Sebi eases FPI norms, approves changes in rules prohibiting insider trading

The Securities and Exchange Board of India (Sebi) on Wednesday eased the process for on-boarding overseas investors. The market regulator also introduced an ‘informant mechanism’ to gather better evidence and crack down on insider-trading cases. The Sebi board clarified on the debt-to-equity ratio companies need to maintain to be eligible for buybacks.

Sebi said foreign portfolio investors (FPIs) would no longer be required to meet the ‘broad-basing’ criteria, under which at least 20 investors were required to establish a fund. Also, central banks that are not members of the Bank for International Settlements (BIS) will be allowed to register as FPIs. Offshore funds floated by Indian mutual funds will be permitted to invest in the domestic markets under the FPI route. 
 

More importantly, Sebi said it would rationalise the framework for issuance of participatory notes (P-notes), an instrument once very popular with overseas investors.

Ajay Tyagi, chairman, Sebi, said the existing FPI regulations were being virtually redrafted.

The changes announced with regard to the FPI framework are based on the final report submitted by the HR Khan committee in May. Experts said the easing could give a fillip to overseas investment in the country.

“This is a much-needed boost to the FPI route, which had been languishing on account of multiple issues in the past few months. Relaxing the broad-based criteria will open up the FPI route to a whole new category of entities that were unable to meet the 20-investor test. The most interesting part lies in the references made to the rationalisation of P-notes,” said Shruti Rajan, partner, Cyril Amarchand Mangaldas.

The easing of FPI norms comes at a time when overseas investors have pulled out over $3 billion from the domestic markets since the Union Budget.

However, Tyagi, when asked if the changes to the FPI framework were being done to soften the blow of higher taxes introduced in the Budget, said work on the new framework had started over a year ago.

Sebi said individuals providing “credible and original information” on insider trading would be rewarded. The reward will be 10 per cent of the disgorgement amount up to Rs 1 crore. The regulator will also put in place a protection system to protect the identity of the informant. Sebi plans to initiate action against those providing frivolous and vexatious information. Sebi will soon issue a process for reporting such information. “Insider-trading cases are difficult to prove. Until now, our enforcement has not been something to talk about. Through this, the informant will be incentivised to give information and we will have evidence to go ahead and take action,” Tyagi said.

Sebi clarified that the debt-to-equity ratio of companies doing buyback should be less than 2:1 on a consolidated basis. The regulator, however, said those with non-banking financial companies (NBFC) arms would be exempt from the rule as long as the NBFC arm had a debt-to-equity ratio of less than 6:1. The issue has gained prominence after Sebi rejected the proposed buyback of Larsen and Tourbo (L&T) on grounds that the company’s debt-to-equity ratio was too high. Most analysts had said the rejection was unfair as most of the debt was due to its NBFC arm, which typically has a high debt given the nature of its business.

Sebi has decided to amend the regulations on credit rating agencies (CRAs) to make it easier for them to obtain information from issuers. 

The regulator said CRAs and companies would have to enter into agreements where the latter would provide “explicit consent” to give details of any delay or default in servicing such borrowing. The move will provide CRAs more power to seek information from companies, which aren’t very forthcoming in sharing information on defaults.

“Rating agencies are often blamed but they should get information about the loans and defaults on time. We are trying to address this issue through this amendment,” Tyagi said.

Other decisions taken by the Sebi board included easing migration of companies listed on the small and medium enterprise (SME) exchange (now called the innovators growth platform) to the main board, relaxations for issuance of municipality bonds, and more leeway to mutual funds for investing in unlisted non-convertible debentures (NCDs).

The Sebi chairman hinted that minimum public shareholding may not be required to go down. 

“The liquidity is good, there cannot be any complaints on that front. On average, the free float is 50 per cent in India. We need to look at global figures and see whether it is mandated elsewhere. We need to look at the short-term and long-term implications on the market. The primary market right now is not doing well. All these issues need to be considered,” said Tyagi, adding that the issue had been taken up with the government.

Tyagi highlighted that there were 45 listed state-owned companies that were yet to meet the 25 per cent minimum public shareholding norms.

• Further easing of FPI registration process
• Clarity on debt-to-equity ratio for buyback eligibility; more leeway to companies with NBFC arms
• Easing of norms for migration of companies listed on SME exchange to main board
• Rules for muni bond issuances eased
• Decks cleared to help rating agencies obtain more info from issuers
• New whistle-blower mechanism to crack down on insider trading
• Informants to be rewarded up to ~1 crore for correct info