Tag: SEBI

Sebi relaxes minimum promoter lock-in norm for Ujjivan SFB, Ujjivan Fin Services for amalgamation, BFSI News, ET BFSI

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Markets regulator Sebi has provided relaxation with regard to the minimum promoter lock-in norm to Ujjivan Small Finance Bank (SFB) and its promoter Ujjivan Financial Services, for the purpose of their amalgamation. On October 30, the bank had approved the scheme of amalgamation between Ujjivan Financial Services (transferor company) and Ujjivan SFB (transferee company).

Following this, it had submitted a joint application on behalf of the transferor/promoter to Sebi, seeking relaxation of the three-year minimum promoter lock-in requirements.

Besides, it also sought approval to adopt the proposed scheme of amalgamation as a method to achieve the minimum public shareholding.

“…we hereby inform you that the Sebi, vide its letter dated December 2, 2021, has acceded to our request to relax the three-year minimum promoter lock-in requirements,” it said in a regulatory filing.

The exemption is subject to no-objection certificate (NOC) from the exchanges and final approval by the National Company Law Tribunal (NCLT).

“The exemption being granted from lock-in is only for the period commencing after approval of the proposed scheme of amalgamation by NCLT and till expiry of the lock-in period,” it said citing the Sebi letter.

However, the Sebi specified that the relaxation is granted to them for the “specific purpose of scheme of amalgamation” between Ujjivan Financial Services and Ujjivan SFB and “shall not be treated as a precedence”.

Further, as advised by Sebi, the bank will initiate necessary steps to ensure compliance with minimum public shareholding requirements through mode specified under Sebi circular dated February 22, 2018, it added.

Currently, Ujjivan Financial Services holds 83.32 per cent of the equity shareholding and 100 per cent of preference shareholding of Ujjivan SFB.

As per the minimum shareholding norms, the promoter’s minimum initial contribution in the SFB arm should be at least 40 per cent. If the promoter’s initial shareholding in the SFB is in excess of 40 per cent, it is to be brought down to 40 per cent within a period of five years from the date of commencement of operations of SFB.

This period of five years is expiring on January 31, 2022.



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India’s new crypto law set to red-flag chit fund, MLM business models, BFSI News, ET BFSI

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India is set to red flag several investment schemes launched by individuals and cryptocurrency exchanges that are similar to chit funds, multi-level marketing (MLM) and systematic investment plans (SIP), as it seeks to build a robust regulatory framework to protect vulnerable rural populations buying risky crypto assets.

Regulators including the Reserve Bank of India (RBI) and Securities and Exchange Board of India (Sebi) have raised concerns before a parliamentary panel about how some individual investors are collecting money in small towns – with business models resembling those of chit funds – for investing in crypto assets.

RBI has pointed out how some Indians have even started accepting cryptocurrency payments for export services, thus posing a broader systemic risk.

“It is observed that some individuals are going to small towns and raising money from people, mainly in cash, with the promise of great returns in cryptocurrencies,” said a person familiar with the representations to central lawmakers. “This is exactly like chit funds, but without any framework or regulations.”

Regulators have reportedly flagged instances in the hinterland, particularly in Uttar Pradesh and Bihar, where collective investment schemes or chit funds have been floated to pool money for alleged investments in cryptocurrencies. Crypto exchanges and related associations have also made representations to the panel of central lawmakers. Officials at Sebi and RBI could not immediately be reached for comments.

Besides chit funds, even MLM-like schemes are being promoted by some unregulated entities, warn insiders. “In India, a lot of scams are driven by smart contracts – anyone can launch their own coin and start raising money,” said Siddharth Sogani, founder, CREBACO, a cryptocurrency research firm.

Scam Schemes
“There is one scam every week in India where fraudsters are trying to do a multi-level-marketing or collective investment scheme, which promises astronomical returns to people.”

CREBACO had red-flagged a “fake cryptocurrency exchange” that announced hiring plans. The exchange was only collecting money and was a “scam,” said insiders. In another instance, a small company started collecting money from small investors in Uttar Pradesh with the promise of doubling their invested funds in a year. The company claimed it would invest the pooled money in cryptocurrencies. “There were many other instances where it was found that individuals are just taking advantage of the cryptocurrency craze and regulators need to protect the rights of small investors,” said a person aware of developments.

