leeway given to stock exchanges to change to another style of stock option after opting for a particular style, with the prior approval of SEBI. This is certainly helpful as it will not give rise to any kind of rigidity in the bourses.
This is seen as a progressive step taken by SEBI as it will boost the trading volume in options for the risk involved is more in American Options. In European-style options, the seller is aware about the timeline he has until the option is exercised. Further, on a separate note, as regards the European style options, there cannot be any option assignment unlike the American-style where there can be assignment prior to expiration of the option.

In furtherance of this circular, the NSE has already announced that it will offer European style stock options.

This circular is available here.

New rules in relation to trading and dematerialisation of shares

SEBI vide circular SEBI/Cir/ISD/ 1 /2010 dated September 2, 2010 has come out with the following rules in relation to the trading and dematerialization of shares.

50% of non-promoter holding should be in demat form for the shares to be traded in normal segment

At least 50% of non-promoter shares of a company have to be in dematerialized form in order for the shares of that company to be traded in the normal segment of the exchange. If the listed companies do not satisfy the above criteria by October 31 2010, the trading in such shares would be moved to the trade for trade segment (TFT segment) from the normal segment.

This move from SEBI aims at improving volumes and participation of public in trading of shares. Also as the volume increases the possibility of price manipulation comes down as there will be enough liquidity in the stock. There will not be any supply constraint and this reduces the scope for operators to manipulate the price.

“Dematerialization” is a process by which physical certificates are converted into electronic form. According to the Depositories Act, 1996, an investor has the option to hold securities either in physical or electronic form. Part of holding can be in physical form and part in demat form. However, SEBI has notified that settlement of market trades in listed securities should take place only in the demat mode. Under the trade for trade segment, the National Securities Clearing Corporation Ltd (NSCCL) does not undertake clearing and settlement of the deals executed. Primary responsibility of settling these deals rests directly with the members and the exchange only monitors the settlement. The parties are required to report settlement of these deals to the exchange.

Trading to take place in TFT segment for the first 10 trading days in case of merger, demerger, amalgamation, capital reduction/consolidation, scheme of arrangement etc.

In case of companies undergoing merger, demerger, amalgamation, capital reduction/consolidation, scheme of arrangement, in terms of the Companies Act and/or as sanctioned by the Courts, rehabilitation packages approved by the BIFR and Corporate Debt Restructuring (CDR) packages, the trading of shares of such companies would take place in TFT segment for first 10 trading days with applicable price band while keeping the price band open on the first day of trading. This rule will not be applicable to original scrips, on which derivatives products are available, or included in indices on which derivatives products are available. 

A copy of the circular is available here.

Media companies to disclose details of ad-for-equity business

SEBI vide press release PR No.200/2010 dated August 27, 2010 has published the new Press Council of India ("PCI") guidelines for media companies. These guidelines require media companies to disclose the details of the stake held by such media companies in various companies. Disclosures regarding such stake should also be made in the news report/ article/ editorial in newspapers/television relating to the company in which the media group holds such stake. Not surprisingly, the mainstream media in India has abstained from reporting this new requirement from SEBI.

Ad-for-equity business model

Under the ad-for-equity business model a company ("Client") buys ad space in newspaper/ television in lieu of its shares. The Client does not pay cash to the media company but issues its own shares to newspapers (in turn, media company buys equity in the Client). The media company gets paid only when it sells the shares of the Client after a period of time. These agreements between the Client and the media company are usually known as 'Private Treaties'. It has been alleged that apart from ad space in newspaper/ television, these Clients also get editorial (advertorial) coverage in newspapers owned by these media companies.

SEBI and the new disclosure requirements

Earlier this year SEBI had taken up its concerns with PCI, on the practice of many media groups entering Private Treaties with Clients as it felt that such agreements may give rise to conflict of interest and may result in dilution of the independence of press. SEBI also felt that such biased and motivated dissemination of information without appropriate and adequate disclosures, guided by commercial considerations can potentially mislead investors in the securities market and would not be in the interest of securities market.

PCI has accepted the following suggestions of SEBI and has issued the following guidelines vide press release PR/3/10-11/PCI dated August 2, 2010.

1. 
   
   
   Disclosures regarding stake held by the media company should be made in the news report/ article/ editorial in newspapers/television relating to the company in which the media group holds such stake.
2. 
   
