SEBI sets severe actions for non-compliance with MPS requirement.

imagesEUD3PM3DSecurities and Exchange Board of India (SEBI) has issued circular number CFD/CMD/CIR/P/2017/115 dated October 10, 2017 for non-compliance with the Minimum Public Shareholding (MPS) requirements.

Regulation 38 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“Listing Regulations”) mandates a listed entity to comply with the Minimum Public Shareholding(“MPS”) requirements specified in rules 19(2) and 19A of the Securities Contracts (Regulation) Rules, 1957 in the manner as specified by the Board from time to time.

In terms of sub regulation (1) of regulation 97 of the Listing Regulations, recognized Stock Exchanges are mandated to monitor compliance by listed entities with the provisions of the Listing Regulations.

Sub regulations (1) and (2) of regulation 98 of Listing Regulations inter-alia specify the liability of a listed entity or any other person for contravention and action which can be taken by the respective recognized stock exchange and the revocation of such action, in the manner specified by the Board.

In order to maintain consistency and uniformity of approach in the enforcement of MPS norms mandated under regulation 38 of the Listing Regulations, the below mentioned procedure shall be followed by the recognised stock exchanges/depositories, as applicable, with respect to non-compliant listed entities, their promoters and directors:

The recognized stock exchanges shall review compliance with MPS requirements based on shareholding pattern/ other filings made with them by the listed entities from time to time. Within 15 days from date of observation of non-compliance, the stock exchanges shall issue notices to such entities intimating all actions taken/ being taken as per this circular and advise the entities to ensure compliance.

On observing non-compliance:

  1. The recognized stock exchange shall impose a fine of ₹5,000/- per day of non-compliance on the listed entity and such fine shall continue to be imposed till the date of compliance by such listed entity.
  2. The recognized stock exchange shall intimate the depositories to freeze the entire shareholding of the promoter and promoter group in such listed entity till the date of compliance by such entity. The above restriction shall not be an impediment for the entity for compliance with the minimum public shareholding norms through the methods specified/approved by SEBI.
  3. The promoters, promoter group and directors of the listed entity shall not hold any new position as director in any other listed entity till the date of compliance by such entity. An intimation to this effect shall be provided to the listed entity by the recognized stock exchange and the listed entity shall subsequently intimate the same to its promoters, promoter group and directors.

In cases where the listed entity continues to be non-compliant for a period more than one year:

The recognized stock exchange shall impose an increased fine of ₹10,000/- per day of non-compliance on the listed entity and such fine shall continue to be imposed till the date of compliance by such listed entity.

The recognized stock exchange shall intimate the depositories to freeze all the securities held in the Demat account of the promoter and promoter group till the date of compliance by such entity. The above restriction shall not be an impediment for the entity with respect to compliance with the minimum public shareholding norms through the methods specified/approved by SEBI.

Direction as per above clause shall continue till the date of compliance by such entity.

The recognized stock exchange may also consider compulsory delisting of the non-compliant listed entity in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956, the Securities Contracts (Regulation) Rules, 1957 and the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009 as amended from time to time.

The recognized stock exchanges may keep in abeyance the action or withdraw the action in specific cases where specific exemption from compliance with MPS requirements under the Listing Regulations/ moratorium on enforcement proceedings has been provided under any Act, Court/Tribunal Orders etc.

In case it is observed that the listed entity has adopted a method for complying with MPS requirements which is not prescribed by SEBI under clauses (2)(i) to (vi) under SEBI circular No. CIR/CFD/CMD/14/2015 dated November 30, 2015 and approval for the same has not been obtained from SEBI under clause 2 (vii) of the said circular, the recognized stock exchanges shall refer such cases to SEBI.

With respect to the fines as stated above:

The amount of fine realized as per the above structure shall be credited to the “Investor Protection Fund” of the concerned recognized stock exchange.

If any non-compliant listed entity fails to pay the fine despite receipt of the notice as stated above, the recognized stock exchange may initiate appropriate action.

Upon intimation of compliance by the listed entity with the MPS requirements, the concerned recognized stock exchange shall, on being satisfied of such compliance:

– intimate the depositories to unfreeze the shares and other securities of the promoter and promoter group of the listed entity.

-intimate the listed entity that directions imposed in terms of clause 4.2.3 above shall not continue and the listed entity shall subsequently intimate the same to its promoters, promoter group and directors.

-disseminate the information in its website regarding the compliance achieved by the listed entity.

