Securities and Exchange Board of India (SEBI) Updates

SEBI notifies the new Takeover Code

noreply@blogger.com (Emil Joseph) — Fri, 23 Sep 2011 14:52:00 +0000

SEBI has today notified the new Takeover Code “SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011”. The regulations shall come into force on the 30th day from the date of the notification i.e. from October 22, 2011.

A copy of the new Takeover Code is available here.

Former SAT chief C Achuthan passes away

noreply@blogger.com (Emil Joseph) — Wed, 21 Sep 2011 06:55:00 +0000

Former Securities Appellate Tribunal chief and Chairman of SEBI's Takeover Regulations Advisory Committee, Mr C Achuthan passed away on Monday. He has made significant contributions to capital market jurisprudence in India.

Bar and Bench

Economic Times

SEBI plugs the loophole in insider trading regulations: Promoters to disclose more often

noreply@blogger.com (Emil Joseph) — Mon, 19 Sep 2011 12:55:00 +0000

Readers must be aware that under regulation 13(1) of the SEBI (Prohibition of Insider Trading) Regulations, 1992 (PIT Regulations), any person holding more than 5% shares or voting rights of a listed company is required to make an initial disclosure of his holding in terms of PIT Regulations. Under regulation 13(3), such a person is also required to make continuous disclosures about number of shares or voting rights held and any change therein from the last disclosure, if such change exceeds 2% of total shareholding or voting rights in the company. This disclosure is required to be made within two working days of receipt of intimation of allotment of shares or acquisition or sale of shares or voting rights, as the case may be.

Clause 35 of the Equity Listing Agreement, listed companies are inter alia required to make disclosures about the shareholding of promoter and promoter group of such company, on quarterly basis within 21 days from the end of each quarter. The Takeover Code also states that promoter or every person having control over a company is required to disclose the number and percentage of shares or voting rights held by such person(s), within 21 days of financial year ending on 31st March as well as the record date.

Issue

As explained above, under the past regulatory framework, the information about shareholding of promoter and promoter group comes in public domain at the end of each financial year and at the end of each quarter. There was no mechanism in place which ensured that the promoter and persons who are part of promoter group immediately disclosed to the market as and when a change (beyond certain threshold) occurs in their shareholding pattern unless such promoter/ person held more than 5% of the shares of the company (in such a case he would be liable to disclose under 13(1) of the PIT Regulations). Thus any person who is promoter and does not hold more than 5% of the shares of a company was not required to inform immediately any change in his shareholding even when such change is beyond the thresholds specified in PIT Regulations. Thus 'in a given case if shareholding of promoter and promoter group has been disclosed at the end of a quarter at say 40%, and promoter and promoter group is consisting of 10 persons so that none of them is holding more than 5% of the shares then information about any change in the shareholding of the promoter and promoter group comes in public domain within 21 days of the end of the relevant quarter. In such a case all the promoters and persons who are part of promoter group can exit from a company within a quarter without any information to the market regarding such change till the next quarterly filing'.

Amendment

By issuing the SEBI (Prohibition of Insider Trading) (Amendment) Regulations, 2011, SEBI has made it mandatory for a promoter or member of promoter group to disclose all changes in their shareholding or voting rights from the immediate previous disclosure made under the PIT Regulations or the Equity Listing Agreement if such change exceeds Rs. 5 lakh in value or 25,000 shares or 1% of total shareholding or voting rights, whichever is lower. This disclosure has to be made within 2 working days of the receipts of intimation of allotment of shares, or the acquisition or sale of shares or voting rights, as the case may be. Also any person who is a promoter or part of promoter group of a listed company should disclose the number of shares or voting rights held by such person, within two working days of becoming such promoter or person belonging to promoter group.

A copy of the SEBI (Prohibition of Insider Trading) (Amendment) Regulations, 2011 is available here.

A copy of the SEBI Board minutes in this regard is available here.

Put/Call Options & Mandatory Buyback are invalid

noreply@blogger.com (Emil Joseph) — Sun, 05 Jun 2011 17:39:00 +0000

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.

Repeated buy-back offers not to be encouraged: SEBI

noreply@blogger.com (Emil Joseph) — Tue, 26 Apr 2011 18:20:00 +0000

SEBI has in its recent order, allowing the Deccan Chronicle Holdings Limited (“Deccan Chronicle”) to buy-back 3.45 crore shares, stated that “repeated buy-back offers by a company is not something that SEBI, as a regulator, would like to encourage, given the fact that it could be misused by entities to consolidate their holding at the expense of the company”. This was the second time in the last two years that Deccan Chronicle had sought the permission of SEBI for exemption from the requirements of Takeover Code to come out with an offer to buy-back its shares. In July 2009 SEBI had granted Deccan Chronicle exemption from the requirements under the Takeover Code for increasing its voting rights from 63% to 73.51% pursuant to buy-back offer proposed by the target company. Thereafter, the target company had made the buy-back offer during August, 2009, wherein 4.84% of the total voting capital of the target company was bought back. In the present case, the Promoters again sought exemption from the requirements under the Takeover Code for increasing their voting rights from 63.37% to 73.83% (assuming 100% response) pursuant to buy-back offer proposed by the target company. SEBI vide its order dated 15 April 2011 granted Deccan Chronicle Holdings exemption from the requirements under the Takeover Code for the second proposed buy back of shares. However SEBI directed Deccan Chronicle not to seek any further exemption pursuant to any further buy-back offers by the target company. SEBI also stated that repeated buyback offers could be misused by acquires to consolidate their holding at the expense of the company and this is not something that SEBI, as a regulator, would like to encourage.

SEBI restricts circulation of unauthenticated news by market intermediaries

noreply@blogger.com (Emil Joseph) — Wed, 30 Mar 2011 14:46:00 +0000

Last week SEBI had issued a circular which prevented the circulation of unauthenticated news or rumours by market intermediaries. SEBI noted that market rumours can do considerable damage to the normal functioning and behavior of the market and distort the price discovery mechanisms. Towards this end, SEBI has issued the following directions to the market intermediaries:

New compliances for market intermediaries

1. Market intermediaries should have in place proper internal code of conduct and controls to prevent circulation of unauthenticated news or rumours.

2. Employees of market intermediaries should not encourage or circulate rumours or information obtained without verification.

3. Access of employees of market intermediaries to blogs/chat forums etc. should either be restricted under supervision or access should not be allowed.

4. Logs for any usage of such blogs/chat forums etc. shall be treated as records and the same should be maintained as specified by the respective Regulations which govern the concerned intermediary.

5. Employees should be directed that any market related news received by them either in their official mail/personal mail/ blog or in any other manner, should be forwarded only after the same has been seen and approved by the concerned Intermediary’s Compliance Officer. If an employee fails to do so, he/she shall be deemed to have violated the various provisions contained in SEBI Act/Rules/Regulations etc. and shall be liable for actions. The Compliance Officer shall also be held liable for breach of duty in this regard.

Challenges

1. The new direction from SEBI seeks to restrict circulation of rumours or unauthenticated news by market intermediaries i.e. the SEBI registered intermediaries like a stock broker or a portfolio manager. However, in many cases the sources of unauthenticated news or rumours are not SEBI registered intermediaries but private persons giving stock advice or websites, forums, blogs etc. managed by entities other than SEBI registered market intermediaries. Thus the new direction from SEBI has failed to address the threats posed by private persons or blogs and forums managed by entities other than SEBI registered market intermediaries.