   
   Disclosure on percentage of stake held by media groups in various companies under such 'Private Treaties' on the website of media groups should be made.
3. 
   
   
   Any other disclosures relating to such agreements such as any nominee of the media group on the board of directors of the company, any management control or other details which may be required to be disclosed and which may be a potential conflict of interest for media group, should also be mandatorily disclosed.
   
   
   

PCI also has expressed its apprehension that the brand building activities pursuant to Private Treaties without appropriate and adequate disclosures would not be in the interest of securities market.

Issues and challenges

1. 
   
   
   Ensuring strict compliance of these disclosure requirements would be tough task for SEBI as well as PCI. Firstly, it is the PCI, which have issued these guidelines and as such SEBI would have no role in the enforcement of these disclosure requirements. It means that the PCI would have to ensure compliance of these guidelines. The enforcement capabilities of PCI are questionable when compared to the capabilities of SEBI. Secondly, the guidelines merely states that 'the above suggestions may be kept in mind by the media'. Thus these guidelines are just recommendatory in nature. The PCI does not prescribe any penalty for non compliance with these guidelines.
2. 
   
   
   The guidelines have failed to define the scope of media companies. Under the ad-for-equity business model, it may not be necessary that the media company (which runs the newspapers/television channels) itself acquires stake in the Client. It might also be an associate company of the media company which acquires stake in the Client. Thus, in order to ensure full compliance, the disclosure requirements should also be extended to investment by associate companies in the Client.
3. 
   
   
   Apart from the above issues, one may also wonder about the locus standi of SEBI in taking up these issues with PCI. In its press release SEBI has stated that 'such brand building strategies of media groups, without appropriate and adequate disclosures may not be in the interest of investors and financial markets'. In most cases of ad-for-equity business/ Private Treaties, both the media company and the Clients are unlisted. Thus these companies (both media company and the Client) do not possess any threat to the interest of investors or financial markets. If SEBI's aim was to cover companies which may come out with public issues in future, these disclosure requirements should have been made a part of the issue documents/ prospectus.
   
   
   

Existing ad-for-equity business models

The Times Group has a 'Private Treaties' division known as the Times Private Treaties ("TPT"). TPT invests with potential, emerging or established brands with the objective of building brand value by advertising in Bennett, Coleman & Co. Ltd.'s media properties (like ET, ET Now, TOI etc.). Currently TPT has entered into 'Private Treaties' with companies (complete list is available here) including Multi Commodity Exchange of India Ltd., India Infoline Ltd., Artha Money etc. (Source: http://www.timesprivatetreaties.com).

Implications

These guidelines, if fully implemented, would bring in transparency in the reporting of news by media houses. All reports/ news/ editorials published by a media house in relation to a company (who is Client) should be followed by a disclosure that the media company holds a stake in such company (Client) or that the media company has entered into a Private Treaty with such company. This may also restrict the freedom of a media house to criticize a particular stance taken by Regulator (including SEBI) against a company (who is a Client), because the readers may, pursuant to such disclosure, link such criticism with the interest of the media house in the Client.

A copy of the PCI guidelines is available here.

A copy of the SEBI press release is available here.

Norms for investment by mutual funds in derivatives and related disclosures

SEBI vide circular Cir/ IMD/ DF/ 11/ 2010 dated August 18, 2010 has made the following modifications to the rules in relation to the investments by mutual funds in derivatives:

• Regulation 59 of the SEBI (Mutual Funds) Regulations, 1996 (“Regulations”) states that all mutual fund companies should publish half yearly results and it should contain the details as specified in twelfth schedule of the Regulations. As per the twelfth schedule, mutual funds should disclose, any exposure in derivative products for more than 10 per cent of the net assets of any scheme. However, the Regulations did not prescribe a format for this disclosure and as such and the disclosures being made by various mutual funds were not uniform across the industry. Now SEBI, vide this new circular, has prescribed the format and other details for such disclosure. SEBI has also defined the expression ‘exposure in derivatives’ and has also prescribed a manner for computation of the same. 
• The cumulative gross exposure through equity, debt and derivative positions should not exceed 100% of the net assets of the scheme.
• Mutual Funds cannot write options or purchase instruments with embedded written options (derivative instrument against another derivative).
• The total exposure related to option premium paid should be limited to 20% of the net assets of the scheme.
• However mutual funds can enter into plain vanilla interest rate swaps for hedging purposes. The counter party in such transactions has to be an entity recognized as a market maker by RBI. 