The recognized stock exchanges shall periodically disclose on their website the following–

-Names of non-compliant entities, amount of fine imposed, freezing of shares held by the promoters and promoter group and other actions taken against the entity;

-Status of compliance including details regarding fine paid by the entity.

The recognized stock exchanges may, having regard to the interests of investors and the securities market, take appropriate action in line with the principles and procedures laid down in this Circular. Any deviation, therefore, should not dilute the spirit of the policy contained herein and may be made on reasonable grounds to be recorded in writing.

In order to ensure effective enforcement of the Listing Regulations, the depositories, on receipt of intimation from concerned recognized stock exchange shall freeze or unfreeze the shareholding of the promoter and promoter group in such entity and the other securities held by them, as applicable.

The actions specified in this Circular are without prejudice to the power of SEBI to take action under the securities laws for violation of the MPS requirements.

The Stock Exchanges are advised to bring the provisions of this Circular to the notice of listed entities and also to disseminate the same on its website.

This Circular shall come into force with immediate effect.

For entities which are non-compliant as on date of this circular:

  1. The stock exchanges shall undertake such action as prescribed under abovementioned clauses of this circular depending on the period of non-compliance by the entity. However, the fines, as applicable, shall be imposed prospectively from the date of this circular.
  2. The provisions of this circular shall not apply to those entities where orders have already been passed by SEBI under provisions of Securities and Exchange Board of India Act, 1992/Securities Contracts (Regulation) Act, 1956 in relation to non-compliance with MPS requirements.

This Circular is issued under regulations 97, 98, 99 and 101 of Listing Regulations.

 

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Categorization and Rationalization of Mutual Fund Schemes

safe_harbour_rulesSecurities and Exchange Board of India (SEBI) has issued circular number SEBI/HO/IMD/DF3/CIR/P/2017/114 dated October 6, 2017 for “Categorization and Rationalization of Mutual Fund Schemes”

It is desirable that different schemes launched by a Mutual Fund are clearly distinct in terms of asset allocation, investment strategy etc. Further, there is a need to bring in uniformity in the characteristics of similar type of schemes launched by different mutual funds. This would ensure that an investor of mutual funds is able to evaluate the different options available, before taking an informed decision to invest in a scheme.

In order to bring the desired uniformity in the practice, across mutual funds and to standardize the scheme categories and characteristics of each category, the issue was discussed in Mutual Fund Advisory Committee (MFAC). Accordingly, it has been decided to categorize the MF schemes as given below:

Categories of Schemes, Scheme Characteristics and Type of Scheme (Uniform Description of Schemes):

The Schemes would be broadly classified in the following groups:

  1. Equity Schemes
  2. Debt Schemes
  3. Hybrid Schemes
  4. Solution Oriented Schemes
  5. Other Schemes

The details of the scheme categories under each of the aforesaid groups along with their characteristics and uniform description are given in the annexure to the circular.

The annexure given with the circular provides for the existing ‘type of scheme’ (presently mentioned below the scheme name in the offer documents/ advertisements/ marketing material/etc) would be replaced with the type of scheme (given in the third column of the tables in the Annexure) as applicable to each category of scheme. This will enhance the existing disclosure. Hence, for the purpose of alignment of the existing schemes with the provisions of this circular, change in “type of scheme” alone, would not be considered as a change in fundamental attribute.

In case of solution oriented schemes, there will be specified period of lock in as stated in the annexure. However, the said lock- in period would not be applicable to any existing investment by an investor, registered SIPs and incoming STPs in the existing solution oriented schemes as on the date on which such scheme is getting realigned with the provisions of this circular.

The investment objective, investment strategy and benchmark of each scheme shall be suitably modified (wherever applicable) to bring it in line with the categories of schemes listed above.

Definition of Large Cap, Mid Cap and Small Cap:

In order to ensure uniformity in respect of the investment universe for equity schemes, it has been decided to define large cap, mid cap and small cap as follows:

  1. Large Cap: 1st -100th company in terms of full market capitalization
  2. Mid Cap: 101st -250th company in terms of full market capitalization
  3. Small Cap: 251st company onwards in terms of full market capitalization

Mutual Funds would be required to adopt the list of stocks prepared by AMFI in this regard and AMFI would adhere to the following points while preparing the list:

  1. If a stock is listed on more than one recognized stock exchange, an average of full market capitalization of the stock on all such stock exchanges, will be computed;
  2. In case a stock is listed on only one of the recognized stock exchanges, the full market capitalization of that stock on such an exchange will be considered.
  3. This list would be uploaded on the AMFI website and the same would be updated every six months based on the data as on the end of June and December of each year. The data shall be available on the AMFI website within 5 calendar days from the end of the 6 months period.

