The Securities and Exchange Board of India board meeting earlier this week set in motion a number of interesting developments. Guided by a busy agenda, the results of such meetings are often difficult to catalog thematically. But the general thrust of the September 28 meeting can be categorized into three key categories (i) simplifying transactions, (ii) keeping corporate governance reforms afloat, and (iii) exploring new asset classes.
Following recommendations from a subgroup of the Primary Market Advisory Committee, SEBI released a consultation paper earlier this year that discussed the idea of streamlining the process for delisting control transactions. Considered for the first time by the TRAC committee in 2012, this proposal was long in coming.
Currently, the law requires any purchaser attempting to withdraw from the listing to first meet a minimum of 25% public shareholding (in the event that the open offer results in these limits being exceeded) and then to attempt a radiation. Rightly described by the consultation paper as “directionally contradictory” transactions, the same buyer is now required to first make an offer to purchase as part of the open offer, then sell to achieve the public shareholding thresholds, then buy again to become private. SEBI’s Board of Directors has now approved amendments which, when implemented, will allow a purchaser who announces its intention to delist to advance two prices: the open offer price and the price. write-off (which will be higher, due to the control premium being integrated). When the 90% delisting threshold is reached, the bidding shareholders receive the delisting price and if not, the open offer price is paid to all public shareholders who tender their shares. By making this process more predictable and less tedious, SEBI seeks to remove an important blocking element for acquirers seeking to privatize listed companies and to usefully move such write-offs away from the reverse book-building process.
Once the fine print is out, it will be interesting to see if SEBI can resist the temptation to prescribe broad parameters for calculating the premium that must be included in the price of the delisting offer, or if it remains satisfied with this. whether it is a purely commercial offer, market-oriented decision.
In most of its meetings this year, the SEBI Board of Directors has always retained at least one or more agenda items focused on corporate governance and improving the information to be provided by listed companies. . At its last board meeting, SEBI approved changes to the existing related party framework, in line with the suggestions made by the SEBI working group in January 2020, and redesigned the definition of the two related parties and their related parties. between oneself transactions.
The framework expands the term “related party” to include any person / entity within the promoter or group of promoters, without defining a shareholding threshold, as is the case today. Will be the fold of the new definition of related party.
Transactions with related parties have also adopted a more comprehensive definition to include those between a listed entity or its subsidiary with their related parties. Filling a long-standing gap, the definition will now cover transactions between listed entities or their subsidiary with any other party, where the purpose and effect of such a transaction is to benefit a related party of the listed entity or of its subsidiaries.
SEBI’s board of directors also suggested recasting the definition of material transactions with related parties such that transactions of Rs 1,000 crore or 10% of the consolidated annual turnover of the listed entity (depending on the lower of the two) now require shareholder approval. It also proposed increased disclosure and reporting requirements to the audit committee, board of directors and shareholders. The press release is not clear on the exact form or frequency of these enhanced disclosures, but the intention is clearly to ensure that this data should be publicly available, to allow stakeholders to easily discern the patterns. company behavior.
Overall, the audit committee’s review of related party transactions, its thoroughness in determining the “purpose and effect”Of a transaction and continued efforts to maintain tight control over all of the group’s transactions will be important to the success of these changes.
Nestled behind the brilliance of some of these larger reforms is the intriguing reference in SEBI’s board minutes to the overhaul of the “fit and proper” test. A permanent feature in the lifespan of any licensed intermediary, its administrators or key management, the suitability and relevance test functions as a sine qua non on the securities market and is a prerequisite for obtaining registrations, pursuing activity or, in the case of natural persons, exercising responsible functions within market intermediaries or of listed companies. Existing regulations are principled and revolve around three main criteria: reputation, financial solvency and equity, and the absence of convictions, restraining orders or reports of willful default.
SEBI’s Board of Directors has now suggested a two-pronged, principled approach “”and or“Rules-based assessment of the term ‘fit and proper’, but the excerpt from the board minutes is not clear on how this will be made applicable.
From the language of the press release, it appears the principled approach will be relevant to license applicants and intermediaries, in which individuals will be vetted against more measurable rules.
If notified, this will be quite significant in terms of impact on the people against whom substantial sanctions or restrictions are issued by regulators and their ability to continue in positions of responsibility. Even when parties are granted a stay of the appeal forum on such directions, the observations and findings of such orders may, until they are completely set aside, weigh heavily on decisions made by boards and committees. internal staff on the adequacy of their key personnel. SEBI should deliberately consider the finer points of this proposal and also ensure that the final directives keep any settlement or composition orders placed by SEBI / RBI, expressly outside its scope.
Goldspotting and new platforms
SEBI’s board of directors also announced a social exchange and reported the establishment of a market for spot trading in gold. Notified as the regulator of India’s gold exchanges with respect to the Union budget earlier this year, SEBI released a consultation paper in May 2021 on its proposal to allow gold trading via electronic gold receipts or EGRs which will be notified as “securities” under the Securities Contracts (Regulation) Act, 1956 and be subject to the securities transaction tax. The introduction of spot gold exchanges complements the existing mix of gold ETFs and mutual fund products and aims to facilitate price discovery in the spot gold market.
This ambitious project will require a transparent interface between vault managers, custodians, exchanges and clearing companies and, while appointing SEBI as regulator, will surely increase confidence in this market, by managing and overseeing the back logistics. -end of the vault managers, by inspecting them, and learning from India’s previous experiences in the cash market will be key to the sustainability of this opportunity.
The idea of a social stock exchange has also been under consideration for some time and following the reports of the SEBI working group as well as the reports of the technical committee, the board of directors of SEBI has now approved the establishment a social listing council as a separate segment within existing stock exchanges. . This will enable entities engaged in activities in the 15 broad categories of social and educational services, both for-profit and not-for-profit, to raise funds for their operations and growth. Great way to create pathways to the growing world of impact investing, operationalizing this platform will require changes to a host of regulations, including ICDR regulations to change the criteria for registration. The interaction between the entities listed on this segment with the Foreign Contribution Regulation Act, which currently regulates the flow of foreign funds into non-profit activities, will be critical to resolve.
As the SEBI consultation document excludes entities with religious and political objectives from raising funds in this social segment, the stock exchanges will have to judiciously define their eligibility criteria during its deployment, in order to ensure that such exclusions are based only on on objective demarcations and verifiable measures.
Shruti Rajan is a partner in the Mumbai office of Trilegal and an attorney specializing in financial services regulation and enforcement. Riya Chopra, partner at Trilegal also contributed to this article.
The opinions expressed here are those of the author and do not necessarily represent those of BloombergQuint or its editorial team.