The rules will be effective from October 1, 2010 for all new schemes as well as the existing schemes.

A copy of the circular is available here.

Pre-open session to be introduced by NSE and BSE

SEBI vide CIR/MRD/DP/21/2010 dated July 15, 2010 has decided to introduce call auction mechanism in pre-open session. The pre-open session would be introduced on a pilot basis by BSE and NSE for the scrips forming part of Sensex and Nifty. The pre-open session would be for a duration of 15 minutes i.e. from 9:00 a.m. to 9:15 a.m., out of which 8 minutes would be allowed for order entry, order modification and order cancellation, 4 minutes for order matching and trade confirmation and the remaining 3 minutes would be the buffer period to facilitate the transition from pre-open session to the normal market.

Susan Thomas of Indira Gandhi Institute of Development Research in her recently published research paper Call auctions: A solution to some difficulties in Indian finance explains the concept of call auctions as follows:

“A call auction is an alternative mechanism through which electronic trading can be organised. It involves two critical differences. First, instead of a continous matching of orders, there is a period of time in which orders are accepted but no trades take place. Second, it is a `single price auction'. At the end of the call auction, all orders which can be matched are traded at a single price. A provisional market clearing price is computed as the intersection of supply and demand curves during the period of the call auction. It is the single price at which the maximal number of securities can be traded, given the orders present in the book at that point in time. It is displayed in real time on the computer screen. After a certain time period, the call auction is ended, and all orders which can be matched at this single price are executed. Call auctions can run for different periods, starting from as short as a minute. Once single-price matching has been done for an order book, there could be orders left in it that cannot be matched. These orders could be the natural starting point for continuous order matching.”

Thus in the call auction, buy and sell orders on the selected stocks (scrips forming part of Sensex and Nifty) would be collected for the first 8 minutes and order matching and trade confirmation would happen in the next 4 minutes. The equilibrium price would be the price at which the maximum volume is executable. In case more than one price meets the said criteria, the equilibrium price would be the price at which there is minimum order imbalance quantity (unmatched order quantity).

A copy of the circular is available here.

Stock exchanges to introduce physical settlement in F&O

SEBI vide CIR/DNPD/ 4 /2010 dated July 15, 2010 has decided to introduce physical settlement in equity derivatives. Stock exchanges have been allowed to settle stock options and futures contracts either on the basis of shares or cash. Stock exchanges may introduce physical settlement in a phased manner. On introduction, however, physical settlement for all stock options and/or all stock futures, as the case may be, must be completed within six months.

A copy of the circular is available here.

ASBA forms to be made available on websites of the stock exchanges

SEBI vide circular CIR/CFD/DIL/7/2010 dated July 13, 2010 has stated that ASBA bid-cum application forms would be made available for download and printing, on websites of the stock exchanges which provide electronic interface for ASBA facility (i.e. BSE and NSE). The ASBA forms so downloaded would have a unique application number and can be used for making ASBA applications in public issues. The ASBA forms should be made availble on stock exchange's websites at least one day before opening of the public issue. This rule is applicable to all public issues opening on or after July 19, 2010. This move from SEBI would ensure wider availability of ASBA forms in addition to the ASBA forms available at the designated branches. It would also improve the popularity of the ASBA facility among the retail investors.

Review of the progress in implementation of ASBA facility

A memorandum circulated in the SEBI board meeting dated May 19, 2010 contains the following facts in relation to the progress of implementation of ASBA facility.

•  ASBA was introduced on July 30, 2008 wherein only ‘Retail Individual Investors’ could make applications in book built public issues by blocking the bid amount in their bank account subject to condition that bidding be done only at ‘cut-off’ price with no revision facility ("Phase–I"). Subsequently, on August 20, 2009, ASBA was made mandatory for rights issue.
• During Phase I, ASBA facility was used in about 23 public issues and 19 rights issues and ASBA applications as a percentage of total applications from retail individual investors category ranged from less than 1% to 28%.
• Later ASBA facility was extended to other investor categories also like Non Institutional Investors (NIIs) which include High Networth Individuals (HNIs), Corporate entities etc. The extension of ASBA facility ("Phase-II") involved changes in system software, procedure etc., and became effective from January 1, 2010 for all the public issues (book built and fixed price) and right issues.
• As on April 15, 2010, 27 banks having 3535 designated branches have certified their readiness for Phase II.
• Since January 1, 2010, ASBA facility was used in 24 public issues and 10 rights issues wherein the ASBA applications as percentage of total applications were in the range of 6.5% to 28% out of which applications by NIIs was in the range of less than 1% to 16%. 

