Sebi clears norms for international finance centres

Norms for debt-equity conversion, foreign funds eased; municipal bonds introduced

India on Sunday moved a step closer to having a Singapore- or Dubai-like financial hub, with the Securities and Exchange Board of India (Sebi) approving a framework for international financial centres (IFCs).

After its board meeting in New Delhi, the market regulator issued broad guidelines for IFCs, aimed primarily at reversing the export of India’s financial markets. And, for the first time, the Sebi board allowed listing and trading of municipal bonds, also referred to as ‘muni’ bonds, to aid the government’s smart-city initiatives.

Sebi, among other things, eased the pricing formula for financial institutions to convert debt to distressed borrowers into equity. A framework to enable local fund managers to simultaneously manage foreign funds was issued, and some key initiatives planned for the coming financial year were also unveiled.

Sebi said IFCs, to be set up under the Special Economic Zone (SEZ) Act of 2005, would allow subsidiaries of both domestic and foreign stock exchanges to set up shop here. Issue of depository receipts and other securities by foreign issuers under the Foreign Currency Depository Receipts Scheme, 2014, will also be allowed.

“The guidelines provide for listing and trading of equity shares issued by companies incorporated outside of India, depository receipts, debt securities, currency and interest-rate derivatives, index-based derivatives and other such securities as might be specified by Sebi from time to time. Non-resident Indians, foreign investors, institutional investors, and resident Indians eligible under the Foreign Exchange Management Act (Fema) might participate in IFCs,” Sebi said in a press release.

Leading domestic bourses — the National Stock Exchange (NSE) and BSE — have already agreed, in principle, to set up international exchanges at the Gujarat International Finance Tec-city (GIFT), an equal joint venture between the Gujarat government and IL&FS that is likely to be the country’s first IFC.

“Sebi is one of the important regulators and it certainly opens up chances for setting up international exchanges. We are hoping other regulators like the Reserve Bank of India and the Insurance Regulatory and Development Authority of India will also frame rules by the end of this month,” said GIFT Managing Director Ramakant Jha.

With tax concessions and a relaxed regulatory framework, IFCs will aim at reversing — or at least stemming — the export of India’s financial market. Due to an easy regulatory environment and lower costs, a major portion of trading on India's benchmark stock indices and currency has shifted to markets like Singapore and Dubai.

DECISIONS AT A GLANCE

On IFC

• Guidelines to be set up under the SEZ Act, 2005
• Subsidiaries’ domestic & foreign stock market intermediaries to be allowed to undertake business at IFCs
• Issue of depository receipts, debt securities to be permitted under the FCDR scheme
• Listing of foreign firms’ shares, other derivative products to be allowed
• All investor categories eligible under Fema to be allowed
• MFs, AIFs set up in IFCs to be allowed to trade
• GIFT to be India’s first IFC

CONVERTING DEBT INTO EQUITY

• Formula eased for banks to convert debt to distressed borrowers into equity
• Conversion to be allowed at face value or new fair-price formula
• New rules to give lenders more flexibility to get control of distressed assets

DISCLOSURE FOR LISTED FIRMS

• To be made first to stock exchanges not later than 24 hours after an event
• Board meeting outcomes to be made public within 30 minutes of meetings
• Listed entities to proactively clarify rumours, reports

THE RECOMMENDATIONS

MUNI BONDS

• Municipalities to issue, to be listed and traded
• Will need to obtain rating from credit rating agencies
• Minimum tenure will be three years
• A municipality must not have defaulted in the previous 365 days
• Should have positive net worth for three preceding years

LOCAL FUND MANAGERS HANDLING FOREIGN MONEY

• Investment objective of both domestic and foreign fund to be the same
• At least 70% portfolio to be replicated
• Fund should be broad-based with at least 20 investors, single investor holding less than 25%

INITIATIVES PLANNED FOR FY16

• Extensive use of technology to ease investing process (eIPO, eKYC)
• New framework to help start-ups, young entrepreneurs in financing, listing needs
• Augmenting investor awareness & education initiatives, use of social media
• Improving enforcement processes, upgrading website

“We should also have a liberal tax regime and a more efficient legal system comparable with Singapore and Dubai, because we are in a direct competition with them. The government is working on these issues right now,” said Jha.

According to Sebi Chairman UK Sinha, the stock exchanges in IFCs will need an initial net worth of Rs 25 crore, as against the Rs 100-crore requirement for bourses present in India. For clearing corporations, the initial requirement has been revised from Rs 300 crore to Rs 50 crore.

However, these market infrastructure institutions will be required to meet the net worth criterion under the Sebi Act over three-five years.

The Sebi board also proposed to relax certain norms in its takeover code, to allow banks to convert their debt into equity. The regulator said the conversion could now take place through a “fair-price formula”, with face value as the floor price. Under the current framework, the conversion formula has often made it unviable for banks to go ahead with conversion. Both Sebi and RBI have been working together to arrive at a new framework to provide a balance to both lenders and the existing shareholders of companies.

“This is to revive such listed companies and provide more flexibility to lending institutions to acquire control over the company in the process of restructuring, for the benefit of all stakeholders,” said Sebi.

The market regulator also approved regulations for listing and issue of debt by municipalities through ‘muni’ bonds.

Municipal ‘muni’ bonds are a debt instrument issued by a state or municipality to finance its capital expenditure for construction of highways, bridges, schools, etc. Globally, there is a huge market for these bonds, as these offer higher coupon rates than government securities.

“Investors like insurance companies, and foreign and domestic pension funds, which earlier shied away from being part of this market (muni bonds), will now get the adequate comfort in these regulations,” said Sebi chief Sinha.

A few municipal corporations raised capital through issue of such bonds in the past, under guidelines from the Union government. But trading in those was not allowed.

The regulations for muni bonds stipulate that an issuer’s contribution to a project shall not be less than 20 per cent of the project cost. These issuances will have a minimum tenure of three years, and will have to mandatorily obtain credit ratings.

The Sebi chief added the board reviewed the requirement for continuous disclosures by listed entities. The regulator clarified the outcome of board meetings at listed firms would have to be disclosed to exchanges within 30 minutes of the meetings. All other disclosures would have to be made to stock exchanges within 24 hours of the events.

Also, before the Sebi board meeting, Finance Minister Arun Jaitley was briefed on the issues around implementation of Budget proposals and the progress on those.

“The Forward Markets Commission’s merger with Sebi was discussed. Certain steps are required; we are working on those,” said Sinha.