Mitigating Risk
RBI has, in the past, said cryptocurrency poses a systemic risk to India’s economy. Most exchanges have distanced themselves from individuals collecting money and investing in crypto assets with a business model not dissimilar to those at chit funds.

Another person close to the developments said concerns were also raised by Sebi on the nomenclature used by exchanges. New regulations could spell out what exchanges can say and what they cannot. “We have to draw a line at what we can say and what we can’t. Maybe, when you say ‘investment,’ it may not be fine; calling it SIP may not be fine too, but as of now, we don’t know what terms to use,” said Sathvik Vishwanath, co-founder and chief executive of Unocoin, a cryptocurrency exchange.

“These (terms) are used haphazardly by different companies for different things. Currently, exchanges have to explain some concepts to a common man who doesn’t have an idea what we are talking about. So, sometimes we have to come up with something to compare it with,” he added.

Cryptocurrency exchanges and associations have even raised concerns about how some fly-by-night crypto exchanges have mushroomed in the past few months, from which the government should differentiate genuine exchanges.

Apart from that, the government could also put out some framework for how money can be raised through an Initial Coin Offering (ICO), which is the cryptocurrency equivalent of an IPO. “Sebi should regulate ICOs in India if these instruments are allowed,” said Sogani of CREBACO.

Regulation Jitters
Investors are wary after New Delhi decided to introduce the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, in the winter session of Parliament. Both investors and venture capitalists sounded cautious after the Lok Sabha bulletin was published last week.



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Cryptos, far from the regulators’ glare

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The manner in which cryptocurrencies which began as innocuous playthings of geeks went on to become the most sought after asset class and a threat to traditional cross-border payment channels, while managing to stay beyond the reach of regulators, shows the challenges that digital innovation pose.

The original white paper on Bitcoin, put out by its founder, the anonymous Satoshi Nakamoto, described it as, “a purely peer-to-peer version of electronic cash (that) would allow online payments to be sent directly from one party to another without going through a financial institution.”

Most regulators did not take it seriously then, since its usage appeared to be limited to a few rebels who wanted to express their displeasure against the traditional fiat currencies. But Bitcoin has cloned thousands of other cryptocurrencies, which are no longer innocent payment channels but have morphed into a highly speculative asset and conduits of illicit cross-border money transfers.

The experience with cryptocurrencies shows that fintech products and innovations need to be taken more seriously going ahead and quickly brought under the regulatory radar before they grow in to a many-headed monster. There are other similar digital innovations such as digital lending or algo trades that have grown surreptitiously in the shadows in a similar manner with the regulators struggling to frame rules them.

Digital lending entities

More than a decade ago, the usurious practices of microfinance companies charging exorbitant rates of interests, harassing and shaming borrowers had led to a spate of suicides making the RBI issue regulations to check the lenders in this space. The same sequence of events is now being repeated, but in digital space.

As the Covid-19 pandemic hit the livelihoods and small businesses, digital lending apps turned out to be a ready source of money to these small borrowers. While funds could be accessed for extremely short periods, ranging from 7 to 15 days, the rates of interest charged by the digital lenders were extremely high, ranging from 60 to 100 per cent, according to reports. These apps required the borrower to give them permission to access all the information on their smartphones under the garb of doing KYC checks. The problem started when the borrowers were unable to repay the loans. They were harassed, publicly shamed and even blackmailed leading to some borrowers even resorting to the extreme step of taking their lives.

The RBI had taken note of these malpractices and issued an advisory in December and had also opened a portal for registering complaints. It recently set up a working group to give recommendations on regulating these businesses.

The swiftness shown by the central bank in trying to bring digital lending entities under regulatory purview is laudable. It’s clear that there is demand for loans from such digital lenders and total clamp-down on this space is not a good idea. Weeding out the bad players and ensuring that the lending activities continue with sufficient protection to borrowers is the way forward.

But the point to note is the manner in which the miscreants were quick to find a regulatory gap and begin operations. This requires equal amount of agility from regulators as well.

Dealing with algo trading

Another instance of a digital innovation blind-siding regulators was seen in the proliferation of algorithmic or programmed trading in Indian stock exchanges. These trades that require little or no manual intervention, where computer programs shoot orders to the exchange servers at lightning speed, currently account for over 60 per cent of turnover in derivatives section and 50 per cent in cash segment of the NSE.