More (previous) posts on ASBA are available here, here, here, here and here.

SEBI postpones the deadline for implementing new valuation norms

SEBI vide circular Cir/IMD/DF/4/2010 dated June 21, 2010 has postponed the deadline for implementing new norms for valuation of mutual fund houses’ debt and money market instruments. The norms would be applicable from August 1, 2010 as opposed to the old deadline of July 1, 2010.


Earlier this year, SEBI had modified the provisions related to the valuation of debt and money market instruments by mutual fund houses (covered in this blog here).

A copy of the circular is available here.

SEBI amends master circular on AML/CFT

SEBI vide circular CIR/ISD/AML/2/2010 dated June 14, 2010 has amended the master circular on Anti Money Laundering (“AML”) Standards/Combating Financing of Terrorism (“CFT”). The major changes are as follows:

1. The scope of Customer Due Diligence (“CDD”) done by Registered Intermediaries (“RIs”) has been increased to include the periodic updation of all documents, data or information of all clients and beneficial owners (“CDD Data”) collected under the CDD process. However SEBI has not prescribed the frequency for such updation of the CDD Data or any triggers which would require the updation of the CDD Data.

2. It has been clarified that the internal audit function in RIs should be independent, adequately resourced and commensurate with the size of business and operations, organization structure, number of clients and other such factors.

3. RIs should revisit their CDD process (customer acceptance policies and other customer profiling policies) when there are suspicions of money laundering or financing of terrorism (“ML/FT”).

4. Usually RIs adopt simplified customer due diligence process for lower risk categories of customers. However SEBI has now clarified that low risk provisions should not apply when there are suspicions of ML/FT or when other factors give rise to a belief that the customer does not in fact pose a low risk.

5. RIs should independently access and consider publicly available information other than the Financial Action Task Force statements while dealing with clients in high risk countries.

6. SEBI has enhanced the CDD measures to determine whether a client/ potential client/customer is a politically exposed person.

7. As per the current regulations RIs should maintain the records of the identity of clients for a period of 10 years from the date of cessation of transactions between the client and RI. It has been clarified that the “date of cessation of transactions” would mean the “date of termination of an account or business relationship”.

8. SEBI has clarified that the prohibition against the ‘tipping off’ of the filing of Suspicious Transactions Reports (“STR”) by any officers of the RIs to the clients would extend not only to the filing of the STR and/or related information but even before, during and after the submission of an STR.

A copy of the circular is available here.

Public shareholding in listed companies to be 25%

The Government has notified the Securities Contracts (Regulation) (Amendment) Rules, 2010 with effect from 4 June 2010. The salient features of this amendment rules are the following:

a) The minimum threshold level of public holding will be 25% for all listed companies.

b) Existing listed companies having less than 25% public holding have to reach the minimum 25% level by an annual addition of not less than 5% to public holding.

c) For new listing, if the post issue capital of the company calculated at offer price is more than Rs. 4000 crore, the company may be allowed to go public with 10% public shareholding and comply with the 25% public shareholding requirement by increasing its public shareholding by at least 5% per annum.

d) For companies whose draft offer document is pending with Securities and Exchange Board of India on or before these amendments are required to comply with 25% public shareholding requirement by increasing its public shareholding by at least 5% per annum, irrespective of the amount of post issue capital of the company calculated at offer price.

e) A company may increase its public shareholding by less than 5% in a year if such increase brings its public shareholding to the level of 25% in that year.

f) The requirement for continuous listing will be the same as the conditions for initial listing.

g) Every listed company shall maintain public shareholding of at least 25%. If the public shareholding in a listed company falls below 25% at any time, such company shall bring the public shareholding to 25% within a maximum period of 12 months from the date of such fall.

h) ‘Public shareholding’ does not include shares which are held by custodian against depository receipts issued overseas like ADRs and GDRs.


A copy of the rules is available here.

