More Power To Minority Shareholders, Relief For Mature Investors: Key Changes Approved By SEBI
A man stops his motorcycle in front the Securities & Exchange Board of India in Mumbai, India (Photographer: Adeel Halim/Bloomberg News)  

More Power To Minority Shareholders, Relief For Mature Investors: Key Changes Approved By SEBI

The market regulator approved several changes to its regulations today, ranging from those relating to independent directors, accredited investors, Indian investment managers, debt and non-convertible securities.

The key changes approved by the Securities and Exchange Board of India include:

Independent Directors: Public Shareholders To Get More Say

Prompted by concerns around efficacy of independent directors and the need to strengthen their independence, the market regulator had floated certain proposals to protect minority investors. SEBI has now notified them effective from Jan. 1, 2022:

  • Appointment, re-appointment or removal of independent directors will now require a special resolution—at least 75% of those voting must favour it.

  • Shareholder approval for appointment of all directors, including independent directors, will need to be taken at the next general meeting, or within three months of the appointment on the board, whichever is earlier.

  • Enhanced disclosures regarding the skills required for appointment as an independent director and how the proposed candidate fits into that skillset.

  • The nomination and remuneration committee will now be composed of two-thirds of independent directors instead of the existing requirement of a plain majority.

A cooling off period of three years will be applicable if key managerial personnel, their relatives and employees of promoter group companies are sought to be appointed as independent directors.

An independent director—intending to transition as a whole-time director in the same company, its holding, subsidiary, associate or promoter group company—can do so after a gap of one year.

Interestingly, SEBI has also urged the Ministry of Corporate Affairs to consider allowing companies to remunerate independent directors via profit-linked commissions, sitting fees, ESOPs, etc., under company law.

Flexibility For Debt Issuers

In May, SEBI had proposed merging its regulations for debt securities and non-convertible redeemable preference shares.

The regulator has now done so by approving a single regulation for both.

All issuers, including those who don't have a three-year existence history, can tap the bond market as long as:

  • Issuance is made only on a private placement basis.

  • On the electronic book platform.

  • Is open for subscription only to qualified institutional buyers.

Unlisted real estate investment trusts and infrastructure investment trusts haven't been allowed to make such debt issuances.

Additionally, the requirement of minimum rating of AA- for non-convertible redeemable preference shares has been removed. To encourage public issuances of debt securities, requirement of minimum size of Rs 100 crore has been done away with.

"The proposed changes provide listed infrastructure investment funds and real estate investment funds to access diverse sources of funding, provides InvITs and REITs to structure more value accretive acquisitions and increases the depth of the debt market as InvITs and REITs are inherently more active in capital raising and acquisition of assets," Kranti Mohan, partner at Cyril Amarchand Mangaldas, said.

Listed InvITs and REITs will benefit from being able to raise debt funding at an early stage thereby increasing the depth of InvITs and REITs. It will also help in increasing investor confidence especially since certain important participants in the InvIT and REIT markets can invest only in listed debt securities due to regulatory or other institutional requirements.
Kranti Mohan, Partner, Cyril Amarchand Mangaldas

Relief For Sophisticated Investors

SEBI has allowed accreditation of investors, who are well informed or well advised about investment products.

This would include entities which did not qualify as qualified institutional buyers but who still are financially sophisticated and would include individuals, HUFs, family trusts, partnership firms and similar entities, Yash Ashar, partner at Cyril Amarchand Mangaldas, pointed out.

An accredited investor will have flexibility to participate in investment products with an investment amount lesser than the minimum amount mandated in the Alternative Investment Funds Regulations and Portfolio Managers Regulations. They will also enjoy regulatory relaxations subject to certain minimum investments.

For an accredited investor in an AIF, if the amount from each investor is at least Rs 70 crore, certain regulatory requirements will be relaxed. If investment is at least Rs 10 crore in PMS, accredited investor can invest in unlisted securities and enter into bilateral negotiations with PMS provider.

"The accredited investor category is an idea whose time had long come and it’s great to see SEBI giving it form," Shruti Rajan, partner at Trilegal, told BloombergQuint. This will act as a huge incentive to the fund management industry and also help development of AI driven robo advisory products, which have long grappled with the conventional suitability and KYC measures, she said.

This category will now allow for informed opt-outs by investors who don’t want the same level of protection as the retail investors. But despite this big-boy approach, will be interesting to track to what extent the amended regulations continue to cast fiduciary responsibilities on advisers and fund managers.
Shruti Rajan, Partner, Trilegal

Indian Fund Managers, Rejoice

To facilitate management of offshore investment funds, resident Indian fund managers have been permitted to be constituents of foreign portfolio investors.

But these FPIs will have to be investment funds approved by the tax department.

Besides these, SEBI has also increased the reward amount for informants under its insider trading regulations, from Rs 1 crore to Rs 10 crore.

It has also changed the minimum investment requirement by asset management companies. It'll now be linked to the risk associated with the scheme. Currently, mutual funds are required to invest 1% of the NFO amount or Rs 50 lakh, whichever is less.

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