There was a lot of furore about these algo trading around 2012 when it was first revealed that programmed trading, especially from colocation sites located close to exchange servers, are ahead of the small investors in trade execution due to their proximity to the exchanges. Further, the high-frequency-trading programs and other rogue programs were gaming the market to stay ahead of other traditional traders.

But no one could explain how or when algo trading had started on Indian exchanges and how they had become so widespread by 2012. The market regulator was in a fix then, since banning algos would have resulted in depriving liquidity from market and making FPIs turn away. SEBI decided to embrace algos and regulate them by issuing guidelines to exchanges, intermediaries and investors about dealing with algos.

We had dealt with this logjam in https://www.thehindubusinessline. com/opinion/columns/lokeshwarri-sk/ learn-to-live-with-algo-trading/ article22995759.ece

Regulating cryptos will be tricky

With fintech adoption growing at a break-neck speed in the country with growing smart phone and data accessibility, it is clear that innovative products that fox regulators and at times border on the illegal will keep cropping up. Regulators need to be on their toes and increase the strength of their digital surveillance team which has the skills to understand these products.

But, while innovations like digital lending and algo trading can be regulated and streamlined by regulators, cryptocurrencies will be much more challenging. This is because — one, it is hard to categorise cryptocurrencies as either currency or asset. So determining the regulator for them is quite difficult. Two, the creation or mining of the cryptocurrencies takes place globally and hence cannot be controlled. While trading can be banned in India, it will continue in other global trading platforms which can be easily accessed by Indians. Three, the investors of these crypto assets are mostly not the investors of traditional asset classes.

Hence it may not be possible for issuing reactive regulations for these crypto assets and absorb them into the mainstream as done for other tech innovations. A global consensus on crypto mining and trading could be the way forward, with uniform rules and regulations framed for crypto trading platforms in all countries. While the contours of the Cryptocurrency Bill to be presented in Parliament is awaited, the last word has not yet been said on taming this beast.

The last two decades have seen rapid innovation in fintech with these digital entities seeping into spaces hitherto occupied by traditional banks, insurance companies, stock brokers, investment advisories, and so on. Some of these entities have tried pushing the boundary between the acceptable and unacceptable, ethical and unethical, legal and illegal and, in many instances, regulators have been caught sleeping at the wheel. Regulators will have to upskill and increase the manpower equipped to deal with fintech entities so that they are not caught off-guard, once too often.

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SAT quashes NSE’s directive to Axis Bank in Karvy case, BFSI News, ET BFSI

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New Delhi, In a relief to Axis Bank, the Securities Appellate Tribunal (SAT) has quashed a direction issued by NSE that funds lying in the bank account of Karvy Stock Broking are the assets of the exchange’s defaulter committee. The order came after Axis Bank challenged the communication issued on December 8, 2020 by NSE holding that the bank accounts of Karvy become the assets of the defaulter committee of the exchange since the stock broker has been declared a defaulter and expelled from the membership of the bourse.

Axis Bank challenged the communication on the ground that the exchange has no power to issue any directions to the bank to freeze its accounts on which the lender has a banker’s lien.

It also contended that Axis Bank is a commercial bank and not a trading member and therefore is not bound by Sebi laws, including the bye laws of the National Stock Exchange of India Ltd (NSE).

“We are of the opinion that respondent no.1 (NSE) had no jurisdiction to hold that the funds lying in the account of Karvy Stock Broking Ltd are assets of the committee as per…NSE bye laws,” SAT said in an order on Monday.

Citing NSE bye laws, the tribunal said the vesting of the assets in the defaulters committee is limited and cannot include all the assets of Karvy, the defaulter. Only such security deposited with the stock exchange vests with the defaulters committee.

In addition, other monies, securities and other assets due, payable or deliverable to the defaulter by any other trading member also vest with the defaulters committee, it added.

“The bye law 12 makes it apparently clear that a defaulter committee can only issue directions against the trading member and cannot issue any direction to a third party, namely, the appellant (Axis Bank) who admittedly is not a trading member,” SAT noted.

It further said NSE does not get any jurisdiction to pass such order based on Sebi’s confirmatory order.

The confirmatory order asked NSE to initiate appropriate action against Karvy for violation of its bye laws. It also allowed the exchange to invite and deal with claims of the clients in accordance with its bye law, the tribunal noted.

