Elevators travel next to electronic boards displaying stock figures at the National Stock Exchange of India Ltd. (NSE) building in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

SEBI Nod To Unified Exchanges, New Framework For Rating Agencies And Mutual Funds

Summary
  • SEBI says credit rating agencies cannot hold more than 10 percent stake in rivals.
  • A similar 10 percent cap on cross-holding has been put in place for mutual funds.
  • All exchanges will be allowed to trade both stocks and commodities from October 2018 with a unified licence.
  • Security receipts issued by asset reconstruction firms can now be publicly listed and traded.
  • Norms for entry of foreign portfolio investors have been simplified.
  • REITs can invest at least 50 percent stake in special purpose vehicles and holding companies.

Markets regulator Securities and Exchange Board of India has taken a slew of decisions in its board meeting today including easier entry norms for foreign portfolio investors, allowing exchanges to trade in stocks and commodity derivatives and putting a cap on the cross-shareholding in mutual funds and credit rating agencies.

Here are the highlights of the decisions taken at the board meet:

Cap On Cross-Holding In Credit Rating Agencies

SEBI introduced a cap on cross-holding among credit rating agencies to “augment governance” and “mitigate issues of conflict of interest”, according to its press note.

No rating agency will be allowed to hold 10 percent or more stake or voting rights in a rival. Besides, no such agency can have any representation on the boards of other credit rating agencies.

JN Gupta, former executive director of SEBI said the move would ensure “fair competition between credit rating agencies, without having undue influence over another.”

SEBI also tightened the eligibility requirement for rating agencies. The minimum net worth requirement of a rating agency has been raised to Rs 25 crore from Rs 5 crore. The promoter of a rating agency will have to maintain 26 percent shareholding for at least three years from its registration.

Cap On Cross-Shareholding In Mutual Funds

SEBI said the 10 percent cross-holding cap will also apply to mutual funds. A sponsor of a mutual fund and its asset management company will not be allowed to have more than 10 percent stake in other mutual funds, AMCs or trustee companies. This also extends to shareholders holding 10 percent or more stake in a mutual fund too.

Such entities where a sponsor of a mutual fund holds more than 10 percent stake in another mutual fund will be given a year’s time to reduce their shareholding in line with the new norms, SEBI Chairman Ajay Tyagi said at the press conference following the board meeting. This will include UTI AMC where certain state-owned banks and the Life Insurance Corporation hold around 18.24 percent stake.

Unified Exchanges

The markets regulator allowed all exchanges in the country to trade both securities and commodity derivatives with one unified licence from October 2018. The integration of brokers and market participants in both asset classes was proposed by the Finance Minister during his Union Budget speech earlier in the year.

This means a broker dealing in the securities markets will be allowed to buy, sell or deal in commodity derivatives without setting up a separate entity and vice versa. SEBI’s move also allows the merger of client accounts across stock and commodity derivative markets.

Regulations like these reduce regulatory compliance and paperwork and allow inter-operability of accounts, benefiting both clients and brokers and facilitating the ease of doing business, Jyoti Rai, associate director of business development and advocacy at Edelweiss Custodial Services, had told BloombergQuint.

India’s largest bourse National Stock Exchange Ltd. will get into all types of asset classes, including agricultural and non-agricultural commodities, its Chief Executive Officer Vikram Limaye told BloombergQuint. He, however, said it was premature to talk about the type of products the bourse will launch.

The devil’s always in the details so we’ll see what the guidelines are.
Vikram Limaye, CEO, NSE

Limaye is confident that NSE will be ready to offer commodity derivative products by October 2018.

Security Receipts By ARCs Can Be Traded

The security receipts issued by asset reconstruction companies can now be listed and traded on stock exchanges. Finance Minister Arun Jaitley in his Budget 2017-18 speech had said that such a move would “enhance capital flows into the securitisation industry and will particularly be helpful to deal with bank non-performing assets”.

SEBI said that a separate chapter detailing the framework for the listing of security receipts will be added to its regulations.

This comes as a relief as security receipts were “illiquid”, or not easily convertible to cash, Siby Antony, chief executive officer of Edelweiss Asset Reconstruction Company told BloombergQuint.

It gives an opportunity for the bank which holds the majority of the security receipts to sell it in the market.
Siby Antony, CEO, Edelweiss Asset Reconstruction Company

However, a lot more needs to be done in this aspect, Antony added. Under the SARFAESI Act, people who can trade security receipts is limited to banks and large non-banking financial firms, he explained. “Unless this definition is expanded, to include high and ultra high networth individuals, I don’t think it may help to a large extent now.”

Easier FPI Entry

SEBI has also relaxed norms for the entry of foreign portfolio investors in Indian markets. "Some fourteen to fifteen simplifications have been made", Tyagi said.

  • Rationalised fit and proper criteria for FPIs
  • Simplified broad-based requirements
  • Modified encumbrance obligation to enable statutory payments
  • Discontinued requirement to seek SEBI approval for changing local custodian
  • Exemption for FPIs having multiple investment managers from seeking SEBI approval for free of cost asset transfers.
  • Permitted broad-based funds to regain status in three months.
  • Permitted conditional registration to existing India-specific funds.

Changes To Norms For REITs And InvITs

SEBI has also tweaked certain norms pertaining to Infrastructure Investment Trusts and Real Estate Investment Trusts “to facilitate growth”.

REITs are currently allowed to invest at least 50 percent stake in holding companies or special purpose vehicles. Similarly, holding companies of REITs are also allowed to invest at least 50 percent stake in SPVs, subject to certain safeguards.

SEBI also rationalised the definition of a sponsor group in case of REITs and enabled investments by REITs in unlisted shares under the 20 percent investment category, the press note added.

More Options To Achieve Minimum Public Shareholding

SEBI introduced two additional options for listed companies to achieve the 25 percent minimum public shareholding requirements. Listed companies can now either use the qualified institutional placement route or the sale of up to 2 percent of shares held by promoters in the open market.

Listed firms have been given till Aug. 21, 2018 to comply with the requirements.

Default Disclosure Norms Deferred

The regulator will hold further discussions on its proposed norms mandating listed companies to make immediate disclosure about their loan defaults, SEBI Chairman Ajay Tyagi said at a press conference following the board meeting.

In August, SEBI had directed listed companies to disclose from Oct. 1 any payment defaults to banks and financial institutions within one working day of such a miss. Later the regulator had deferred the implementation of this directive "until further notice" as banks had asked for more time for the new rules, saying the Indian credit market was different from its Western counterparts where such a disclosure is mandatory, wire agency PTI said in a report.

Information Came From Listed Firms: SEBI On WhatsApp Leaks

In reply to a question on WhatsApp data leaks, the SEBI chairman said is it clear that the information must have come from listed firms and their judiciaries. "We have asked companies to conduct inquiries. We are doing our own investigations also," Tyagi said.

In an order posted on its website yesterday, SEBI had directed private lender Axis Bank Ltd. to conduct an internal investigation into financial earnings that were allegedly leaked on the Whatsapp messaging platform ahead of the earnings being disclosed to the stock exchanges and shareholders. Axis Bank has to complete the inquiry within three months and file a report to SEBI seven days thereafter.

During its preliminary examination, the Securities and Exchange Board of India said in its statement that financial results of Axis Bank for the June-ended quarter were “almost identical” to the information that was circulated on private WhatsApp groups.

All those responsible, including auditors, will face action and rules would be strengthened if required, Tyagi said.

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