SEBI guidelines for credit rating agencies

SEBI vide CIR/MIRSD/CRA/6/2010 dated May 3, 2010 has provided for certain transparency and disclosure norms for the Credit Rating Agencies (“CRAs”). The major measures taken in this regard are summarized below:

1. CRAs should maintain records of the rating committee, including voting details and notes of dissent, for a period of five years.
2. It has been made mandatory for CRAs to publish information about the historical default rates of their rating categories and whether the default rates of these categories have changed over time.
3. CRAs should ensure that its analysts do not participate in any kind of marketing and business development, including negotiations of fees with the issuer whose securities are being rated. Also, the employees involved in the credit rating process and their dependants cannot own shares of the issuer.
4. CRAs while rating structured finance products, are barred from providing consultancy or advisory services regarding the design of the structured finance instrument. This prohibition would apply to the subsidiaries of CRAs too. While publishing the ratings of structured finance products and their movements, CRAs apart from following all the applicable requirements in case of non-structured ratings should also disclose the track record of the originator and details of nature of underlying assets while assigning the credit rating.
5. In case of unsolicited credit ratings (the credit ratings not arising out of the agreement between the CRAs and the issuer), credit rating symbol should be accompanied by the word “UNSOLICITED” in the same font size.
6. CRAs should also disclose (i) the policies, methodology and procedures in detail followed by them regarding solicited and unsolicited credit ratings, (ii) the history of credit rating of all outstanding securities, (iii) the general nature of its compensation arrangements with the issuers and (iii) the details of any relationship it has with the issuer whose securities are being rated and any of its associate of such issuer and the CRAs or its subsidiaries.

SEBI commented that the recent events in global financial system have underlined the pivotal role that credit ratings play. Effective use of credit ratings by the users is crucially dependent upon quality and quantity of disclosures made by the CRAs. Reserve Bank of India had recently published two documents which review the role of CRAs in India.

A copy of the circular is available here.

SEBI permits derivative contracts on volatility index

SEBI vide circular CIR/DNPD/ 1 /2010 dated April 27, 2010 has permitted stock exchanges to introduce derivative contracts on volatility index like the Volatility Index (“VIX India”) of National Stock Exchange (“NSE’). The derivative contracts introduced on volatility index are subject to the following conditions:

(a) The underlying volatility index has a track record of at least one year.
(b) The exchange has in place the appropriate risk management framework for such derivative contracts.

SEBI also has asked stock exchanges to file details like contract specifications, position and exercise limits, margins, the economic purpose it is intended to serve, likely contribution to market development etc. to SEBI before introduction of such derivative contracts.

Earlier in January 2008, SEBI has permitted stock exchanges to adopt any of the volatility index computation models available globally or develop their own model for computation of volatility index. Last month SEBI has permitted in principle the introduction of derivative contracts on volatility indexes.

Volatility Index is a measure of market’s expectation of volatility over the near term. Volatility is often described as the “rate and magnitude of changes in prices” and in finance often referred to as risk. Volatility Index is a measure, of the amount by which an underlying Index is expected to fluctuate, in the near term, (calculated as annualised volatility, denoted in percentage e.g. 20%) based on the order book of the underlying index options. Currently, only the NSE has the Volatility Index, called India VIX. NSE has introduced this index in April 2008.

A copy of the circular is available here.

Indicative timelines for the proposed issue process

SEBI vide circular CIR/CFD/DIL/3/2010 dated April 22, 2010 has issued the indicative timelines for various activities in the proposed issue process, wherein the time period between issue closure and listing is reduced to 12 working days. Earlier on April 6, 2010 SEBI had decided to reduce the time period between issue closure and listing to 12 working days from the current 22 days for public issues opening on or after May 1, 2010.

A copy of the circular is available here.

SEBI’s ban on ULIPS to remain with respect new schemes/products

SEBI vide press release PR No.96/2010 dated April 13, 2010 has stated it has decided to keep in abeyance, till further notice, the enforcement of its order (banning 14 life insurance companies from selling ULIPs till they obtained SEBI registration) with respect to the ULIP schemes /products existing on the date of the order, i.e. 09.04.10. However, with respect to any new ULIP schemes / products launched after 09.04.10, the directions mentioned in the said order will be enforced.

A copy of the press release is available here.

