SEBI Board Decisions

SEBI announced
a slew of decisions taken at its board meeting yesterday, which are excpected
to have an impact on the capital markets, both primary and secondary.
International
Financial Services Centres (IFSCs)
SEBI’s board has approved the SEBI (International
Financial Services Centres) Guidelines, 2015, which will help establish IFSCs
such as the proposed Gujarat International Finance Tec-City. The idea appears
to be to create an environment for attracting domestic and global players to
engender vibrant financial markets. This requires several steps to be taken
including upgrading securities regulation to meet the requirements (an effort
that SEBI has undertaken with this decision), and several other aspects
including capital controls and taxation. As a post
by Anjali Sharma on Ajay Shah’s Blog argues, there is still a long way to go in
creating the required ecosystem. Nevertheless, SEBI’s changes are an important
step in the direction. While SEBI’s press release indicates some of the
changes, it would be necessary to await the fineprint before expressing
detailed comments.
Conversion of
Debt into Equity by Banks and Financial Institutions
The current regime is inefficient in its ability to
provide an option to banks and financial institutions (Fis) to convert their
loans into equity, especialy when the loans turn bad and the company and the
lenders wish to restructure them. This because the terms of the conversion are
dictated by the SEBI (Issue of Capital and Disclosure Requirements)
Regulations, 2009 (“ICDR Regulations”), which impose minimum pricing
requirements based on the past track record of the stock price of the company.
This may make it unviable for lenders to convert at such a minimum price, which
may not truly reflect the value of the company that is unable to pay its debts.
Moreover, any conversion of debt and acquisition of control would possibly
attract the provisions of the SEBI (Substantial Acquisitoin of Shares and
Takeovers) Regulations, 2011 (“Takeover Regulations”) triggering a mandatory
offer requirement.
In order to overcome these hurdles, SEBI has proposed
amendments to the ICDR Regulations and the Takeover Regulations whereby banks
and FIs may convert their debt into equity 
at a “price being as per a fair price formula prescribed and not being
less than the face value of the shares”. Of course, more details are awaited
regarding the precise mechanisms, but it is clear that the conversion may be
possible at either fair price or face value, whichever is higher. The more
onerous pricing norms set out in the ICDR Regulations would not be applicable.
This would confer greater options to lenders facing
repayment issues to exercise the right of conversion, and tackle bad loans. It
would also create additional options for restructuring by enabling lenders to
obtain control over the borrower company, and thereby reduce the moral hazard
problems for the borrower’s management.
Continuous
Disclosure Requirements
In an ongoing effort to enhance secondary market
disclosures and to bring it to the same level of stringency imposed on primary
market disclosures, SEBI has set out a list of proposals. For example, every
company is required to disclose the outcome of board meetings within 30 minutes
of closure of the meeting. Other episodic disclosures are to be made within 24
hours of occurrence of the relevant events. Similarly, there is an express
requirement for the company to clarify to the stock exchanges regarding
rumours, and also to confirm or deny any reported information to the stock
exchanges.
This last requirement makes it important for companies
to contain the information with significant transactions are being undertaken
(and before they are announced). Any leakage of information would lead to
rumours that would cause stock exchanges to confront company managements who
need to be prepared to provide updated positions. This is especially cumbersome
when the transaction that is the subject matter of the rumour is still in early
stages of discussion or negotiation where neither are the details clear nor is
there even any level of certainty that the deal will in fact happen. Companies
need to be cautious about such information management and must have detailed
plans to address such situations.
Municipal Bonds
A few months ago, SEBI had issued a discussion
paper
on creating a regime for isssue of debt securities by municipal
authorities. This is now being operationalized through the proposed SEBI (Issue
and Listing of Debt Securities by Municipality) Regulations, 2015. This will
likely see another important segment in the securities markets, but its depth
and time for evolution is yet unclear.

SEBI’s announcements yesterday include a few other
decisions which are contained in SEBI’s press
release
.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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