2. SEBI has mandated that any market related news received by employees of market intermediaries, should be forwarded by the employee only after the same has been seen and approved by the concerned Intermediary’s Compliance Officer. However, it is difficult for Market Intermediaries having large number of employees to implement the same. Also it is difficult for any entity to monitor all the online activities of their employees like emails, chats, blog posts, forum posts etc.

Listing Agreement for Securitized Debt Instruments

noreply@blogger.com (Emil Joseph) — Tue, 22 Mar 2011 18:39:00 +0000

Last week SEBI had issued the listing agreement for securitized debt instruments. The listing agreement provides for disclosure of pool level, tranche level and select loan level information. The listing agreement comes into force with immediate effect for all securitised debt instruments as defined under regulation 2(1)(s) of the Securities and Exchange Board of India (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2008, seeking listing on the stock exchange. Readers may recall that in October last year SEBI had issued the draft listing agreement for securitized debt instruments for public comments/ suggestions.

Stock broker allowed to undertake referral activities for loan, mutual fund distribution etc.

noreply@blogger.com (Emil Joseph) — Thu, 03 Mar 2011 16:45:00 +0000

Readers may recollect the SEBI order under the SEBI (Informal Guidance) Scheme 2003 wherein it was stated that a merchant banker cannot undertake referral activities for non-security related products and/or services ("Barclays Case"). SEBI has recently passed an order under the SEBI (Informal Guidance) Scheme 2003 wherein it has stated that stock brokers may undertake referral activities and may act as an agent on behalf of the lenders for referring/distributing third party loans without taking on any personal financial liability. SEBI stated that such activities fall under the exception provided at Rule 8(1)(f) of the Securities Contracts (Regulation) Rules, 1957.

In the recent case, Fullerton Securities & Wealth Advisors Limited ("Fullerton") a stock broker, registered with SEBI, had filed with SEBI a request for 'No Action Letter' under the SEBI (Informal Guidance) Scheme 2003 in relation to its proposed businesses including referral activity. Under its proposed business scheme Fullerton would refer /distribute loans provided by third party NBFCs/banks/HFIs/lending institution to its customers while acting in capacity as agent or broker, with no personal financial liability on Fullerton. Fullerton also proposed to undertake activities like distribution of mutual funds, setting up a corporate agency for distribute insurance products and act as a depository participant. SEBI in its reply stated the following:

(i) Fullerton may undertake referral activities act as an agent on behalf of the lenders for referring/distributing third party loans without taking on any personal financial liability (as it is allowed under Rule 8(1) (f) of the Securities Contracts (Regulation) Rules, 1957).

(ii) Fullerton may distribute mutual funds after obtaining requisite registration from AMFI.

(iii) Fullerton may distribute insurance products in compliance with IRDA directives.

(iv) Fullerton may provide services as depository participant in compliance with the SEBI (Depositories & Participants) Regulations, 1996.

In the Barclays Case, SEBI had stated that a merchant banker registered with SEBI cannot undertake any business other than in the securities market, under regulation 13A of the SEBI (Merchant Bankers) Regulations, 1992. Thus a merchant banker cannot undertake referral activities for non-security related products and/or services. However in the present case (Fullerton's case) SEBI allowed a stock broker registered with SEBI to under referral activity as there are no similar restrictions (as in the nature of regulation 13A of the SEBI (Merchant Bankers) Regulations, 1992) in the Securities Contracts (Regulation) Rules, 1957.

Creeping acquisitions under regulations 11 (1) and 11(2) in the same year: Did SEBI go wrong in its interpretation?

noreply@blogger.com (Emil Joseph) — Mon, 28 Feb 2011 18:06:00 +0000

Regulation 11(1) of the SEBI (Substantial Acquisition of Shares Takeovers) Regulations, 1997 ("Takeover Code") allows an acquirer holding 15% to 55% of shares in a target company to additionally acquire up to 5% of shares of the target company (with post acquisition shareholding of the acquirer not exceeding 55%) in any financial year without making a public announcement/ offer under the Takeover Code. The second proviso to regulation 11(2) of the Takeover Code states that an acquirer holding 55% to 75 % of the shares in a target company may acquire additional shares up to 5 % in the target company without making a public announcement/ offer under the Takeover Code.

SEBI has recently in an 'Interpretive Letter" (under the SEBI (Informal Guidance) Scheme 2003) stated that acquisitions under regulation 11 (1) and second proviso to regulation 11(2) of the Takeover Code can be undertaken by an acquirer in the same financial year. SEBI also clarified that the 5% acquisition under second proviso to regulation 11(2) is a one-time exemption.

Thus an acquirer holding 50% of the shares in a target company may acquire an additional 5% of the shares in a financial year under regulation 11(1) of the Takeover Code. Later the same acquirer (who currently holds 55%) may also acquire another 5% of the shares under second proviso to regulation 11(2) in the same financial year. This would mean that an acquirer holding 50% of the shares in a target company can acquire an additional 10% of the shares in the target company in a single financial year without making a public offer under Takeover Code.

Going by SEBI's interpretation an acquirer holding 15% to 49.99% of the shares in a target company may acquire additional shares up to 5 % in the target company in any financial year without making a public offer under the Takeover Code. However the moment acquirer holds 50% in the target company, he is conferred with the right to acquire an additional 10% shares in the target company in any financial year without making a public offer under the Takeover Code.

The spirit of the Takeover Code is to provide the shareholders of a target company with a suitable exit in case of acquisition of certain quantity of shares/ control of the target company by an acquirer. As per SEBI's interpretation if an acquirer, holding 15% to 49.99% of the shares in a target company, acquires more than 5% of the shares in the target company in any financial year, the Takeover Code provides for an exit option to the shareholders. However if an acquirer, holding 50% to 55% of the shares in a target company, acquires more than 5% of the shares in the target company (up to 10% in cases where the acquirer is holding 50% shares) in any financial year the Takeover Code does not provide for an exit option to the shareholders.

A viable alternative in this case would have been to allow the acquirer to undertake acquisitions under regulation 11 (1) and second proviso to regulation 11(2) in the same financial year up to 5% of the shares of the target company. SEBI has already clarified that an acquirer may exercise his right under second proviso to regulation 11(2) in one or more tranches, without any restriction on the time-frame within which the same can be acquired. Thus if the cumulative acquisition of shares under regulation 11 (1) and second proviso to regulation 11(2) has been limited to 5% in any financial year, the acquirer can exercise his remaining right under the second proviso to regulation 11(2) in the following financial years.

2010 –The Big Year in securities enforcement

noreply@blogger.com (Emil Joseph) — Thu, 24 Feb 2011 19:45:00 +0000

The year 2010 has been a landmark year for securities law enforcement in India. Last year SEBI aggressively pursued its investigations against companies and market intermediaries and it resulted in some of the landmark orders (like the penalty imposed on enam securities, prohibition of sahara group from accessing capital markets, prohibitions imposed on FIIs for violating reporting norms etc.). Many orders passed by SEBI/SAT in 2010 (like the Subhkam case, MCX case) were characterized by its comprehensive analysis of the applicable rules and implications on the capitals markets. In the legislative front, the proposed takeover code and report on ownership of stock exchanges proposed certain out of the ordinary rules and received much criticism from the industry. In addition, SEBI also issued certain important rules/ regulations like the mandatory 25% public shareholding rule, introduction of volatility index and the pre-open session, regulation of media companies and the private treaty business etc. At the same time, SEBI also had its own share of controversies like the ban of ULIPS, its refusal to grant permission for running stock exchanges in the case of MCX etc.

