The Securities and Exchange Board of India (Sebi) has issued new norms covering a wide gamut of issues to boost transparency, mitigate risks, and streamline the processes in the capital market.
Sebi’s 17-point circular on Wednesday addresses various concerns relating to financial disclosures, borrowings, investing, corporates’ environmental, social, and governance (ESG) ratings, strengthening investors’ grievance redressal mechanism, etc.
In one of the major moves, the Sebi board approved amendments in mutual fund regulation in 1996 and devised a new framework for sponsors of mutual funds (MF) to give greater flexibility to the industry. "While strengthening the existing eligibility criteria for sponsors, introduced an alternative route to enable a diverse set of entities to become sponsors of MFs. Such entities, who otherwise may not have been eligible to be sponsors, include private equity funds, with requisite safeguards included in the proposal," said Sebi. Currently, the sponsor needs to contribute at least 40 per cent of the net worth of the asset management company. This amendment in MF regulation will pave the way for more entities to set up mutual funds in India and so more options for investors. The amendments also allow for “self-sponsored AMCs” to continue the mutual fund business, subject to the said AMCs fulfilling certain criteria.
Trading In Secondary Market Via UPI
The board has also approved the framework for setting up an “Application Supported by Blocked Amount” (ASBA)-like facility for trading in the secondary market through the Unified Payments Interface (UPI). ASBA will be optional for investors and stock brokers. “ASBA is an IPO application process under which the application money by an investor is blocked in the investor's bank account. Once it is approved, the application money is debited from the investor’s account. The investor earns interest on the blocked amount till it’s debited. In case the investor doesn't get an allotment, the block is released,” says Ashutosh K. Srivastava, Counsel at SKV Law Offices. A similar process will now be introduced in the secondary market.
The facility is based on the concept of “blocking of funds” for trading in the secondary market through UPI. “Under the proposed framework, stock brokers will be allowed to either directly settle the brokerage with the UPI clients or opt for CC’s (Clearing Corporation) facility to deduct the standard rate of brokerage from the UPI block of the clients,” Sebi said in the circular.
“Blocking of funds, in this context, essentially means that funds would remain in the account of the client but will be blocked in favour of the Clearing Corporation (CC) till the expiry date of the block mandate or till the block is released by the CC, whichever is earlier. CC can debit funds from the client account, limited to the amount specified in the block,” adds Srivastava.
Sebi said it would ensure “settlement visibility”, prevent “co-mingling” of clients’ funds and securities, and eliminate the custody risk of the client’s collateral, presently retained by the members, besides immediate unblocking of funds in the case of member default. In addition, it will bring efficiency to the secondary market ecosystem by “allowing the use of the same blocked amount towards margin and settlement obligations”, thus lowering the working capital requirements for the members, Sebi said.
Stringent Framework For ESG Investing
Sebi has taken various measures to enhance stewardship reporting requirements and to promote Environmental, Social and Governance (ESG) investing. These measures are taken to address the risk of mis-selling and greenwashing. According to the new framework, ESG schemes are required to invest at least 65 per cent of assets under management (AUM) in listed entities, where assurance on Business Responsibility and Sustainability Report (BRSR) Core is undertaken. It has also mandated third-party assurance and certification by the Board of AMCs on compliance with the objective of the ESG scheme. Sebi has also enhanced disclosures on voting decisions with a specific focus on environmental, social and governance factors. The fund is also required to provide the fund manager's commentary and case studies which inter-alia highlight how the ESG strategy is applied to the fund/investments.
Introduction Of BSSR Report
Sebi introduced the Business Responsibility and Sustainability Report, or BRSR, with a set of key performance indicators for listed entities to enhance the reliability of their ESG disclosures.
BRSR will be implemented in a phased manner, starting with the top 150 listed entities by market capitalisation from FY2023-24 and gradually expanding that list to 1,000 entities by FY2026-27. The regulator noted that since many “companies have significant ESG footprints in their value chain”, BRSR Core will ensure transparency, disclosure, and assurance of listed entities.
Regulating Index Providers
The board has also approved a proposal to regulate index providers to foster transparency and accountability in the governance of financial benchmarks in the securities market. Sebi plans to implement the framework in a phased manner to facilitate the market’s smooth transition.
Sebi has also introduced the General Information Document (GID) and Key Information Document (KID) concepts for bond and commercial paper issuance. “Sebi would like to bring parity for the private placement of bonds/debentures by increasing the disclosure requirements in line with public issues. This move seems to have brought in considering the maximum amount of transactions happening only through the private placement market compared to a few public issuances of bonds,” says Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP, a fixed income advisory firm.
The GID may contain management and other important disclosure requirements about the issuer, which will be valid for a year, and the KID may detailed information about the structure of the transaction, issuance term sheet, and so on, he adds.
Upstreaming Of Clients’ Funds
To mitigate credit risk on intermediaries or potential misuse of clients’ funds, the board proposed to introduce a regulatory framework for “upstreaming clients’ funds by stock brokers and non-bank clearing members (CMs) to Clearing Corporations (CCs)”. As per the changes, clients’ funds will be up-streamed by SBs and non-bank CMs to CCs in cash, as a lien on Fixed Deposit Receipts (subject to certain conditions), or pledge of units of Mutual Fund Overnight Schemes (MFOS) at the end of each trading day to ensure the money are is not retained by them. The first phase of this is expected to be implemented from July 1, 2023.
Other Key Changes
The market regulator has also announced a host of other changes to the rules that include:
Amendments to Stock Brokers’ Regulations to prevent and detect fraud by stock brokers
Backstop facility for specified debt funds during market dislocations.
Clarity on the roles and responsibilities of the trustees and board of the asset management companies of mutual funds, focusing on unitholder protection.
Amendments to Sebi rules to facilitate comprehensive and timely disclosure.
Extension of the “comply or explain” period for large corporates that borrow from the debt market to meet up to 25 per cent of their financing needs in a financial year.
Operationalise the online dispute resolution mechanism for investors across registered intermediaries and regulated entities.