Subsequent to any updation in the list, mutual funds would have to rebalance their portfolios (if required) in line with updated list, within a period of one month.

Process to be followed for categorization and rationalization of schemes:

Only one scheme per category would be permitted, except:

  1. Index Funds/ ETFs replicating/ tracking different indices;
  2. Fund of Funds having different underlying schemes; and
  3. Sectoral/ thematic funds investing in different sectors/ themes

Mutual Funds would be required to analyze each of their existing schemes in light of the list of categories stated herein and submit their proposals to SEBI after obtaining due approvals from their Trustees as early as possible but not later than 2 months from the date of this circular.

The aforesaid proposals of the Mutual Funds would also include the proposed course of action (viz., winding up, merger, fundamental attribute change etc.) in respect of the existing similar schemes as well as those that are not in alignment to the categories stated herein.

Subsequent to the observations issued by SEBI on the proposals, Mutual Funds would have to carry out the necessary changes in all respects within a maximum period of 3 months from the date of such observation.

Where there is a merger of schemes/change of fundamental attribute(s) of a scheme (as laid down under SEBI Circular No. IIMARP/MF/CIR/01/294/98 dated February 4, 1998), the AMCs would be required to comply with Regulation 18 (15A) of SEBI (Mutual Funds Regulation, 1996).

Mutual Funds are advised to strictly adhere to the scheme characteristics stated herein as well as to the spirit of this circular. Mutual Funds must ensure that the schemes so devised should not result in duplication/minor modifications of other schemes offered by them. The decision of SEBI in this regard shall be binding on all the mutual funds.

Applicability of this circular:

  1. All existing open ended schemes of all Mutual Funds
  2. All such open ended schemes where SEBI has issued final observations but have not yet been launched.
  3. All open ended schemes in respect of which draft scheme documents have been filed with SEBI as on date
  4. All open ended schemes for which a mutual fund would file draft scheme document.

This circular is issued in exercise of the powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act, 1992, read with the provision of Regulation 77 of SEBI (Mutual Funds) Regulations, 1996 to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.

 

Investments by FPIs in Government Securities

pledgeSecurities and Exchange Board of India (SEBI) has issued circular number IMD/FPIC/CIR/P/2017/113 dated October 04, 2017 for “Investments by FPIs in Government Securities.”

RBI in its Fourth Bi-monthly Policy Statement for the year 2015-16, dated September 29, 2015 had announced a Medium Term Framework (MTF) for FPI limits in Government securities in consultation with the Government of India. Accordingly, SEBI had issued circulars CIR/IMD/FPIC/8/2015 dated October 06, 2015, IMD/FPIC/CIR/P/2016/45 dated March 29, 2016 and IMD/FPIC/CIR/P/2016/107 dated October 03, 2016, IMD/FPIC/CIR/P/2017/30 dated April 03, 2017 and IMD/FPIC/CIR/P/2017/74 dated July 04, 2017 regarding the allocation and monitoring of FPI debt investment limits in Government securities.

It has been decided to revise the limit for investment by FPIs in Government Securities, for the October – December 2017 quarter, as follows:

Limit for FPIs in Central Government securities shall be enhanced to INR 189,700 cr.

Limit for Long Term FPIs (Sovereign Wealth Funds (SWFs), Multilateral Agencies, Endowment Funds, Insurance Funds, Pension Funds and Foreign Central Banks) in Central Government securities shall be revised to INR 60,300 cr.

The debt limit category of State Development Loans (SDL) shall be enhanced as follows:

  1. SDL-General shall be enhanced to INR 30,000 cr
  2. SDL-Long Term shall be enhanced to INR 9,300 cr

Accordingly, the revised FPI debt limits would be as follows:

Type of Instrument Upper Cap as on July 04, 2017 (INR cr) Revised Upper Cap with effect from October 03, 2017

(INR cr)

Government Debt – General 187,700 189,700
Government Debt – Long Term 54,300 60,300
SDL – General 28,500 30,000
SDL – Long Term 4,600 9,300
Total 275,100 289,300

All other existing conditions with regard to allocation and monitoring of debt limits shall continue to apply.