A brief summary of the important events of the year 2010 is given below:

1. Ban on Sahara

In November 2010 SEBI banned the directors and promoters of Sahara India Real Estate Corporation Limited and Sahara Housing Investment Corporation Limited from accessing capital markets. This was pursuant to a possible violation by the Sahara Group of DIP Guidelines/ICDR Regulations and the other applicable laws in relation to raising capital from the public. This was followed by a number of legal developments including Sahara Group publicly challenging the authority of SEBI through newspapers etc. Later SEBI put up a notice on its website cautioning the investors against investing in the above mentioned companies and the matter is currently pending before the Supreme Court.

2. Fine imposed on Enam

The year 2010 ended with the news of SEBI imposing a fine of 25 lakh rupees on Enam Securities for its failure to exercise due diligence in the public offer of YES Bank. SEBI also noted that Enam Securities, who were the BRLM to the IPO of Yes Bank, failed to disclose, in the offering document, Rabobank International Holding B.V. as the promoter of Yes Bank.

3. Rejection of the application of MCX-SX

In September 2010 SEBI rejected the application of MCX-SX to run bourses trading various products, including stocks and equity derivatives, saying that it wasn't in "the interest of trade and public interest to allow the application". In its order SEBI has stated that MCX-SX is not fully compliant with Manner of Increasing & Maintaining Public Shareholding (MIMPS) norms for recognised stock exchanges. This SEBI order too unfolded into a controversy and it was followed by the submission of the report of the Bimal Jalan committee on "Review of Ownership and Governance of Market Infrastructure Institutions" which added fuel to the fire. The order of SEBI is currently under the review of the Bombay High Court upon a writ petition filed by MCX-SX challenging the same.

4. Ban on issuance of ULIPS

SEBI in April 2010 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. Through its order SEBI directed insurance companies not to raise money from investors through ULIPs without obtaining prior registration from SEBI. Not surprisingly this order too lead to a war of words between the two regulators (SEBI & IRDA) until the Central Government stepped in and passed an ordinance amending the RBI Act 1934, Insurance Act 1938, SEBI Act 1992 and Securities Contract Regulations Act 1956 clarifying that life insurance business would include any ULIPs or scripts or any such instruments. This brought an end to the 2 months long battle between the regulators SEBI and IRDA, by giving IRDA the jurisdiction over ULIPs business.

5. Rules/ Regulations

It was in year 2010 that SEBI effectively addressed the need for consolidated circulars by issuing master circulars following the footsteps of the RBI. These master circulars are compilations of the circulars/communications issued by SEBI up to the date of the master. As on today SEBI has issued master circulars for stock exchanges and depositaries, mutual funds, anti-money laundering, administration of stock exchanges, stock exchanges- cash market and Exchange traded derivatives.

SEBI also introduced call auction mechanism in pre-open session and permitted stock exchanges to introduce derivative contracts on volatility index in the year 2010.

6. Committee Reports

Two major committee reports were submitted in the year 2010 namely (i) Report of the Bimal Jalan committee on "Review of Ownership and Governance of Market Infrastructure Institutions" and (ii) Report of the Achuthan Committee on Takeover Regulations. It is worthy to note that SEBI so far has not acted upon these reports.

7. Others

Veto rights not to constitute 'Control'

In January 2010, SAT in the matter of Subhkam Ventures (I) Private Limited v. SEBI held that that veto rights in favour of certain shareholders to veto certain actions proposed to be undertaken by the company (affirmative voting rights in the shareholders agreements) do not constitute 'Control' under the Takeover Code and that the shareholders having such affirmative rights need not make an open offer under the Takeover Code to the other public shareholders of the target company. This SAT decision is currently under Supreme Court's scrutiny. In the event the Supreme Court agrees with the SAT decision it would be beneficial to private equity (PE) and venture capital (VC) firms in India.

Offerings

In the offerings front, Standard Chartered Bank, for the first time, successfully raised capital from India through Indian Depository Receipts (IDR) route.

Regulation of media companies

SEBI made it mandatory for media companies to disclose the details of the stake held by such media companies in various companies. SEBI stated that such disclosures should be made in the news report/ article/ editorial in newspapers/television relating to the company in which the media group holds such stake.

What to expect in 2011?

The year 2011 started with the news of SEBI settling a case with Anil Ambani group companies for a record settlement amount of Rs. 50 crore. SEBI also barred two Anil Ambani group companies from investing in the secondary markets till December 2012 for allegedly routing money raised through overseas bonds to the stock market in 2007. This was followed by news reports that SEBI plans to levy a record penalty upto 1500 crores on Reliance Industries (RIL) for its alleged involvement in insider trading.

In light of the above, one may safely assume that SEBI is getting stricter with its enforcement measures and going forward SEBI enforcement measures would assume more importance than its role as a law maker. Recently Shri U K Sinha took charge as the Chairman of SEBI replacing the Shri CB Bhave. As his predecessor is credited as one of the best heads SEBI ever had, Shri U K Sinha has big shoes to fill.

Can directions of SEBI under Section 11B of the SEBI Act be punitive in nature?

noreply@blogger.com (Vaibhav Modi) — Fri, 18 Feb 2011 07:50:00 +0000

SAT recently pronounced an interesting order (available here) in the matter of G.M. Bosu and Company Private Limited (the “Appellant”) versus SEBI and Central Depositary Services (India) Limited (the “Respondent 2”) and Mrs. Atreyee Chakraborty (the “Respondent 3”) wherein it held that the directions of SEBI under section 11B of the Securities and Exchange Board of India Act, 1992 (the “SEBI Act”) cannot be punitive in nature.

Section 11 of the SEBI Act empowers SEBI to protect the interests of the investors in securities and to regulate the securities market by taking measures it deems fit and Section 11B reads as under:
“11B. Power to issue directions – Save as otherwise provided in section 11, if after making or causing to be made an enquiry, the Board is satisfied that it is necessary,-
(i) in the interest of investors, or orderly development of securities market; or
(ii) to prevent the affairs of any intermediary or other persons referred to in section 12 being conducted in a manner detrimental to the interest of investors or securities market; or
(iii) to secure the proper management of any such intermediary or person, it may issue such directions,-
(a) to any person or class of persons referred to in section 12, or associated with the securities market; or
(b) to any company in respect of matters specified in section 11A, as may be appropriate in the interests of investors in securities and the securities market.”

The facts of this matter in brief were that the husband of Respondent 3 was a registered holder of 1100 equity shares of ITC Limited, which were held by him in physical form. On his death, Respondent 3 approached one Mr. Pyne, who was an ex-employee of the appellant and was working with her husband for getting the shares transferred in her name. Mr. Pyne advised her to open a demat account to facilitate the transfer and Respondent 3 handed over the share certificates representing the aforesaid shares to Mr. Pyne. Mr. Pyne opened the demat account with the Appellant, a depositary participant of Respondent 2, which is a depositary. The Appellant issued printed receipts acknowledging the receipt of share certificates representing the said shares.

The case presented by Respondent 3 was that Mr. Pyne was responsible for fraudulently transferring some of the shares to third parties and some in his own name, given the fact that she had had signed a number of blank printed forms and other documents including delivery instruction slips (the “DIS”) in good faith, under the impression that those documents were necessary for opening a demat account. Respondent 3 produced a hand written note (the “Note”) signed by Mr. Pyne and witnessed by her wherein Mr. Pyne confessed that he had cheated Respondent 3 and had obtained her signatures on some forms including DIS without her consent and transferred the shares illegally. In the Note, Mr. Pyne made a commitment to deliver the shares to Respondent 3 in the time stipulated therein and also committed that upon his failure to pay the dues with interest to Respondent 3, his legal heirs would be liable to pay the said dues.

Respondent 3 made a complaint to the Board that she had been defrauded of the shares by Mr. Pyne and that she had suffered a financial loss amounting to INR 3 lakhs and sent a copy of the note therewith. She also complained to the Appellant that she had been defrauded of the said shares by Mr. Pyne and she further alleged that Mr. Pyne was acting as a sub-broker of the Appellant and, therefore, she claimed damages to the tune of INR 3 lakhs for harassment and loss suffered by her. On getting no response from SEBI she filed a writ petition in the Calcutta High Court seeking a mandamus directing SEBI to initiate proceedings against Respondent 2 and the Appellant. The said writ petition was disposed by the Hon’ble High Court with an order to SEBI to give a reasonable opportunity of being heard to Respondent 3, Respondent 2 and the Appellant and give a decision regarding the question whether complaints made by Respondent 3 called for initiation of proceedings under any provisions of law.

Accordingly, SEBI conducted the relevant hearings and communicated to Respondent 3 its conclusion that the complaint of Respondent 3 did not call for initiation of proceedings by SEBI. SEBI was of the opinion that Respondent 3’s complaint was in the nature of a ‘private arrangement’ between her and Mr. Pyne, ‘an unregistered entity’, wherein Mr. Pyne acted contrary to her instructions, so SEBI had no role to play in this regard. Being dissatisfied with this order by SEBI, Respondent 3 again filed a writ petition in the Calcutta High Court contending that Respondent 2 and the Appellant were negligent in not ensuring that payment had been received by her before they transferred her shares in the name of third parties and, therefore, they violated Regulation 32 (as it then stood) of the Securities and Exchange Board of India (Depositories and Participants) Regulations, 1996 (the “DP Regulations”). This writ petition was disposed by the Hon’ble High Court ordering SEBI to make an enquiry as to how Respondent 2 has ensured in terms of Regulation 32 that the depositor was paid before effecting transfer, upon notice to the Appellant and upon hearing the necessary parties including Respondent 3 and if found that proper mechanism under Regulation 32 was not in place, to take steps accordingly.

Pursuant to the aforesaid order, the whole time member of SEBI, after hearing Respondent 3, Respondent 2 and the Appellant passed an order holding that the Appellant and Respondent 2 had violated Regulation 32 of the DP Regulations (as it then stood) and treating this order as a show cause notice called upon the Appellant and Respondent 2 to show cause why they should not be directed jointly and severally to compensate Respondent 3. The Appellant replied to the said show cause notice stating that it was in compliance with Regulation 32 of the DP Regulations. The Appellant stated that the DIS is required to be filled by the client and the appellant as a participant, is only to ensure the transfer of securities as per the instructions contained therein. The Appellant claimed to have enquired from both Respondent 3 and Mr. Pyne about the validity of the DIS and the relevant payment and only on being informed that everything was in order, the Appellant recommended the transfer of the securities. The whole time member of SEBI passed an order under holding that both the Appellant and Respondent 2 were negligent in not ensuring that Respondent 3 had received the payment before transferring her shares and were, thus, guilty of violating Regulation 32 of the DP Regulations. Further, he issued direction under sections 11 and 11B of the SEBI Act directing the Appellant to transfer the shares (along with the accrued benefits) to Respondent 3 and file a compliance report with SEBI, failing which SEBI would initiate appropriate proceedings in accordance with law. The Appellant appealed against this order to SAT.

The Appellant submitted before SAT that it had not violated Regulation 32 of the DP Regulations and assuming arguendo if there was any such violation by the Appellant, the only course open to SEBI is to proceed against them under Chapter V of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 (the “Intermediaries Regulations”) and that it was not proper for SEBI to exercise powers under section 11B of the SEBI Act and issue directions. This argument of the Appellant was accepted by the SAT and it set aside the order made by the whole time member of SEBI.

Regulation 32 of the DP Regulations (prior to the Securities and Exchange Board of India (Depositaries and Participants) (Second Amendment) Regulations, 2008, available here ) read as under:

“32. Transfer to be effected only after payment– The depository shall satisfy the Board that it has a mechanism in place to ensure that the interest of the persons buying and selling securities held in the depository are adequately protected and shall register the transfer of a security in the name of the transferee only after the depository is satisfied that payment for such transfer has been made.”

By the said amendment, the words “and shall register the transfer of a security in the name of the transferee only after the depository is satisfied that payment for such transfer has been made” in Regulation 32 were deleted.

Also, the relevant part of Regulation 64 of the DP Regulations reads as under:

“64. Liability for action in case of default – A depository or a participant who-
(a) contravenes any of the provisions of the Act, the Depositories Act, the bye-laws, agreements and these regulations;
(b) …………..
(c) …………...
(d) ……………
(e) ……………
(f) ……………
shall be dealt with in the manner provided under Chapter V of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008”

Chapter V (Regulations 22 to 33) of the Intermediaries Regulations (titled “Action in Case of Default and Manner of Suspension or Cancellation of Certificate) contains the detailed procedure to be followed to deal with the delinquents. It envisages a two stage inquiry before taking any action against the delinquent. A designated authority is required to be appointed which shall issue a show cause notice to the delinquent and after holding an inquiry, a report shall be submitted. The report will then be considered by the designated member after issuing a notice to the delinquent who will also be furnished with a copy of the report. It is only then that the designated member can take any one or more of the actions referred to in Regulation 27 of the Intermediaries Regulations (viz. suspension/cancellation of registration certificate; prohibiting, debarring or warning the intermediary) keeping in view the facts and circumstances of the case.

On the issue of violation of Regulation 32 by the Appellant, the SAT held that-
“The plain language of regulation 32 makes it clear that the obligation to satisfy itself is only on the depository and no such duty is cast on the participant. A participant is only an agent of the depository. It is relevant to point out that this obligation of the depository has also been done away with when this regulation was amended with effect from August 8, 2008. The words “and shall register the transfer of a security in the name of the transferee only after the depository is satisfied that payment for such transfer has been made” were deleted. We cannot, therefore, agree with the Board that the appellant violated this regulation.”
SAT further held that- “Assuming (though not holding) that there was such a violation, Regulation 64 (of the Depositaries Regulations) requires that the depository or a participant who contravenes any provision of the regulations ‘shall be dealt with in the manner provided under Chapter V of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008.’ ” [emphasis provided].

From above, it can be inferred that in the instant case, SAT's stance was that what necessarily had to be done, was to follow the procedure under Chapter V of the Intermediaries Regulations and not an issuance of directions by SEBI under section 11B of the SEBI Act. As regards section 11B of the SEBI Act, SAT remarked that “It is true that the powers of (SEBI) under section 11B are wide enough to issue directions to any intermediary or person associated with the securities market but such powers are to be exercised only to protect the interests of investors in securities or for orderly development of securities market and to preserve its integrity. These directions cannot be punitive in nature and cannot be issued to punish a delinquent. Punitive action against any delinquent intermediary could be taken only in accordance with (the Intermediaries Regulations).”

