InvestorQ : The latest SEBI Board meet made some interesting announcements on the FPI and mutual funds front. What were the broader implications of the SEBI board meet outcome?
Chandralekha Desai made post

The latest SEBI Board meet made some interesting announcements on the FPI and mutual funds front. What were the broader implications of the SEBI board meet outcome?

Mitali Bhutta answered.
3 years ago

In its August 21 meeting of the SEBI Board, they announced a number of market friendly reforms at its board meet. Here are some of the key highlights.

· The regulator took one most step in simplifying FPI investments into India. SEBI has initiated simpler on-boarding process, compliance requirement and documents to be submitted. The number of FPI categories is also being shrunk from 3 to 2 to make it more rational.

· Continuing on the subject of FPIs, the SEBI has announce that now all central banks can register as FIIs even if they are not members of the Bank for International Settlements (BIS). In addition the entities that are established and run out of the IFSC, Gujarat will be deemed to have met FPI criteria automatically.

· Currently, FPIs are only allowed to put trades through the normal market route and offline transfers are not permitted. This was creating a problem in case of illiquid stocks. In a major shift, the SEBI has allowed FPIs to now do off-market transfers of shares that are illiquid or unlisted. Now they can exchange blocks offline.

· On the buyback front, the regulator has not given any additional clarity on the buyback tax that was introduced in the July budget. It was supposed to be levied at 20% of the difference between the buyback price and the stock issue price, which was objected to by many investors and corporates as being unfair. That area has been left untouched.

· However, on the buyback front, the SEBI did give a clarification on the standalone vs consolidated issue and that was the case where the L&T buyback had been stalled. The regulator has retained the maximum debt/equity ratio at 2:1 based on standalone and on a consolidated basis. The only exception will be where the subsidiaries are NBFCs or HFCs and are regulated by the RBI. Such subsidiaries will have to limit their debt / equity ratio to a maximum of 6:1 and this should likely facilitate the L&T buyback plan.

· Rating agencies and mutual funds have been in the midst of a lot of controversy in the last few months. Let me focus on what SEBI announced on the credit rating front. Credit ratings and the processes had come under question after the IL&FS default and SEBI reviewed the rating process and the rating inputs. As per SEBI, the credit rating agencies will have the explicit authority to call for any data on past or future loans about the rated company either from the company being rated or even from statutory agencies. This was proving to be a bottleneck. The idea is to enable the CRAs to get timely information to warn on credit downgrades.

· Many mutual funds had been invested in such debt that was suddenly downgraded and have paid the price in the form of delays in FMP redemptions. Under the modified SEBI rules, mutual funds will be given flexibility to invest only 10% of their corpus in unlisted NCDs. However, the condition is that these NCDs must have simple structures and not the complex ones or as fronts for promoter funding. Such unlisted instruments, it has been mandated, must be rated and secured with respect to timely coupon payments. To avoid practical hassles, this will be implemented in a phased manner by mid 2020.

· Finally, SEBI has also issued a consultative paper on amendments to Insider Trading Regulations. This has been a grey area for quite some time and it has now introduced a reward scheme for whistle blowers. Informants will be given a separate channel to report such insider trades with adequate proof and documentation. A dedicated division at SEBI will be responsible for protecting confidentiality of the informant. SEBI has also come out with a reward scheme for such cases where the total disgorgement is more than Rs.1 crore. The payout will be 10% and shall be paid out of the IPEF.