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Mumbai, NFAPost: The Modi-led government has rolled out a slew of investment-friendly initiatives, including various company disclosure regulations, led by the Securities and Exchange Board of India (Sebi) in a circular released on Friday. Sebi issued this reform agenda after the annual board meeting in Mumbai.

In a statement, Sebi said the Board considered and approved the proposals relating to review of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 pertaining to issuers who have listed Non-Convertible Debt Securities, Non-Convertible Redeemable Preference Shares, Perpetual Debt Instruments and/or Perpetual Non-CumulativePreference shares.

Besides relaxing the lock-in period with regard to pre-IPO shareholding and approved the concept of ‘controlling shareholders’, the regulator also eased the framework for the issuance of stock options and increased the investment headroom for alternative investment funds (AIFs) in unlisted companies.

The regulator has halved the lock-in period to 18 months that promoters have to observe on 20% of their shareholding following an initial public offering (IPO). The lock-in on pre-IPO shareholding of non-promoters has also been halved to six months, while the minimum lock-in for venture capital funds will be six months from the date of acquisition, as against one year at present.

According to Arvian Research, the Sebi’s decision will have a far-reaching impact on the investment climate in the country as Indian companies are registering exponential grows and looking for financial help.

“It is really a positive move as it would encourage more companies to go public. The relaxation comes at a time when the IPO market is witnessing record fundraising led by new age internet companies,” said Arvian Resarch.

Currently, 20% of the promoter shareholding — known as minimum contribution — is subject to a three-year lock-in, and the rest of the shareholding is locked for one year. The lock-in on minimum contribution will be reduced to just 18 months if the IPO is entirely an offer for sale or where 50% of the issue proceeds are not meant for capital expenditure.

The requirement is to ensure that promoters have skin in the game, particularly in the case of companies that raise public capital for project financing or setting up a greenfield project. The reduction in the lock-in period for non-promoter shareholding, experts said, would boost the sentiment of private equity (PE) investors.

Commenting on the SEBI reforms, J Sagar Associates Partner Anand Lakra said private equity investors will welcome the reduction of the post IPO lock in period as they can get a timely exit.

“The big change is SEBIs in-principle approval to move to a controlling shareholder test instead of the current promoter test. While the actual text of the various impacted regulations is awaited, it would be good if SEBI also uses this opportunity to re-consider the definition of control,” said Anand Lakra

To reduce the disclosure burden at the time of IPO, Sebi has excluded companies having common financial investors from the definition of promoter group. Also, the disclosure requirements on group companies have been eased.

KEY DECISIONS

IPO disclosure requirements eased
Path being laid out to move towards ‘controlling shareholder’ concept
ESOP issuance framework relaxed
AIFs get more legroom to invest in unlisted firms
Shareholding criteria for MIIs tightened
Framework for issuance of corporate bonds eased
Controlling shareholders

The Sebi board agreed in-principle to replace the concept of promoter with ‘controlling shareholders’. This is expected to fuel the growth of domestic capital markets into a new era. However, as this will involve rewriting of several existing regulations, it will be done in a “smooth, progressive and holistic manner”.

Sebi has said it will engage with other regulators to resolve regulatory hurdles, prepare draft amendments to securities market regulations, and develop a road map for implementation of the proposed transition.

“In recent years, a number of businesses and new-age companies with diversified shareholding and professional management that are coming into the listed space are non-family owned and do not have a distinctly identifiable promoter group. Further, there is an increasing focus on better corporate governance with responsibilities and liabilities shifting to the board of directors and management,” Sebi said in a release.

This concept will help pin responsibility on individuals in cases where companies have zero promoter shareholding. The above changes approved by the Sebi board were part of a consultation paper it had issued in May. The obligation for physical disclosures would be done away with effect from April 01, 2022.

ESOP framework eased

The Sebi board approved the merger of ‘sweat equity’ and ‘share-based employee benefits’ regulations into a single regulation called the Sebi (Share-Based Employee Benefits and Sweat Equity) Regulations, 2021. Under this, the time period for appropriating the unappropriated inventory has been extended from the existing one year to two years.

Also, the minimum vesting period and the lock-in period for all share benefit schemes in the event of death have been done away with. The maximum yearly limit of sweat equity shares has been set at 15 per cent of the existing share capital within the overall limit of 25% for listed companies and 50 per cent in the case of companies listed on the Innovators Growth Platform.

“Implementing share-based schemes through trust at times poses some practical challenges. The flexibility now allowed to switch from trust to direct route would certainly help overcome these challenges,” said Harish Kumar, partner, L&L Partners.

Changes to AIF regulations

Sebi has done away with the investment restrictions on the residual portion of investable funds of venture capital funds (VCFs). It has also allowed category-I AIF–VCF to invest at least 75% of the investable funds in unlisted equity shares or in companies listed or proposed to be listed on an SME exchange.

“Now category-I VCFs will have more flexibility to deploy the 25% of the investible funds in debts of companies which they are not invested in, as well as investments in listed firms. This should make the category-I VCF structure more flexible for the investment managers,” said Yashesh Ashar, partner, Bhuta Shah & Co.

‘Fit and proper’ criteria

Sebi has said the ‘fit and proper’ status of persons acquiring less than 2% of its shareholding will also be made applicable to unlisted stock exchanges and depositories. Also, the existing requirement of seeking post-facto approval of Sebi for acquisitions between 2% and 5% shareholding has been discontinued for all eligible shareholders. The stock exchanges and depositories being systemically important institutions, their shareholding is tightly regulated by Sebi.

(This story is based on Sebi circular issued on Friday)

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