“The impugned communication issued by NSE dated 8th December, 2020 invoking bye law 11 of its bye laws is totally without jurisdiction and is quashed,” SAT said.

It was alleged that in the course of its banking business, Axis Bank had granted several credit facilities to Karvy, which owed Rs 165 crore alongwith interest to the lender.

Also, it is alleged that on January 27, 2021, Axis Bank had Rs 8.27 crore in the bank account and fixed deposit accounts of the lender. Of the Rs 8.27 crore, a sum of Rs 7.98 crore was the exclusive property of Karvy and the balance amount of Rs 28.66 lakh belonged to clients and other parties.

Sebi, through an interim order in November 2019, put several restrictions on Karvy, including prohibiting the brokerage from taking new clients in respect of its stock broking activities as it had misused clients’ securities by unauthorisedly pledging the securities.

Among others, the regulator had directed the stock exchange to initiate appropriate action against Karvy for violation of bye laws. This order was confirmed by the regulator in November 2020.

Further, Karvy was declared a defaulter in November 2020 under the bye laws of NSE and was accordingly dismissed from the membership of the exchange as a trading member. PTI SP ABM ABM



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ARSS Infrastructure Projects case: SEBI rejects ‘acted in good faith’ rule for SBI nominee

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In a rare case, markets regulator SEBI has disallowed protection under the rule of ‘acted in good faith’ to 75-year old Krishna Chandra Raut, a nominee of government-owned State Bank of India (SBI) on the board of ARSS Infrastructure Projects (AIPL). Government employees or its nominees on the board of companies are protected from prosecution or legal proceedings by any authorities unless it has proved that they acted in a ‘bad faith’.

Raut is a retired SBI official who was put as a nominee by the bank on AIPL board in 2013 after the company went into CDR (corporate debt restructuring).

SEBI has barred Raut from the stock markets for six months and imposed a fine of ₹1.5 lakh on the charges that AIPL misrepresented its books of accounts. SEBI has also took action against key board members of AIPL including the CFO and CEO for misrepresenting the financials of the company and misusing the funds. Raut was just a nominee director on AIPL board and not involved in any of the day-to-day activities of the company.

“It is strange that the regulator has gone to the extent of charging a nominee director of SBI for misrepresenting the books of accounts but has yet to take any action against the auditors. The matter could be surely challenged in SAT (Securities and Appellate Tribunal). Also, this order of SEBI is in contrast to its past behaviour where the regulator has not acted against senior stock and commodity exchange officials on grave matters citing the rule of ‘acted in good faith’ despite the fact that forensic audit reports pointed fingers in their direction for wrong doings,” a SEBI lawyer told BusinessLine.

Raut’s resignation

In July, Raut resigned as SBI’s nominee on the AIPL board. Raut told SEBI that he became a director of AIPL on May 11, 2013, and had no role to play in the affairs or day to day management of the company. He submitted further that there was no question of proceeding against any nominee director of a public sector bank in respect of any act done or omitted to be done in discharge of its duties as a director/unless it was established that he had acted in bad faith and was complicit in commission of any such offence.

Raut also told SEBI that he had joined SBI as a probationary officer on December 24, 1970, and retired as Chief General Manager from SBI Kolkata local head office on April 30, 2005 with an unblemished service record.

But SEBI’s reasoning in pressing charges against Raut was that he was not just a director of AIPL but a member of the audit committee and had attended 2 of the 4 audit committee meetings in FY2015-16 and all the 4 meetings during FY2016-17. “Hence, the noticee (Raut) cannot take the plea that he acted in good faith as a director of the board in approving the financials that were provided to him by the audit committee, as the noticee himself was a member of the audit committee whose role under Regulation 18(3) read with Part C of Schedule II of the LODR (Listing Regulations) was inter alia to review the financial statement and auditors report with reference to disclosure of any related party transactions etc. and to ensure that the financial statement is correct, sufficient and credible.”

SEBI has said that AIPL presented true and fair financial statements and had executed transactions which are non-genuine in nature tantamounting to misrepresentation of the accounts/financials statement and misuse of account/funds of the company.

SEBI has said that AIPL had misused funds/misrepresented books of accounts which are detrimental to the interests of genuine investors and are fraudulent in nature. It was also alleged that the directors, CEO and CFO had failed to exercise duty of care, by misrepresenting the financials/misusing the funds. It was alleged that transactions which are non-genuine in nature were executed.

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Sebi levies Rs 1.15 cr fine on Voltaire Leasing and Finance, others for fraudulent trading, BFSI News, ET BFSI

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Markets regulator Sebi has imposed total fine of Rs 1.15 crore on Voltaire Leasing and Finance Ltd, its officials, one entity and eleven individuals for fraudulent trading in the shares of the firm. They violated Prohibition of Fraudulent and Unfair Trade Practices norms.

The investigation period was between August 2014-July 2015. They had manipulated the price of the scrip and the company and its directors-Dilip Rajkumar Patodia, Amlesh Sadhu and Harivallabh Mundra – were also part of the scheme for manipulating the price in the scrip.

“By executing manipulative trades, as has been executed by these noticees in the instant matter, the price discovery system itself is affected. It also has an adverse impact on the fairness, integrity and transparency of the stock market,” Sebi said.

All the entities forming the group of off-market transferors, the group of sellers and the company and its directors in charge of its affairs at the time of the violations, have manipulated the scrip price.

The firm is facing a fine of Rs 10 lakh and the three directors are facing fine of Rs 15 lakh each.

Besides, Sebi has imposed fine of Rs 5 lakh each on others.

In another order, Sebi levied total fine of Rs 88 lakh on 12 entities for violation of several market norms.

These include Nikita Forex Pvt Ltd, Nature Infosoft, Topline Fabrics and Tushar Commodities, apart from eight individuals.

The fine has been levied in the range of Rs 6-11 lakh.

It was found that they acted as a group, orchestrated a fraudulent scheme where a false and misleading information was circulated through bulk SMSes to create artificial demand, in order to offload large number of shares of Kalpa Commercial to gullible investors.

Besides, the transactions were not in conformity with the provisions relating to spot delivery contract which require that actual delivery/ transfer of shares and the payment should be on the same day as date of contract or the next day.



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IndusInd Bank clarifies on appointment of BFIL executives by SSFL, BFSI News, ET BFSI

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IndusInd Bank has clarified that Shalabh Saxena and Ashish Damani are currently employed with its wholly owned subsidiary Bharat Financial Inclusion (BFIL) as managing director & CEO, and Chief Financial Officer, respectively, countering that they have been appointed by Spandana Sphoorty Financial Ltd (SFFL). SFFL on Monday had announced the appointment of Saxena as its MD & CEO, and Damani as the President and CFO of the company.

In a clarification, IndusInd Bank said that “Shalabh Saxena and Ashish Damani are currently employed with bank’s wholly owned subsidiary, Bharat Financial Inclusion (BFFL), in the capacity of the Managing Director & Chief Executive Officer and Executive Director & Chief Financial Officer, respectively”.

“Neither, Shalabh Saxena nor Ashish Damani have tendered their resignation from the services of BFIL,” the bank said.

As per the terms of their employment, once the resignation is tendered, it is subject to acceptance by the board of directors of BFIL (board). Upon acceptance by the board, a specified notice period is also required to be served, IndusInd Bank said in a regulatory filing.

“However, as neither of them have tendered their resignations to BFIL, such due process has not been initiated,” it added.

Spandana had announced that Saxena accepted the position of Managing Director & Chief Executive Officer, and Damani as the President & Chief Financial Officer of the company, respectively.

The private sector lender also said that Saxena and Damani are prohibited from accepting employment at a competitor of BFIL (such as SSFL), unless approved in writing by the board of BFIL.

“As resignation from BFIL has not been tendered to the board by Shalabh Saxena and/or Ashish Damani, any purported acceptance by them of employment at SSFL would be in contravention of the terms of their employment with BFIL,” IndusInd Bank said.

Further, it said that they cannot be relieved from the services of BFIL until completion of the review related to certain transactions relating to the micro finance lending arm.

An ongoing review and the continued employment of Saxena and Damani is critical to the closure of such process, the bank said.

Earlier this month, the bank had refuted a whistleblower allegations on loan evergreening at BFIL as inaccurate and baseless, however, it admitted to disbursing 84,000 loans without customers consent in May due to a “technical glitch”.

“The bank strongly denies the allegations of ‘evergreening’. All the loans originated and managed by BFIL, including during the Covid period which saw the first and second waves ravaging the countryside, are fully compliant with the regulatory guidelines,” an official statement from the bank said on November 6.

“BFIL and the bank are in the process of evaluating and undertaking appropriate steps and actions, including strengthening the management of BFIL to continue its usual business operations under the able guidance of its management and the bank,” as per the filing.

Meanwhile, Spandana has sought time from Sebi to publish its financial results for quarter ended September 30, 2021, citing the recent management level changes at the company.

It was supposed to publish its financial results before November 14, 2021 — as the listed companies are required to publish the same to the stock exchanges within 45 days from the close of a quarter.

On November 2, Spandana informed that its Founder & Managing Director Padmaja Gangireddy had resigned from the company from immediate effect.

Hyderabad based Spandana Sphoorty is a rural-focussed non-banking financial company and a microfinance lender.

Stock of IndusInd Bank traded at Rs 990.95 apiece on BSE, up by 1.06 per cent from the previous close. Spandana Sphoorty scrip was down by 3.82 per cent at Rs 439.45.



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PSBs line up local AT-1 bonds issues, but private-sector lenders stay away, BFSI News, ET BFSI

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Public sector banks have started issuing AT-1 bonds in the domestic market more than a year after wriding down of such bonds of Yes Bank spooked the market

However, private sector banks are still keeping away and raising money via the instrument overseas, where interest rates are low.

At present, nearly three-four state-owned including SBI, Union Bank, Canara Bank and Bank of Baroda are looking to raise funds through AT-1 bonds.

In March this year, prodded by the Finance Ministry, the Securities and Exchange Board of India (Sebi) had relaxations in valuation norms. However, the main issues that AT1 bonds will continue to be treated as 100-year bonds stayed. The deemed residual maturity of Basel-III AT-1 bonds would be 10-year until March 31, 2022. Sebi said from April to September 2022, it would be valid at 20 years, and from October 2022 to March 2023, it would have a life span of 30 years. From April 2023, the residual maturity will be 100 years from the date of issuance of the bond.

In September SBI Rs 4,000 crore via additional Tier 1 bonds at a coupon rate of 7.72%, the first such issuance in the domestic market after Sebi issued new rules.

The plan

SBI is weighing options to raise money either through local additional tier-1 securities for the third time in this financial year or rupee-denominated ‘masala’ bonds for overseas investors. Bank of Baroda has approved the issuance of AT1 and AT11 bonds worth Rs3000 crore. Capital Raising Committee of our Bank has today approved the issuance of Basel III Compliant Additional Tier 1 (AT1) / Tier II Bonds for an aggregate total issue size of Rs3000cr in single or multiple tranches,” the bank said earlier this month.

What are AT1 bonds?

These are unsecured bonds which have perpetual tenure — or no maturity date. They have a call option, which can be used by the banks to buy these bonds back from investors. AT1 bonds are subordinate to all other debt and only senior to common equity. Mutual funds are among the largest investors in perpetual debt instruments, and hold over Rs 35,000 crore of the outstanding additional tier-I bond issuances of Rs 90,000 crore.

The mutual fund position

Mutual funds, which once used to buy heavily in AT1 bonds, are lukewarm about this asset class after the banking regulator last year ordered that these instruments be written off in Yes Bank’s state-sponsored bailout. Also, on March 10, Sebi had ordered mutual funds to cap ownership of bonds with special features at 10% of the assets of a scheme and value them as 100-year instruments from next month, potentially triggering a redemption wave. Later, the capital markets regulator eased valuation rules but with some riders after the finance ministry asked it to withdraw the directive to mutual funds.

The muted response by MFs had prompted the lenders to tap the overseas market.

Perpetual bond sales by banks have nearly halved to Rs 18,772 crore in FY21 from Rs 34,860 crore three years earlier.



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Sebi tweaks guidelines for processing of draft schemes filed with exchanges, BFSI News, ET BFSI

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New Delhi: Sebi on Thursday clarified on guidelines for processing of draft schemes pertaining to mergers and demergers filed by listed companies with the stock exchanges. Under the rule, listed entities desirous of undertaking a scheme of arrangement are required to submit certain documents to the exchanges.

Listed entities will be required to submit no objection certificate (NOC) from the lending scheduled commercial banks/financial institutions as well as debenture trustees, Sebi said in circular issued on Thursday.

This circular is an addendum to the one issued on Tuesday.

On Tuesday, the regulator said that such entities will be required to submit NOC from the lending scheduled commercial banks or financial institutions.

