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SEBI Eases Rules For Foreign Investors, Allows Side-Pocketing By Mutual Funds

The market regulator’s board today approved a slew of measures at its meeting that range from easier rules for clubbing foreign portfolio investment limits to allowing mutual funds to segregate illiquid and distressed assets.

The board approved a proposal that clubbing of investment limit for FPIs will be on the basis of common ownership of more than 50 percent or common control, according to its media statement by the Securities and Exchange Board of India. “However, in the case of appropriately regulated public retail funds, investment limits will not be clubbed on the basis of common control.”

The board took a call that clubbing of investment limit should not be done on the basis of same set of beneficial owners as per the Prevention of Money Laundering Act. The move was based on the recommendations of a SEBI working group under HR Khan.

Currently, the FPIs are treated as part of the same investor group and the investment limits of all such entities are clubbed for deriving the investment limit as applicable to a single FPI, in case of the same set of ultimate beneficial owners investing through multiple entities.

Side-Pocketing Allowed For Mutual Funds

SEBI has also allowed mutual funds to create segregated portfolios of debt and money market instruments, subject to various safeguards. This facility will be available to mutual funds based on credit events. “Creating segregated portfolio may be optional for mutual funds, but approval of trustees is necessary for activating such a portfolio.”

In market parlance, this is commonly referred to as “side-pocketing”. It is a mechanism to separate distressed, illiquid and hard-to-value assets from other more liquid assets in a portfolio. It prevents the distressed assets from damaging the returns generated from more liquid and better-performing assets.

Allowing a segregated portfolio to be created lets asset managers move bonds which undergo a credit event to segregated portfolio. This prevents redemption panic and will allow the primary portfolio to operate as usual, without any undue liquidity stress.
Kaustubh Belapurkar, Director of Fund Research, Morningstar

Scope Of Offer-For-Sale Widened

The board also approved modifications to the existing offer-for-sale mechanisms to expand the universe of firms to whom the facility is available and bring more clarity in the conditions for cancellation of an offer.

Now the offer mechanism will be available for shareholders of companies with market capitalisation of Rs 1,000 crore and above. The threshold of market capitalisation will be computed as the average of daily reading for six months prior to the month in which the offer opens.

If a seller fails to get enough demand from non-retail investors at or above the floor price on the day of the offer, then the seller has the option to cancel the offer, even after bidding on T day.

Also read: SEBI Panel Pitches For Direct Listing Of Indian Companies Overseas

Other Decisions

Startup Listing Platform

The board gave its approval to rename the Institutional Trading Platform as the Innovators Growth Platform aimed at startups. For a firm to list, it should be engaged in intensive use of new-age technologies. Also, 25 percent of the pre-issue capital should have been held by qualified institutional buyers, family trusts with over Rs 500 crore net worth, a category III foreign portfolio investor, a pooled investment fund with minimum assets of $150 million or an accredited investor with gross income of at least Rs 50 lakh annually.

Rules Governing Changes In Issue Size

SEBI amended its capital and disclosure requirements regulations. In case of any increase or decrease in the estimated issue size by more than 20 percent, a fresh filing of the offer document will be required. At present, such requirement is both for fresh issues and offer for sale. In case of offer-for-sale, the board approved that a fresh offer document will be required when the number of shares offered change by more than 50 percent.

Also read: Credit Rating Agencies To Disclose Historical Performance Under New SEBI Guidelines

Watch SEBI Chairman Ajay Tyagi’s press conference here: