Technicality or Trivialisation - SAT’s Attempt to Balance Interests of Justice

The Securities Appellate Tribunal (SAT) passed an order (Order)[1] recently, ruling that it is empowered to hear and decide appeals even in the absence of a Technical Member. The Order was prompted by an objection raised by the Securities and Exchange Board of India (SEBI) regarding the constitution of SAT’s Bench, in light of the earlier technical member of SAT having demitted office on March 31, 2021, and the ensuing vacancy of such office.
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SEBI Clarifies Key Aspects of Investment Advisers Regulations through Informal Guidance

The Securities and Exchange Board of India (“SEBI”), through its interpretive letter, issued upon the request of Paytm Money Limited (“Paytm”) under the SEBI (Informal Guidance) Scheme, 2003 (“Informal Guidance Scheme”), on April 09, 2021, has clarified that investment advisers (“IAs”), registered with SEBI under the SEBI (Investment Advisers) Regulations, 2013 (“IA Regulations”), may not: (i) be reimbursed from the asset management companies for any expenses incurred for services rendered to their clients, even though the adviser may not be charging any advisory or execution fees; (ii) seek electronic consent from clients prior to rendering any investment advice, instead of a signed investment advisory agreement; and (iii) appoint a department head, who is not a managing director or designated director or managing chairman or executive chairman or any other equivalent management body of the IA, as its ‘principal officer’.
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Indian Mutual Funds – New M&A Rules! Anu Tiwari (Partner), Ritu Sajnani (Senior Associate), Utkarsh Bhatnagar (Senior Associate) and Karthik Koragal (Associate) The Securities Exchange Board of India (“SEBI”) carried out a regulatory revamp exercise of SEBI (Mutual Funds) Regulations, 1996 (“MF Regulations”) and various circulars issued under it by way of a circular on mutual fund(s) (“MF”) issued on March 4, 2021 (“MF Circular”), effective from March 5, 2021, thereby streamlining a robust regime governing the reporting, compliance and disclosure requirements applicable to asset management company(ies) (“AMC”) and the trustee(s) of such AMCs. Reporting requirements strengthened Currently, the MF Circular requires an AMC to furnish the complete details of any indirect change in its control/ promoters of the sponsor(s) to SEBI and also notify details of a proposed change in control (whether direct or indirect) to the unitholders, by way of an email (in addition to publishing the same in newspapers. Similarly, in case of any proposed change to the fundamental attributes of a MF scheme, trustees are now mandated to obtain comments from SEBI, prior to effectuating such change. With an intent to ensure better compliance, SEBI has also expanded the scope of ‘key personnel’ of an AMC to include chief investment officer, chief risk officer, chief information security officer, chief operation officer, compliance officer, sales head, investor relation officer(s), etc. in addition to the erstwhile list of key personnel, which included the chief executive officer, fund manager(s), dealer(s) and head of other departments of the AMC. Hence, inter alia these new key personnel who are also now prohibited from carrying on self-dealing or front running activities, in addition to meeting the prescribed eligibility criteria. The revised reporting requirements extends SEBI’s regulatory prowess to monitor and bring more transparency in relation to the indirect change in control of the AMCs’ process. Relaxations and scrutiny go hand-in-hand In order to facilitate innovation in the MF space, SEBI has introduced certain relaxations like permitting employees of AMCs to participate in private placement of equity by any company, has allowed trustees to delegate its function(s) to declare/ fix a record date and decide the quantum of dividend, etc. to AMC officials. Further, trustees are now mandated to report to SEBI the MF securities dealt by them, only if a transaction exceeds INR 5 lakhs (vis-a-vis the previous threshold of INR 1 lakh). The regulator has also classified investment in non-convertible preference shares (“NCPSs”) as a ‘debt instrument’ and accordingly, limitation of a MF scheme to invest not more than 10% of its net asset value in debt instruments will also include NCPSs. The trustees now being required to obtain SEBI comments before effecting a ‘change in in the fundamental attributes of a MF scheme’ seems burden-some, as the regulator’s role, and oversight, already guarantees for the requisite checks and balances to govern the MF scheme, including for MF scheme transfers, through separate regulations and circulars in this behalf. Above is likely to add another layer to M&A deal-making, with already many layers involved, impacting deal costs and timelines, especially if a ‘new sponsor’ application may be involved, from a process, governance and unit holders’ standpoint. Albeit above ties into SEBI’s increasing focus on MF trustee’s accountability, which has hitherto been an overlooked area, given the nature and composition of MF trustee boards. Though, done with noble regulatory intent, one would have to see whether the above changes, including expansion of key personnel, further ‘spook’ trustee directors, especially independents - already an onerous position, with few upsides, especially after Calcutta High Court’s Order in the ITC / JPMorgan MF Trustees case, and SEBI’s approach qua Franklin Templeton trustees in 2020, expand the scope of potential SEBI show-cause ‘noticees’ from the current list of 7 (!), and shoot MF M&A in the knees, which was given a new lease of life recently via SEBI dropping the ‘3/ 5’ profitability criterion in Regulation 7, MF Regulations.

The Securities Exchange Board of India (“SEBI”) carried out a regulatory revamp exercise of SEBI (Mutual Funds) Regulations, 1996 (“MF Regulations”) and various circulars issued under it by way of a circular on mutual fund(s) (“MF”) issued on March 4, 2021 (“MF Circular”), effective from March 5, 2021, thereby streamlining a robust regime governing the reporting, compliance and disclosure requirements applicable to asset management company(ies) (“AMC”) and the trustee(s) of such AMCs.
Continue Reading FIG Papers (No.4 : Series – 2): Indian Mutual Funds – New M&A Rules!

RECLASSIFICATION OF PROMOTERS BY SEBI

The Securities and Exchange Board of India (SEBI) came out with its consultative paper on “promoter reclassification/ promoter group entities and disclosure of the promoter group entities in the shareholding pattern[1] to seek public comments on November 23, 2020.

The topic of promoter reclassification has been a talking point since 2015, wherein the power to reclassify promoters laid in the hands of the company, rather than the promoter. Therefore, it was observed by SEBI that the process provided too wide a net to alter the tag of a “promoter”. Hence, in 2018, SEBI revamped the procedure and came out with the now inserted Regulation 31A of Listing Obligations and Disclosure Requirements Regulations, 2015.
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Year 2020 in Review - The Funds Perspective

Remembering the year 2020 could easily turn one pensive. The year posed unprecedented challenges for the funds industry, driving-forth fundamental changes in the manner business would be conducted alongside the pandemic. The year also marked an important milestone in the ever-evolving regulatory landscape, with several amendments critical for funds and fund managers being rolled out.

SEBI Changes to Scheme Circular - Is it a case of over-prescription

SEBI has been continuously streamlining the regulatory architecture governing schemes of arrangements under Sections 230-232 of the Companies Act, 2013 (“Companies Act”) and Regulations 11, 37 and 94 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR”) involving listed companies with the introduction of the SEBI Circular dated March 17, 2017 (“SEBI Scheme Circular”). SEBI vide its Circular dated November 3, 2020 (“Amendment Circular”), has introduced further changes to the SEBI Scheme Circular. The Amendment Circular is brought into effect for all schemes of arrangement submitted to the Stock Exchanges on or after November 17, 2020. Changes introduced under the Amendment Circular are as follows:
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 RAISING CROSS-BORDER DEBT – THE INDIAN AND US EXPERIENC

CAM authors collaborate for this article with our Guest Authors –  Michael J. Cochran, Partner at Kilpatrick Townsend & Stockton and Gabrielle Gollomp , Associate at Dentons

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India

Over the last decade, alternatives to traditional bank lending have emerged to service the debt requirements of Indian corporates. With Indian banks and non-bank companies facing stress (due to rising bad debt levels), Indian corporations are increasingly looking to tap into foreign debt sources. The development of offshore loan and debt markets can also be attributed to the operation of the Insolvency and Bankruptcy Code, 2016, which accords significant powers to creditors of debt-ridden Indian companies to restructure and resolve bad debts.
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PRIOR INTIMATION REQUIREMENT UNDER THE LISTING REGULATIONS - A CRITIQUE 

Introduction

Norms concerning corporate governance in India have evolved over a period of time. Since markets and businesses are inherently dynamic, they continue to evolve globally. The Securities and Exchange Board of India (“SEBI”), to its credit, has been on the ball and contributed significantly towards raising the standards of corporate governance for listed entities in India. The proof of the pudding, however, is in the eating and to this end, this piece examines the relevance of the extant requirement of prior intimation prescribed for listed entities in the current market.

Regulations 29 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended (“Listing Regulations”), requires a listed entity to intimate the stock exchanges beforehand if its board of directors (“Board”) have a meeting scheduled to consider certain specified proposals, including financial results, buy-back of securities, voluntary delisting and fund raising (intimation is also required for general meeting or postal ballot for this proposal indicating the type of issuance).
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WHAT IS FRONT RUNNING – A Q&A PIECE IN LIGHT OF THE SEBI ORDER AGAINST DEALERS OF RELIANCE SECURITIES LTD

Introduction

In an interim ex-parte order last month against the dealers of Reliance Securities Limited (“RSL”) and other related entities (“RSL Order”)[1], SEBI prima facie held over two dozen entities to have engaged in front running the trades of Tata Absolute Return Fund, a scheme of Tata AIF (“Big Client”).

During its preliminary examination, SEBI meticulously pieced together several bits of available circumstantial evidence and alleged an archetypal scheme of front running purportedly employed by three senior dealers (“Dealers”) at RSL, in nexus with various related entities. The RSL Order alleges that once the Dealers at RSL were privy to the non-public information of the impending orders of Big Client, they along with their connected broker or dealer entity would, through multiple trading accounts directly or indirectly controlled by them, place trades either in the Buy-Buy-Sell pattern or Sell-Sell-Buy pattern, around the time of the orders of the Big Client to generate substantial proceeds.
Continue Reading What is Front Running? – A Q&A Piece in Light of the SEBI Order Against Dealers of Reliance Securities Ltd.

ESOPS as Managerial Remuneration - Do Regulators Need to Revisit Regulatory Architecture

Employee Stock Option Plans (ESOPs) are a well-recognised method of compensating employees and attracting and retaining the best talent. Compensation in the form of equity shares helps in creating a sense of ownership in the mind of employees. Benefit schemes for employees, including ESOPs, have gained popularity, especially in technology start-ups that have limited financial resources in the initial years, but want to attract the best talent. ESOPs are the option or a right, but not an obligation, which is offered by a company to its employees to purchase its shares at a pre-determined price in the future. ESOPs align the interest of the employees with long term interest of the companies and play a vital role in retaining employees at the growing stage of the company.

Section 2(37) of the Companies Act, 2013 (“Act”), defines ‘employees’ stock option’ as the option given to directors, officers or employees of a company or of its holding company or subsidiary company or companies, if any, which gives such directors, officers or employees, the benefit or right to purchase, or to subscribe for, the shares of the company at a future date at a pre-determined price. The Act expressly prohibits ESOPs for Independent Directors[1] as the law makers believe that it compromises the ‘independence’ of such Independent Directors. Section 62(1)(b) of the Act provides for the approval of shareholders by a special resolution. Rule 12 of the Companies (Share Capital & Debentures) Rules, 2014, lays down the legal framework for issuance of ESOPs for unlisted companies. Listed companies having ESOP plans are required to comply with the SEBI (Share Based Employee Benefits) Regulations, 2014 (“ESOP Regulations”).
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