Apart from this, the listed entities are required to submit certain documents to the exchange, which includes a valuation report.

As per the revised guidelines, this report needs to be accompanied by an undertaking from the listed entity, stating that no material event impacting the valuation has occurred during the intervening period of filing the scheme documents with exchange and period under consideration for valuation.

“These amendments are aimed at ensuring that the recognised stock exchanges refer draft schemes to Sebi only upon being fully convinced that the listed entity is in compliance with Sebi Act, Rules, Regulations and circulars,” Sebi said.

Besides, the entities need to submit a declaration on any past defaults of listed debt obligations of the entities forming part of the scheme.

“The fractional entitlements, if any, shall be aggregated and held by the trust, nominated by the Board in that behalf, who shall sell such shares in the market at such price, within a period of 90 days from the date of allotment of shares, as per the draft scheme submitted to Sebi,” the regulator noted.

The listed company has to submit a report from its audit committee and the independent directors certifying that the listed entity has compensated the eligible shareholders.

Both the reports will be submitted within 7 days of compensating the shareholders. Sebi has also asked the exchange to ensure compliance with the guidelines and the non-compliance, if any, has to be submitted to the regulator on a quarterly basis.

Any misstatement or furnishing of false information will make the listed entity liable for punitive action. The guidelines will be applicable for all the schemes filed with the stock exchanges from the date of the circular.

There are certain requirements that need to be fulfilled before the scheme of arrangement is submitted for sanction by the National Company Law Tribunal. This includes that listed entities choose one of the stock exchanges having nationwide trading terminals as the designated stock exchange to coordinate with Sebi.

Scheme of arrangement is a court-approved agreement between a company and its shareholders or creditors.



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RBI wants open offer exemption for ARCs buying bad assets from banks, BFSI News, ET BFSI

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The Reserve Bank of India has sought open offer exemption from capital markets regulator Securities and Exchange Board of India (Sebi) for equity stake purchases by Asset Restructuring Companies (ARCs).

Under the current Takeover Code rules, commercial banks and public financial institutions are exempt from making an open offer if they acquire shares beyond a threshold by invoking a pledge. ARCs acquire loans that qualify as non-performing assets from banks.

Banks sell bad loans to an ARC for a lower price and cut losses. In this process, all the collateral that was pledged in favour of the bank will be transferred to ARC.

If the collateral exceeds 25% of the total equity of the company, then such pledge invocation will need the ARC to give an open offer to the minority investors.

Takeover code

Sebi’s takeover code is triggered when an entity acquires over 25% stake in a listed company. At this point, the acquirer has to declare an open offer and buy at least 26% more stake from public shareholders.

Until 2019, the open offer exemption was available to all classes of investors undertaking debt restructuring. In 2019, Sebi changed the rules because RBI dissolved all the debt restructuring schemes and instead all the liquidation was being done through the Insolvency and Bankruptcy Code (IBC).

Market participants say the open offer requirement also slows down the resolution process since a lot of minority shareholders would view it as their last chance to cash in on the shares of a company that is most probably going to be liquidated.

Revised norms

In 2018, the RBI revised norms for bad loan resolution. Until then, banks were allowed to recast the corporate debts by converting their debt into equity.

In February 2018, the central bank phased out the debt restructuring schemes and made it mandatory for banks to refer all bad loans to the IBC process after a specific timeline. This circular of RBI prompted Sebi to revise its rules.

The RBI is mulling easier rules for ARCs. Earlier this month, an expert panel led by former RBI executive director Sudarshan Sen submitted its report to the central bank aimed at simplifying regulations for these financial institutions.

What Sudarshan Sen panel says

In the interest of debt aggregation, the scope of Section 5 of the SARFAESI Act, and other related provisions, may be expanded to allow ARCs to acquire ‘financial assets’ as defined in the Act, for the purpose of reconstruction, not only from banks and ‘financial institutions’ but also from such entities as may be notified by the Reserve Bank.

Reserve Bank may consider permitting ARCs to acquire financial assets from all regulated entities, including AIFs, FPIs, AMCs making investment on behalf of MFs and all NBFCs (including HFCs) irrespective of asset size and from retail investors.

ARCs should be allowed to sponsor SEBI registered AIFs with the objective of using these entities as an additional vehicle for facilitating restructuring/ recovery of the debt acquired by them.



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