 

Deferment of Implementation of SEBI Circular dated August 04, 2017

eodbBoth National Stock Exchange of India Limited (NSE) and Bombay Stock Exchange (BSE) had issued circulars mentioning deferment of implementation of SEBI Circular dated August 04, 2017

Securities and Exchange Board of India (SEBI) circular dated August 04, 2017 titled “Disclosures by listed entities of defaults on payment of interest/ repayment of principal amount on loans from banks / financial institutions, debt securities, etc” contains that –

“SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“SEBI LODR Regulations”) currently require disclosure of material events / information by listed entities to stock exchanges. Specific disclosures are required under the SEBI LODR Regulations in certain matters such as delay / default in payment of interest / principal on debt securities, including listed Non-Convertible Debentures, listed Non-Convertible Redeemable Preference Shares, Foreign Currency Convertible Bonds (FCCBs) etc. Similar disclosures are presently not stipulated with respect to loans from banks and financial institutions.

Corporates in India are even today primarily reliant on loans from the banking sector. Many banks are presently under considerable stress on account of large loans to the corporate sector turning into stressed assets / Non Performing Assets (NPAs). Some companies have also been taken up for initiation of insolvency and bankruptcy proceedings.

The circular shall be applicable to all listed entities which have listed any of the following: specified securities (equity and convertible securities), non-convertible debt securities and non-convertible and redeemable preference shares.

The disclosures shall be made to the stock exchanges when the entity has defaulted in payment of interest / instalment obligations on debt securities (including commercial paper), Medium Term Notes (MTNs), Foreign Currency Convertible Bonds (FCCBs), loans from banks and financial institutions, External Commercial Borrowings (ECBs) etc.

Default’ for the purpose of this circular shall mean non-payment of interest or principal amount in full on the pre-agreed date.

This circular shall come into effect with effect from October 1, 2017. This is to enable listed companies to put appropriate systems in place for prompt submission of disclosures as stipulated in this circular.”

SEBI vide Press Release PR No. 59/2017 dated September 29, 2017 has deferred the implementation of the aforementioned circular until further notice.

Listed Companies are required to take note of the same.

 

Review of norms for participation in derivatives by Mutual Funds

bse circularSecurities and Exchange Board of India (SEBI) has issued circular number SEBI/HO/IMD/DF2/CIR/P/2017/109 dated September 27, 2017 for review of norms for participation in derivatives by Mutual Funds

Please refer to SEBI circulars No.MFD/CIR/15/19133/2002 dated September 30, 2002, No.SEBI/MFD/CIR No.03/158/03 dated June 10, 2003, No.DNPD/CIR-29/2005 dated September 14, 2005 and No.IMD/DF/11/2010 dated August 18, 2010 on investment in derivatives by mutual funds and disclosures thereof.

In order to enable mutual funds to hedge the debt portfolio from interest rate volatility, SEBI held a series of meetings with various stakeholders of the mutual fund industry. Accordingly, it has been decided to implement the following:

Exposure Limits

In addition to the existing provisions of SEBI circular No.IMD/DF/11/2010 dated August 18, 2010, the following are prescribed:

To reduce interest rate risk in a debt portfolio, mutual funds may hedge the portfolio or part of the portfolio (including one or more securities) on weighted average modified duration basis by using Interest Rate Futures (IRFs). The maximum extent of short position that may be taken in IRFs to hedge interest rate risk of the portfolio or part of the portfolio, is as per the formula given below:

(Portfolio Modified Duration* Market Value of Portfolio)


(Futures Modified Duration*Futures Price/PAR)

In case the IRF used for hedging the interest rate risk has different underlying security(s) than the existing position being hedged, it would result in imperfect hedging.

Imperfect hedging using IRFs may be considered to be exempted from the gross exposure, up to maximum of 20% of the net assets of the scheme, subject to the following:

a) Exposure to IRFs is created only for hedging the interest rate risk based on the weighted average modified duration of the bond portfolio or part of the portfolio.

b) Mutual Funds are permitted to resort to imperfect hedging, without it being considered under the gross exposure limits, if and only if, the correlation between the portfolio or part of the portfolio (excluding the hedged portions, if any) and the IRF is at least 0.9 at the time of initiation of hedge. In case of any subsequent deviation from the correlation criteria, the same may be rebalanced within 5 working days and if not rebalanced within the timeline, the derivative positions created for hedging shall be considered under the gross exposure computed in terms of Para 3 of SEBI circular dated August 18, 2010. The correlation should be calculated for a period of last 90 days.