Undoubtedly, the facts in this matter would not have been fit for directions to be issued by SEBI under section 11B, but the aforesaid observations of SAT amounts to reading a restriction on the powers of SEBI under section 11B of the SEBI Act which is not there in that section nor the SEBI Act. With all due respect, there appears to be no logical reason whereby a punitive action against a delinquent intermediary cannot be said to be a direction issued by SEBI under section 11B ‘in the interest of investors or to prevent the affairs of an intermediary conducted in a manner detrimental to the interest of investors’. Another important aspect in this regard is that the Intermediaries Regulations itself is made by virtue of powers conferred on SEBI by section 30 of the SEBI Act.

On a separate point, SAT opined that since Respondent 3 was duped by Mr. Pyne, it is not fair to direct the Appellant to compensate her and her remedy would be against the heirs of Mr. Pyne(since Mr. Pyne had deceased). SAT further remarked that “….why did she (Respondent 3) sign the blank DIS form(s) which are like cheques and since she did that, she has herself to blame.” This gives an impression that an investor will not be remedied for losses suffered due to his own negligence, viz. signing the blank DIS forms, as in this case.

Outcome of the SEBI Board Meeting on 7 February 2011

noreply@blogger.com (Vaibhav Modi) — Thu, 17 Feb 2011 17:50:00 +0000

The outcome of the SEBI Board meeting held on 7 February 2011(press release available here) is as follows:

The ASBA facility will become mandatory from 1 May, 2011 for non retail investors (QIBs and NIIs) making applications in public / rights issues.
The certificate of registration granted to an intermediary will now be for an initial period of five years and only on assessment of the performance of the intermediary and its track record during the initial five years, it will be granted registration on permanent basis. If the performance is not satisfactory the certificate of registration granted to an intermediary may be terminated or may be temporarily granted for an additional term of five years- As per the existing regulation 11 of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008, the certificate granted to an intermediary is permanent unless surrendered by the intermediary or suspended/cancelled in accordance with the said regulations.
The currency derivative segment will have self clearing members and the self clearing members are required to have a net worth of INR five crores.
SEBI will recommend to the Ministry of Corporate Affairs to suitably amend Clause 166 of the Companies Bill, 2009 to disallow interested shareholders from voting on the special resolution of the prescribed related party transaction- This will protect small and diversified shareholders in listed companies from abusive related party transactions. This view was taken based on the findings from the investigation in the matter of Satyam Computer Services Limited. Section 300 of the Companies Act, 1956 does not allow an interested director to participate or vote in Board proceedings in which the director is interested. If the recommendations of SEBI are accepted, similar restrictions may apply to shareholders voting on a special resolution. This issue has been discussed insightfully in the Indian Corporate Law blog here.

Merchant bankers cannot undertake referral activities for non-security related products and/or services

noreply@blogger.com (Emil Joseph) — Sun, 16 Jan 2011 17:32:00 +0000

SEBI has recently stated that a merchant banker cannot carry on any business other than in the securities market. In June 2010 Barclays Securities (India) Pvt. Ltd. ("BSIPL"), a merchant banker registered under the SEBI (Merchant Bankers) Regulations, 1992, had filed with SEBI a request for 'No Action Letter' under the SEBI (Informal Guidance) Scheme 2003 in relation to its proposed referral business. Under the proposed referral business BSIPL would refer its clients to other service providers for non-security related products/ services. The other service providers are in the nature of investment banking firms and/or intermediaries who may assist clients to invest in corporate deposits or property consultants who can advise clients on purchasing or selling real estate assets etc.

SEBI in its reply stated that a merchant banker cannot carry on any business other than in the securities market, under regulation 13A of the SEBI (Merchant Bankers) Regulations, 1992. SEBI also stated that regulation 13A was further clarified by the circular dated June 05, 1998, whereby certain other activities such as 'advisory services for projects', 'syndication of rupee term loans', 'international financial advisory services' have been specifically permitted. Since referral activities for non-security related products and/or services does not fall within the purview of the activities permitted by regulation 13A nor is specifically enumerated in the aforesaid circular, SEBI disallowed BSIPL from undertaking such business.

SEBI Master Circulars and new SEBI website

noreply@blogger.com (Vaibhav Modi) — Tue, 11 Jan 2011 07:20:00 +0000

SEBI has recently issued the following master circulars:

1. Master Circular on Matters Related to Exchange Traded Derivatives (available here) issued with a sunset clause of one year
2. Master Circular on Administration of Stock Exchanges, Arbitration in recognised Stock Exchanges and Stock Exchanges / trading platform for Small & Medium Enterprises including guidelines for Market Makers (available here)
3. Master Circular for Depositaries (available here)
4. Master Circular for Stock Exchanges and Depositaries (available here)
5. Master Circular for Stock Exchanges- Cash Market (available here)
6. Master Circular on Anti-Money Laundering (available here)
7. Master Circular for Mutual Funds.(available here)

It was in December 2008 that SEBI started issuing master circulars, following the footsteps of the RBI (which has various master circulars on FEMA, NBFCs, etc.). The first master circular issued by SEBI was the consolidated Master Circular on Anti Money Laundering (AML) and Combating Financing of Terrorism (CFT) on December 18, 2010 (covered in this blog here). This was followed by a Master Circular on Mutual Funds (covered in this blog here) which was issued on January 1, 2010.

On a separate note, SEBI has come up with a new website (currently in Beta), which depicts trend graphs and live feeds of SEBI/SAT orders. This new SEBI website can be accessed here.

Bimal Jalan Committee report- some interesting remarks

noreply@blogger.com (Vaibhav Modi) — Thu, 23 Dec 2010 07:49:00 +0000

The recommendations in the report of the Bimal Jalan Committee (the “Committee”) (discussed in a previous post) has generated a lot of buzz. These recommendations have mostly been met with criticism, the most criticised being the stand taken by the Committee to disallow the listing of the stock exchange. A column in a newspaper (available here) reports the sharp exchanges between the stakeholders and the Committee members over the recommendation to disallow the listing of stock exchanges in a meeting organised by CII.

Further, in an open letter published in newspapers (see Economic Times and Financial Express- 21st December 2010) by a minority stakeholder in NSE to the NSE's managment, the view expressed is that- “Without listing, minority shareholders feel trapped". To the contrary, the MD of NSE seems to be supportive of the Committee’s recommendations, as is evident from this news report available here. He is reported as stating that “Some people have argued that this conflict is not serious or that a poorly governed exchange will collapse. If the conflict is not serious, how is it that every developed market has taken out the regulatory role from an exchange.” This is apparently demonstrating a rift between the minority shareholders and the management of NSE, reflecting the wider debate and lobbying over the Committee’s recommendations. This is portrayed in another news column available here.

The most interesting remark to the Committee’s recommendation has been that- “Jalan panel disrespects Parliament”, which is in a news column available here, wherein the author brings out the contradictions between the Committee’s recommendation and the previous report of committee headed by former Chief Justice of India M.H. Kania, pursuant to which major amendments were brought to the Securities Contract (Regulation) Act, 1956. The author therein remarks that “The Jalan Committee takes us back not just in time but to the soviet philosophy of 1970s” [emphasis mine].

SEBI amends the Listing Agreement

noreply@blogger.com (Vaibhav Modi) — Tue, 21 Dec 2010 17:45:00 +0000

SEBI has made some significant changes to the equities listing agreement (the “Listing Agreement”) by a circular (available here) on 16th December, 2010. The changes introduced are as under:

1. Changes to clause 35
Clause 35 of the Listing Agreement mandates companies to file the details of their shareholding pattern with stock exchanges on a quarterly basis within 21 days of end of each quarter. SEBI has now added two more reporting requirements in clause 35 which are (i) companies should disclose their shareholding one day prior to the listing of its securities and the stock exchanges are required to disseminate these details before the first trade (this ensures wider public dissemination of shareholding pattern), and (ii) companies should report within 10 days any capital restructuring resulting in a change exceeding +/-2% of the total paid-up share capital.

Another change introduced in clause 35 is with respect to the details of ‘shares held by custodians and against which DRs(depositary receipts) have been issued', which are presently required to be disclosed in Table (I) (a) of Clause 35, should from now on be further segregated as those pertaining to the ‘promoter/promoter group’ and to the ‘public’.

This will ensure a holistic and true picture of the promoter/promoter group holding.

2. Changes to clause 5A
Clause 5A of the Listing Agreement contains the procedure to be followed by the companies with respect to the unclaimed shares pursuant to public or any other issue. Before the amendment, the clause only dealt with the shares issued in electronic and provided nothing for shares issued in the past in physical mode. Vide this amendment, SEBI has inserted specific provision for procedure to be followed in respect of unclaimed shares issued in physical form.

This will end the difficulties faced by the companies which have in the past issued shares in physical form.

3. Changes to clause 20
Clause 20 of the Listing Agreement mandates the companies to intimate the exchange of the outcome of the board meeting to consider payment of dividends or buyback. The existing clause does not require the companies to intimate the date of payment/dispatch of dividends to the exchange. Vide this amendment, SEBI has made it mandatory for the companies to also inform the exchange the date on which dividend would be paid.

This will enhance transparency and enable the investors to manage their cash/securities flows efficiently

4. Changes to clause 22
Clause 22 of the Listing Agreement mandates the companies to intimate the exchange within 15 minutes of the closure of the Board meeting the particulars of the decisions taken therein pertaining to increase of capital by issue of bonus shares, re-issue of forfeited shares/securities or any other alterations of capital. Vide this amendment, SEBI has made it mandatory for the companies to also inform the exchange the date on which the bonus shares would be credited/ dispatched.

5. Changes to clause 40A
Clause 40A of the Listing Agreement contains the condition for minimum public float to be adhered to by a listed company. The Government in June 2010 through the Securities Contracts (Regulation) (Amendment) Rules, 2010 (a copy of which is available here), had mandated listed companies to achieve at a 25 percent public shareholding in the next three years. This amendment had also prescribed annual floors of 10%/ 5% by which the listed companies should reach the 25% public shareholding. However, there was a further amendment in August 2010 vide Securities Contracts (Regulation) (Second Amendment) Rules, 2010 (notification no. GSR662(E) dated 9th August 2010 available at MANU/EAF/0142/2010), whereby the 25% requirement was reduced to 10% for public sector enterprises and flexibility was provided to the listed companies to attain the 25%(10% for public sector enterprises) within three years without any annual floor.

Clause 40A has now been amended to bring it in alignment with this second amendment to the Securities Contract (Regulation) Rules, 2010 (the “Rules”). The amended clause 40A now specifically provides that a listed company has to comply with the requirements of the Rules and can reach the required level of public shareholding by issuance of shares to public through prospectus/offer of promoters’ shares to public through prospectus/sale of promoters’ shares through secondary market.

6. Insertion of new clause 53 and 54
The following new clauses have been inserted in the Listing Agreement by this amendment:
• “53. The issuer company agrees to notify the stock exchange and also disseminate through its own website, immediately upon entering into agreements with media companies and/or their associates, the following information:-
a. Disclosures regarding the shareholding (if any) of such media companies/associates in the issuer company.
b. Any other disclosures related to such agreements, viz., details of nominee of the media companies on the Board of the issuer company, any management control or potential conflict of interest arising out of such agreements, etc.
c. Disclosures regarding any other back to back treaties/contracts/agreements/MoUs or similar instruments entered into by the issuer company with media companies and/or their associates for the purpose of advertising, publicity, etc. “

• “54. The issuer company agrees to maintain a functional website containing basic information about the company e.g. details of its business, financial information, shareholding pattern, compliance with corporate governance, contact information of the designated officials of the company who are responsible for assisting and handling investor grievances, details of agreements entered into with the media companies and/or their associates, etc. The issuer company also agrees to ensure that the contents of the said website are updated at any given point of time.”

These added clauses seek to ensure public dissemination of details of agreements entered into by corporates with media companies. This change is basically a bye-product of an earlier SEBI press release available here, which has been discussed in a previous post.

The amendments to clauses 5A, 35, 40A and insertion of clause 53 comes with immediate effect, while the amendments to clauses 20, 21 and 22 would be applicable for all board/shareholders meetings held on or after 1st January, 2011. The insertion of clause 54 is to take effect from 1st April, 2011.

SEBI should be consistent in its approach: SAT

noreply@blogger.com (Vaibhav Modi) — Sat, 04 Dec 2010 16:31:00 +0000

In a recent order, the Securities Appellate Tribunal ("SAT") made this striking remark- “It must be remembered that it is in public interest that a statutory regulator like the Board (read SEBI) should be consistent in its approach as that would send the right signals to the capital market and would also insulate the Board from the charge of discrimination.”

This remark was made in the concluding paragraph of its order in an appeal from a SEBI’s order (“Impugned Order”). Through the Impugned Order, SEBI refused to grant exemption to a promoter group from making a public offer to the existing shareholders to acquire further shares in the company under Regulations 10 and 11(1) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997 (“Takeover Regulations”). The appellants in the appeal pointed out to the SAT a few earlier orders passed by SEBI wherein SEBI had granted exemption from Regulations 10 and 11 of the Takeover Regulations in a similar factual matrix of appellant’s case.

Briefly stated, the facts of this case were that a listed company (the "Company/Target Company") required finance for expanding its business for which it approached the banks. The banks agreed to sanction the required loan with a pre-disbursement condition that the company raises an upfront equity of Rs. 50 crores (to comply with the debt-equity ratio norms). To raise this amount the company decided to do a preferential issue to its promoters and another entity (whose holding post the issue was to be 13.82% of the shares of the Target Company) who agreed to subscribe to the requisite number of shares. The Company got the necessary shareholders approval through a postal ballot, wherein the resolution for this purpose was passed by 99.1% (7586 postal ballots received out of 71589 shareholders). In the explanatory statement sent to the shareholders, all the necessary details of this issue were brought to the notice of the shareholders including inter-alia the fact that there will be no change in the management or control of the company; and that a rights issue is not being resorted to by the Company as it would delay the process. Since this preferential issue was to increase the holding of the promoters/promoters acting in concert group from 25.32% to 45.91%, the proposed acquirers made an application for exemption from Regulations 10, 11(1) and 12 of the Takeover Regulations. This application was rejected by SEBI against which an appeal was filed in SAT, which reversing the order of SEBI, granted the exemption to the appellants.

SEBI was of the view that the method of preferential allotment denied to the shareholders an equal opportunity in the fund raising exercise, and being denied this equal opportunity, they should be given an exit option through an open offer by declining an exemption.

SAT termed this order of SEBI as ‘wrong in approach and perception of the shareholders’ interest’ and observed that “….. it is not for the Board (read SEBI) to advise or insist on any company as to how and in what manner it should raise its further equity capital when the law gives the aforesaid three options [i.e. a Further Public Offer/ Rights Issue/Preferential Allotment] to a company. Of course, it must ensure that whichever method a company may adopt for raising equity capital, the procedure prescribed by law for that method has been followed in letter and spirit.”

It was argued by SEBI that only 10 per cent of the shareholders had participated in the postal ballot and that this percentage does not represent the majority of the shareholders. This argument was rejected by the SAT on the premise that the majority had been provided with an opportunity to caste their vote and those who did not caste their votes were in silent agreement with the proposed resolution for the preferential allotment. In this regard, the SAT opined that- “Their silence cannot be taken otherwise in the absence of any statutory provision to the contrary. The matter would have been different if the majority had not been provided with an opportunity to cast their votes.”

The most important observation made by the SAT in the matter was this- “we cannot forget that the primary object of the acquisition was to provide additional financial assistance to the target company for its new project.” This order of SAT has some interesting aspects. In a way it can be seen as laying down the proposition that if the funds are required to meet the expansion activities and the objective of acquisition of shares is to provide financial assistance then the exemption under Regulation 3(l) of the Takeover Regulations should be granted. Of course this will be with the rider of ‘no change in control’.

To raise an upfront equity, a company has three options- it can go to public and ask for funds or it could approach the existing shareholders with a rights issue or it can do a preferential allotment to a select group of persons. A company can opt for any of these options as per its requirements. SAT agreed with the appellant's submission that preferential allotment was not only the quickest but also the surest way of raising equity. SAT appears to be highlighting the benefits of a preferential allotment in this order!

Dr. Bimal Jalan committee report on ownership and governance of the Market Infrastructure Institutions

noreply@blogger.com (Emil Joseph) — Wed, 01 Dec 2010 19:08:00 +0000

SEBI, in January 2010, had appointed a committee under Dr. Bimal Jalan (former Governor of the Reserve Bank of India) to study and recommend changes on the ownership and governance of the Market Infrastructure Institutions ("MIIs") like stock exchanges, depositaries and clearing corporations. The committee, on November 22, 2010, has submitted its report ("Report") to SEBI and is available here for public comments. The report makes some particularly strong recommendations including not allowing such entities to get listed on stock exchanges.

The Report examines the nature of these institutions and the reasons for such institutions being referred to as MIIs in the light of doctrines like 'Essential Facilities', 'Natural Monopolies', 'Economies of Scale' and emphasizes on the systematic importance of these MIIs for the economy. The report views these MIIs as producers of public good and says that '….. the three MIIs in the securities holding-trading-clearing-settlement chain are engaged in the business of producing a valuable public good for society, which are essentially the price signals produced by a transparent and efficient market mechanism'.

The Report says that it is not possible to sever the regulatory role of the MIIs from their more obvious role of serving as providers of infrastructure of the market and goes on to describe the characteristics and functions of these MIIs emphasizing the following characteristics of such institutions:-

In general, MIIs are in the nature of public utilities.
All of them are vested with regulatory responsibilities, in varying degrees.
They have systemic importance to the economy.

In the above background, the Report highlights the conflict in the 'regulatory role' of these MIIs with their 'economic interests'.

The key recommendations in the Report are the following:

1. Changes to Securities Contracts (Manner of Increasing and Maintaining Public Shareholding in Recognised Stock Exchanges) Regulations, 2006: The Committee has proposed the replacement of these regulations by a comprehensive set of regulations on the ownership and governance of stock exchange. By way of a transit, the committee recommends changes for the existing provisions of these regulations which inter-alia contains a recommendation that- ' All anchor institutional investors put together shall not hold more than 49% of the total equity capital of an exchange'. Currently depositories, clearing corporations, banks, insurers and public financial institutions are allowed to hold, individually, up to 15% in a stock exchange.

2. Ownership and Control of a MII in another classes of MII: As regards the ownership and control of MII, the committee has proposed the following:

Clearing Corporations and Depositories may not be allowed to invest in other class of MIIs .
at least 51% of the paid-up equity capital of the Clearing Corporation should be held by one or more recognised Stock Exchanges.
the holding of stock exchanges in depositories may be restricted to a maximum of 24%.
In case of all MIIs, FIIs should be allowed to acquire the shares through off market transactions including through initial allotment, as allowed for any other shareholders, subject to the limits specified by the Government from time to time.

3. Governance of MIIs: As regards the governance of MIIs, the committee has proposed the following:

Stock Exchanges:

no trading /clearing member (irrespective of exchange where he operates) shall be allowed on the board of any of the stock exchange
the number of public interest directors ("PIDs") on the board of a stock exchange shall at least be equal to the number of shareholder directors without trading/ clearing interest.
Clearing Corporations:
the number of PIDs on the board of a clearing corporation shall at least be equal to the number of shareholder directors without trading/clearing interest.
Depositories:
same as prescribed for listed companies under clause 49 of the listing agreement.

4. Disclosures by board members of MIIs: All transactions in securities of the board members of the MII and their family have to be disclosed to the board of the MII.

5. Disclosure and corporate governance requirements: The committee recommends that the disclosures and corporate governance requirements of the listing agreement applicable to listed companies shall be made applicable to MIIs too. The information required to be disclosed under the listing agreement should be posted on the website of the MII.

6. Mandatory appointment of Compliance Officers: SEBI has mandated various registered intermediaries and also depositaries to appoint a compliance officer to ensure that the intermediary complies with the rules, regulations, circulars and directives of SEBI. The committee recommends that such appointment should be made mandatory also for the stock exchanges and clearing corporation.

7. No listing of these MIIs: The committee is not in favour of listing of MIIs and observes that- '... MII should not become a vehicle for attracting speculative investments. Further, MIIs being public institutions, any downward movement in its share prices may lead to a loss of credibility and this may be detrimental to the market as a whole'.

8. Networth Requirements: The committee recommends that Stock Exchanges should have a net worth of INR 100 crores at all times. As regards depositories, the SEBI prescribed net worth of INR 100 crores is suggested to be retained with a rider that '…all other investments in related, unrelated/other business shall be excluded while computing the net worth'. For clearing corporation, the committee recommends an ongoing net-worth requirement of INR 300 crores in the form of liquid assets.

Apart from above, a recommendation in the report which may cause significant outcry is putting of a cap on the maximum return that can be earned by MII on its net worth and can be distributed / allocated to its shareholders. The committee observes '…MII being a public utility should endeavor to earn only reasonable profits at par with average earnings of the corporate sector in India'.

It would be interesting to see how much of these recommendations are implemented by the regulator. These recommendations are seen as a disappointment and have been met with criticism (here, here, here and here) on the lines that it would protect the monopolistic market structure and perverse anti-competitive practices by some and prevent new entrants on the stock exchange space. Also, the buzz in media is that the government is unsure of implementing these recommendations.

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

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

noreply@blogger.com (Emil Joseph) — Tue, 23 Nov 2010 19:18:00 +0000

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

noreply@blogger.com (Emil Joseph) — Fri, 29 Oct 2010 18:05:00 +0000

[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.

Investment limit for retail investors increased to 2 lakh, Rights issue framework for IDRs, Norms for public issues by insurance companies etc.

noreply@blogger.com (Emil Joseph) — Tue, 26 Oct 2010 19:34:00 +0000

SEBI vide PR No.231/2010 dated October 25, 2010 has published the decisions taken by the SEBI Board in its meeting held on the same date. The highlights of the press release are as follows: -

Norms for public issues by insurance companies

SEBI has stated that SEBI (ICDR) Regulations, 2009 would be applicable to public issues by insurance companies. SEBI and IRDA have been working together for finalizing a framework for life insurance companies to raise funds from the market and list in the capital markets. The new framework stipulates more disclosures wherein insurance companies need to put in the risk factors specific to insurance industry in the offer document. Other changes include amendments to the ICDR regulations which allow monitoring agencies like one for banks in India where RBI is monitors banks, IRDA will be allowed to monitor life insurance companies who come into the capital markets.

Preferential issue of equity shares or convertible securities or warrants to promoters and promoter group

SEBI stated that in case of preferential issues, where any promoter or any promoter group entity has previously subscribed to the warrants of the company but failed to exercise the warrants, the promoters and promoter group would be ineligible for issue of equity shares or convertible securities or warrants for a period of one year from the date of expiry of the currency /cancellation of the such warrants. In case of any member of the promoters/ promoter group has sold shares in the previous six months, then the promoters/ promoter group would be ineligible for allotment on preferential basis.

The SEBI (ICDR) Regulations, 2009 allows preferential allotment of warrants subject fulfillment of certain specified conditions. These warrants give promoters an option to convert warrants into shares at a pre-determined price. The price of such conversion is decided based on the average price of the last six months or last two weeks, whichever is higher. Promoters have 18 months to convert the warrants into shares at that price. They generally convert the warrants in a rising market and book profits but tend to let them lapse when markets fall. Thus the allotment of warrants allowed promoters to enrich themselves in booming markets and getaway in crashing markets. SEBI, taking note of this issue, had earlier proposed to increase the upfront margin to be paid by allottees of equity warrants to 25% from the earlier 10%.

Rights issue framework for IDRs

SEBI stated that it will soon notify the framework for rights issue of IDRs. This would facilitate simultaneous rights offering by the foreign issuers (who have listed their Indian Depository Receipts (IDRs) in Indian Stock Exchanges) in their home jurisdiction and in India. Even though the Companies (Issue of Indian Depository Receipts) Rules, 2004 were issued in 2004, only one company has so far issued IDRs in India for raising capital.

Investment limit for retail investors increased to 2 lakh

SEBI has increased the maximum application size for retail individual investors to Rs.2 lakh across all issues.

Regulation 2 (1) (ze) of SEBI (ICDR) Regulations, 2009 currently defines "retail individual investor" to mean an investor who applies or bids for specified securities for a value of not more than one lakh rupees. Earlier in August 2009 SEBI had released a discussing paper which proposed to raise the investment limit for retail investors from the current Rs 1 lakh to Rs 2 lakh. SEBI felt that the retail individual investors who have the capacity and appetite to apply for securities worth above one lakh rupees were constrained from doing so because of the one lakh limit and they do not make application under the non institutional investor category because the allocation there is limited to 15% as against 35% for retail individual investor category. Another reason which prompted SEBI for such a move is the inconvenience faced by merchant bankers in big offerings to get enough number of retail investors because of the limit of one lakh rupees. It is also felt that the huge public offerings of PSUs which are in pipeline have prompted the Government for such a move to ensure that the offerings are fully subscribed in the retail segment.

Requirement of promoters' contribution not be applicable to FPOs

SEBI has stated that the requirement of promoters' contribution would not be applicable to FPOs where equity shares of the issuer are not infrequently traded in a recognised stock exchange for three years and the issuer has a track record of dividend payment for three years.

News reports appearing after filing of draft offer document to be consistent with disclosures in the offer document

SEBI has stated that the merchant bankers may submit a compliance certificate as to whether the contents of the news reports that appear after filing of draft offer document are supported by disclosures in the offer document or not. This would apply in respect of news reports appearing in newspapers stipulated in ICDR for issue advertisements, major business magazines and also in the print and electronic media controlled by any media group where the media group has a private treaty/shareholders' agreement with the issuer company/promoters of the issuer company. Earlier in August, 2010 SEBI had asked media companies to disclose the details of the stake held by such media companies in various companies.

A copy of the press release is available here.

SEBI amends ICDR Regulations: Draft offer documents of public issues upto 100 crore to be filed with regional offices

noreply@blogger.com (Emil Joseph) — Wed, 13 Oct 2010 19:24:00 +0000

SEBI vide circular CIR/CFD/DIL/9/2010 dated October 13, 2010 has mandated that draft offer documents in respect of public issues of size upto 100 crore should be filed with the concerned regional office of the SEBI under the jurisdiction of which the registered office of the issuer company falls. Earlier offer documents of issues upto 50 crore were filed with the concerned regional offices of SEBI. SEBI has now increased this limit from 50 crore to 100 crore. This circular comes into force with immediate effect.

A copy of the circular is available here.

ASBA forms can be collected by syndicate/ sub-syndicate members

noreply@blogger.com (Emil Joseph) — Wed, 13 Oct 2010 19:15:00 +0000

SEBI vide circular CIR/CFD/DIL/8/2010 dated October 12, 2010 has allowed syndicate/ sub-syndicate members to collect ASBA forms from the investors and to submit it to Self Certified Syndicate Banks ("SCSBs"). Earlier only SCSBs were allowed to collect ASBA forms, while the syndicate/ sub-syndicate members collected the non-ASBA forms. Under the new scheme syndicate/ sub-syndicate members would be required to upload the bid and other relevant details of such ASBA forms in the bidding platform provided by the stock exchanges and forward the same to the respective SCSBs. SCSBs should carry out further action for such ASBA forms such as signature verification, blocking of funds etc. and forward these forms to the registrar to the issue.

A copy of the circular is available here.

SEBI modifies the rule of dividend transfer under SLB

noreply@blogger.com (Emil Joseph) — Fri, 08 Oct 2010 17:17:00 +0000

SEBI vide circular CIR/MRD/DP/ 33 /2010 dated October 07, 2010 has modified the Securities Lending and Borrowing ("SLB") framework. As per the modified framework, the lenders of shares under SLB scheme will now get dividend on the record date. Currently the borrower who is in the possession of share gets the dividend on the record date and he transfers the dividend to the lender at the time of repayment of the shares borrowed.

A copy of the circular is available here.

Draft listing agreement for securitized debt instruments

noreply@blogger.com (Emil Joseph) — Wed, 06 Oct 2010 17:48:00 +0000

SEBI has placed on its website, the draft listing agreement for securitized debt instruments, for public comments/ suggestions. The highlights of the draft listing agreement are the following:

Performance related information to be disseminated on a monthly basis.
The burden of disclosures is placed on the Special Purpose Distinct Entity (SPDE)/ SPV which is the issuer of securitized debt. In order to facilitate flow of information, the draft requires the SPDE/ SPV to enter into back to back arrangements with the originator, servicer and the trustee.

A copy of the draft listing agreement is available here.