Sebi unveils settlement scheme for NSEL brokers facing regulatory action

Markets regulator Sebi on Wednesday announced the introduction of a settlement scheme for certain stock brokers, who traded on the National Spot Exchange Ltd (NSEL) platform.

This long-awaited move is expected to bring major relief to traders whose funds have been stuck since the NSEL payment crisis in July 2013.

In a press release after its board meeting, Sebi said the scheme is for those stock brokers against whom enforcement actions have been initiated by the regulator.

By opting for the scheme, these brokers will have an opportunity to resolve pending proceedings and bring them to an expedited conclusion.

The Sebi board also cleared significant reforms to boost investment activity through Alternative Investment Funds (AIFs).

It approved a proposal to allow Category I and II AIFs to offer co-investment schemes under the AIF regulations. This will further facilitate AIFs and investors to co-invest and support capital formation in unlisted companies through AIFs.

Under the newly approved framework, 'Co-investment' refers to investments made by either the manager/sponsor of the AIF or an investor in Category I and II AIFs in unlisted companies, alongside the main AIF investment.

For instance, if an AIF scheme invests Rs 100 crore in a company, and the total capital requirement is Rs 300 crore, the fund manager can now offer an additional Rs 200 crore investment opportunity to investors under the scheme.

Previously, co-investments were primarily facilitated through the Portfolio Management Services (PMS) route.

However, a Sebi-appointed working group observed multiple challenges with this approach, such as the need for dual registration under both AIF and PMS regulations, and operational difficulties for unlisted companies managing a large number of shareholders.

To address these issues, the working group recommended enabling co-investment directly within the AIF framework. Now, Sebi has decided to allow the creation of a co-investment scheme (CIV scheme) within AIF regulations.

Each co-investment in an unlisted company will be handled through a separate CIV scheme. Further, certain regulatory requirements that apply to regular AIF schemes will be relaxed for these CIV schemes.

With this, investors now have two parallel co-investment routes -- the traditional PMS route and the newly introduced CIV scheme under the AIF umbrella.

On the settlement scheme for NSEL brokers, Sebi clarified that the proposal was approved by the competent authority, following the recommendations of its High Power Advisory Committee (HPAC). The matter was placed before the board for information and implementation.

The non-monetary terms of the settlement will vary, with voluntary debarment ranging from 1 to 6 months, depending on the severity of actions previously ordered. If a broker has already served a period of debarment under earlier Sebi directions that duration will be adjusted against the new term.

However, Sebi has specified that the scheme excludes certain brokers, specifically those named in charge sheets filed by the Economic Offences Wing, Enforcement Directorate, or other law enforcement agencies in the NSEL matter, as well as those declared defaulters at stock exchanges.

Last month, NSEL announced that it received over 90 per cent positive response from traders regarding a Rs 1,950-crore one-time settlement offer.

The board also approved a proposal to review the regulatory framework for Angel Funds under AIF regulations to rationalise their fundraising and enhance ease of doing business.

Also, the Sebi board has given the green signal to mandate select shareholders, including directors, key managerial personnel and current employees, to hold shares in demat form before filing an initial public offering (IPO) document.

These measures will help eliminate inefficiencies and risks associated with physical share certificates, including loss, theft, forgery, and delays in transfer and settlement.