Explanation: If the fund manager intends to do imperfect hedging upto 15% of the portfolio using IRFs on weighted average modified duration basis, either of the following conditions need to be complied with:

The correlation for past 90 days between the portfolio and the IRF is at least 0.9 or

The correlation for past 90 days between the part of the portfolio (excluding the hedged portions, if any) i.e. at least 15% of the net asset of the scheme (including one or more securities) and the IRF is at least 0.9.

At no point of time, the net modified duration of part of the portfolio being hedged should be negative.

The portion of imperfect hedging in excess of 20% of the net assets of the scheme should be considered as creating exposure and shall be included in the computation of gross exposure in terms of Para 3 of SEBI circular dated August 18, 2010.

The basic characteristics of the scheme should not be affected by hedging the portfolio or part of the portfolio (including one or more securities) based on the weighted average modified duration.

Explanation: In case of long term bond fund, after hedging the portfolio based on the modified duration of the portfolio, the net modified duration should not be less than the minimum modified duration of the portfolio as required to consider the fund as a long term bond fund.

The interest rate hedging of the portfolio should be in the interest of the investors.

Mutual Fund schemes may imperfectly hedge their portfolio or part of their portfolio using IRFs, subject to the following conditions:

Prior to commencement of imperfect hedging, existing schemes shall comply with the provisions of Regulation 18 (15A) of SEBI (Mutual Funds) Regulations, 1996 and all unit holders shall be given a time-period of at least 30 days to exercise the option to exit at prevailing NAV without charging of exit load.

The risks associated with imperfect hedging shall be disclosed and explained by suitable numerical examples in the offer documents and also needs to be communicated to the investors through public notice or any other form of correspondence.

In case of new schemes, the risks associated with imperfect hedging shall be disclosed and explained by suitable numerical examples in the offer documents.

Disclosure of Derivative Positions

In addition to the existing provisions, the mutual funds shall also make the following disclosures:

Separately disclose the hedging positions through IRF (both perfectly and imperfectly) in respective debt portfolios as per the format prescribed in para-13 of SEBI circular no.IMD/DF/11/2010 dated August 18, 2010,

Investment in interest rate derivatives (both IRS/IRF) shall also be disclosed in the monthly portfolio disclosure as per para-H of SEBI Circular No. CIR/IMD/DF/21/2012 dated September 13, 2012 and

Disclosure of the details of interest rate derivatives (both IRS/IRF) used for hedging along with debt and money market securities transacted on its website and also forwarded to AMFI as per para-B(3) of SEBI Circular No.Cir/IMD/DF/6/2012 dated February 28, 2012.

Applicability

The aforesaid circular stands modified to the said extent from the date of this circular and all other provisions of the above mentioned circulars remains unchanged.

 

Clarification on e-form DPT-3

clarificationMinistry of Corporate Affairs (MCA) has issued General Circular No. 11 /2017 dated 27th September,2017 for Clarification on the timelines for making applicable/available new Form DPT-3 issued vide the Companies (Acceptance of Deposits) Second Amendment Rules,2017

This Ministry, vide notification number G.S.R. 1172(E) dated 19th September, 2017 has issued the Companies (Acceptance of Deposits) Second Amendment Rules, 2017 thereby amending the Companies (Acceptance of Deposits) Rules, 2014. The said amendment Rules inter-alia provide for substitution of existing Form DPT-3 with a new Form DPT-3.

Stakeholders have sought clarifications with respect to timelines of the applicability/availability of the new Form DPT-3.

The matter has been examined and it is hereby clarified that new Form DPT-3 shall be made available for E-filing after the month of November, 2017 and till the time the new e-form is made available, the existing e-form can be used.

 

Consultancy Paper for further simplification of company incorporation

eodbDuring the past two years several initiatives have been taken by Ministry of Corporate Affairs (MCA) which includes centralisation of name reservation and incorporation services through establishment of Central Reservation Centre (CRC) at Manesar.

SPICe form has been introduced whereby the procedure of obtaining DIN by the proposed directors, name reservation, incorporation, allotment of PAN and TAN were integrated into one service facilitating incorporation of a company, thereby enabling starting a business in a day or two, which earlier used to take substantial time. However, availing DIN allotment or name reservation service independently is also simultaneously available to cater to those stakeholders who wish to proceed with incorporation in a piecemeal manner. Suggestions are invited from stakeholders for further simplification of process aimed at further easing the starting of a business, which may be filed online at comments.nameintegration@mca.gov.in on or before 05/11/2017.