SEBI board meet this week: Separate delisting norms for PSUs, greater flexibility for AIFs, easier QIP norms on agenda

Market regulator Securities and Exchange Board of India's (Sebi) board meeting, scheduled this week on June 18, is set to take key decisions related to regulatory changes. The important issues likely to be deliberated are treatment of Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) as equity. Separate voluntary delisting framework for PSUs having 90 percent or more holding. Amendment in SEBI's regulations concerning employee stock options (ESOPs) so that founders of start-ups can retain the ESOPs even after IPO. Some other proposals related to FPIs, AIF etc are also likely to be placed before the board. But one key proposal of demerger of clearing corporations may not go to the board this time, as more discussion is required.

Here are the key proposals which are likely to go to the board:

REITs and InvITs as equity

Treatment of Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) as equity is among the important proposals that board is likely to deliberate in board meeting. It was a key demand of industry, and was pitched since long time. This will help inclusion of REITs and InvITs in equity indices. In some countries such products are treated as equity. Allowing more investment by mutual funds in REITs and InvITs is also a key proposal. SEBI has proposed raising equity funds net asset value in REITs and InvITs to 20% from 10%, while keeping the exposure of debt funds at 10%.

Another issue is of changes in the REIT and InvIT regulation for ease of doing business and clarification purpose, like clarification on definition of “public” for minimum public unitholding requirement, adjustment of negative cash flows at holding company with distributions received from SPV in calculation of net discount cash flow, alignment of timelines for submission of quarterly reports etc.

Separate guidelines for voluntary PSU delisting

Separate delisting mechanism for voluntary delisting of government companies, or so-called PSUs, is also one key proposal that is going to the board. Sebi had floated a consultation paper on the same. Many PSUs have low public shareholding, outdated business models or weak future outlook and higher market prices due to low free float, which is financially burdensome for the government to delist. Due to these drawbacks and to facilitate delisting of such PSUs, Sebi has proposed that a separate carveout for voluntary delisting should be created.

Easier ESOP rules for start-up founders

SEBI had floated a consultation paper to amend the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021. This is to provide relaxation on the issuance of ESOPs to founders of start-ups planning to come up with IPO. Sebi’s proposal is to allow such founders, identified as promoters or part of the promoter group, to hold or exercise ESOPs granted one year before the company’s IPO plan. As per existing rules, ESOPs are reserved for employees only. Currently, founders have to be classified as promoters before filing of IPO. But the issue is rules prohibit the issuance of ESOPs to promoters. With this amendment, Sebi wants to bring clarity.

Ease of doing business for QIPs

This proposal will help the companies to file only relevant details in the documents. As per existing norms, companies raising funds via QIP have to file lengthy documents, which is a time-consuming process and also leads to bulky documents. SEBI had also floated a consultation paper on ease of doing business for Qualified Institutional placement (QIP).

Also read: A dedicated portal for FPIs in works, SEBI in talks with exchanges and depositories

Flexibility to Alternative Investment Funds (AIFs) in co-investment

Flexibility to Alternative Investment Funds (AIFs) in co-investment opportunities to investors within the AIF structure is also a much-demanded proposal that is likely to be placed before the board. Co-investment is an industry practice that allows certain AIF investors to own additional shares in the investee companies. SEBI is keen to allowing AIFs to offer such co-investment opportunities through a co-investment vehicle (CIV) as a separate scheme of the AIF. Also, allowing manager of AIF to provide advisory to any investors, irrespective of whether the AIFs managed by it has made investment in such listed securities or not.

Easier norms for FPIs investing in only Government Bonds

Another Ease of Doing Business proposal for board meeting is to simplify the registration process and ease ongoing compliance obligations for FPIs investing in only Indian Government Bonds (IGBs), thus recognising the relatively lower risk associated with investments limited to sovereign debt instruments.

Appointment of new EDs

Appointment of Executive Directors (EDs) for Information Technology and legal department is also a proposal, which is likely to be placed before the board. Sebi has currently one ED for legal department, seeing the workload, the idea is appointment of additional EDs in the department. Seeing the importance of information technology department, the appointment of dedicated EDs for IT department is also proposed.

 Demerger of clearing corporation proposal unlikely this time

The key proposal of demerger of clearing corporation from exchanges is unlikely to go to board this time. As the proposal requires more discussion on the issue, SEBI has proposed for demerger so that clearing corporations become independent and exchanges don’t have to infuse capital. But exchanges have a different view from SEBI and want the existing structure to continue. Experts also believe that making clearing corporations independent without making them financially independent may not be a prudent idea for now.

Also read: Consultation paper soon to review sub-broker norms; higher net worth, educational criteria may be proposed

Settlement Schemes for NSEL brokers and VCF violations

A settlement scheme for commodity brokers entangled in NSEL matter may also go for board nod as information memorandum. Sebi had issued more than 300 show cause notices in the matter and securities appellate tribunal (SAT) had advised Sebi to consider such a proposal as per consent regulations. Sebi had found that commodity brokers violated various Sebi laws and were not fit and proper to be an intermediary. Multiple brokers had challenged the same in SAT.

Another scheme which may be placed before the board for information is for cases of violations of erstwhile venture capital funds (VCF). As per one source, aware of the matter, the scheme will be placed before the board as information memorandum. Normally, where industry wide or large number of violations are seen, Sebi comes up with specific settlement schemes.

Usually the matters where a regulatory change is required, they go for board nod. Sometimes, operational issues that do not require board approval but are significant for the market are placed before the board information memorandum.An email seeking comments from SEBI on the board proposals did not elicit any response.