SEBI commences disbursement process of disgorged amount

The disbursement of reallocation amount to 12.75 lakh investors from the amount disgorged in the matter of IPO irregularities commenced today. The first set of cheques was handed over by Shri Pranab Mukherjee, Hon’ble Finance Minister of India at a function held on SEBI Foundation Day at New Delhi today. The Finance Minister, Shri Pranab Mukherjee initiated the process of disbursement of disgorgement proceeds to investors who have been identified as rightful beneficiaries of the gains recovered from the wrong doers. Describing this as a significant milestone, the Finance Minister said that this is the first time that not only the manipulators are being penalized but the amount recovered is being redistributed to the persons who were deprived of their gains. The Finance Minister expressed hope that this first but significant step will go a long way towards making the investors feel safe and secure while investing in the stock markets.

More details are available here and here.

SEBI approval required for offering ULIPs

SEBI vide order WTM/ PS /IMD/06/APR/2010 dated April 9, 2010 has stated that ULIPs (Unit Linked Insurance Plans) are a combination of investment and insurance and therefore it can be offered/launched only after obtaining registration from SEBI under section 12(1B) of the SEBI Act. SEBI stated that the investment components in ULIPS are in the nature of mutual funds which require registration with SEBI under section 12(1B) of the SEBI Act 1992.

This order has been passed against 14 insurance companies which offer ULIPS to customers. Earlier in January 2010, SEBI had issued show cause notices against these companies, as SEBI prima facie found that these companies offer ULIPs which are similar to the mutual fund schemes without obtaining registration from the SEBI. Insurance companies pleaded that ULIPs are predominantly life insurance products having an investment component. It was argued that a ULIP is insurance cover and is dependent on human life and the mere existence of an additional investment feature cannot convert a ULIP into a mutual fund. They also contended that regulations issued by IRDA are special laws for ULIPs and SEBI cannot apply the general laws applicable to tradeable securities such as collective investment schemes or mutual funds to ULIPs.

Rejecting the arguments of insurance companies, SEBI stated that a combination product containing an investment component, in any proportion, exposing investors to risks of securities market products, can be issued only after obtaining registration from SEBI and in compliance with the applicable laws. SEBI also stated that units of ULIPS have the characteristics of units of mutual funds. Units of mutual funds are “securities” as defined under Section 2 (h) of Securities Contracts (Regulations) Act, 1956. Merely because they are named as units of ULIPs, such units cannot be ousted from the ambit of definition of “securities”. As regards the contention that ULIPS were launched after following appropriate procedures and obtaining requisite permission from IRDA, SEBI said that the approval from one regulatory authority does not exempt the entity from complying with other applicable laws administered by relevant regulators. Accordingly SEBI has directed the insurance companies not to issue any offer document, advertisement, brochure soliciting money from investors or raise money from investors by way of new and/or additional subscription for any product (including in ULIPs) having an investment component in the nature of mutual funds, till they obtain the requisite certificate of registration from SEBI.

A copy of the order is available here.

SEBI issues master circular for depositories

SEBI vide circular CIR/MRD/DP/11/2010 dated April 6, 2010 has issued a master circular for depositories compiling the circulars issued by SEBI up to March 31, 2010. This master circular comes into force with immediate effect.

A copy of the master circular for depositories is available here.

SEBI has also issued a master circular on allotment of codes to stock exchanges, subsidiary management by stock exchanges, governance of recognised stock exchanges and arbitration in recognised stock exchanges. This master circular summarises and consolidates the circulars/directions issued by SEBI in this regard up to March 31, 2010. This master circular also comes into force with immediate effect.

A copy of abovementioned master circular is available here.

Earlier SEBI had issued the following master circulars:

Master circular on oversight of members in March 2010
Master circular for mutual funds in January 2010
Master circular on Anti Money Laundering (AML) and Combating Financing of Terrorism (CFT) in December 2008

Standard Chartered PLC files draft prospectus for the first ever IDR issue

Standard Chartered PLC has on March 30, 2010 filed a draft prospectus with SEBI to raise up to USD 750 million (around Rs 3,375 crore) through Indian Depository Receipts (“IDR”). If successful, this would be the first time that an MNC is raising capital from India through IDR route.

Even though the Companies (Issue of Indian Depository Receipts) Rules, 2004 were issued in 2004, no foreign company had so far issued IDRs in India for raising capital. Later these rules were relaxed in 2007 in order to make IDR route attractive to the foreign companies. Apart from these rules, chapter X of the SEBI (ICDR) Regulations, 2009 contains the regulations in relation to the issue of IDRs in India.

A copy of the draft prospectus is available here.