SEBI Tightens SME IPO Norms, Assigns Responsibility to MIIs, RIs for AI Usage
Moneylife Digital Team 19 December 2024
Market regulator Securities and Exchange Board of India (SEBI) has approved a series of measures, including stricter regulatory norms for initial public offerings (IPOs) of small and medium enterprises (SMEs), a comprehensive overhaul of investment banking regulations, and an expanded definition of unpublished price-sensitive information (UPSI). SEBI also approved reforms to boost the ease of doing business for debenture trustees, environmental, social and governance (ESG) rating providers, infrastructure investment trusts (InvITs) and real estate investment trusts (REITs) and small and medium (SM) REITs.
 
Further, the SEBI board, at its meeting on Wednesday, also decided to introduce specific timelines for fund deployment in new fund offers (NFOs) and ease compliance burdens for employees of asset management companies (AMCs).
 
SEBI also decided to assign responsibility for the use of artificial intelligence (AI) tools by market infrastructure institutions (MIIs), registered intermediaries (RIs) and other regulated persons. It says, "The Regulations shall be applicable irrespective of the scale and scenario of adoption of such tools for conducting its business and servicing its investors. Such SEBI-regulated persons shall be solely responsible for the privacy, security and integrity of investors' and stakeholders' data, including data maintained by it in a fiduciary capacity, throughout the processes involved, the output arising from  the  usage  of  such  tools  and techniques it relies upon or deals with and the compliance with applicable laws in force."
 
The SEBI board also approved the proposal for mandating any kind of payment, including dividend or interest or redemption or repayment by a listed entity, to its security-holders in electronic form only. "In case of returned dividend, interest or redemption, there will be an obligation on the company to inform the demat account holders by way of registered post as well as by email and SMS to update their correct bank account details. The companies and depositories shall engage in a sustained campaign to facilitate that investors populate their bank account details so as to receive their payments in electronic mode. The amendment will take effect from a date subsequent to such sustained campaign," it says.
 
For SME IPO, SEBI has come out with a stricter regulatory framework by introducing a profitability requirement. "An issuer shall make an IPO, only if the issuer has an operating profit (earnings before interest, depreciation and tax) of Rs1 crore from operations for any two out of three previous financial years at the time of filing of its draft red herring prospectus (DRHP). Offer for sale (OFS) by selling shareholders in SME IPO shall not exceed 20% of the total issue size and selling shareholders cannot sell more than 50% of their holding."
 
SEBI also introduced phased lock-in for promoters. It says, "Lock-in on promoters' holding held in excess of minimum promoter contribution (MPC) to be released in phased manner i.e. lock-in for 50% promoters' holding in excess of MPC shall be released after one year and lock-in for remaining 50% promoters' holding in excess of MPC shall be released after two years. SME issues shall not be permitted, where objects of the issue consist of repayment of loan from promoter, promoter group or any related party, from the issue proceeds, whether directly or indirectly."
 
The market regulator announced measures towards ease of doing business and InvITs, REITs and SM REITs. It says, "The Board approved ease of doing business proposals for REITs and InvITs which included, permitting inter-se transfer of locked-in units amongst a sponsor group entity, providing the definition of 'common infrastructure' in the REIT Regulations, permitting investment in interest rate derivatives for hedging (as a user or client) subject to Reserve Bank of India (RBI) guidelines as applicable and providing three months for filling up of vacancy of director."
 
Further, SEBI approved investor protection measures where REITs or InvITs will be permitted to invest in unlisted equity shares, but only of a company which provides property management, property maintenance, housekeeping and project management and other incidental services to the REIT and InvIT assets subject to conditions. REITs and InvITs will also be permitted to invest in liquid mutual funds schemes only where the credit risk value is at least 12 and falls under the class A-I in the potential risk class matrix and expanding the roles and responsibilities of the trustee to strengthen and enhance their role for the benefit of unit-holders, SEBI says.
 
The market regulator approved three proposals to facilitate the ease of doing business related to the activities of SM REITs. It includes standardising the disclosures in the scheme offer document including bifurcation of the scheme offer document into key information of the trust (KIT) and key information of the scheme (KIS), manner of filing and processing of KIT and KIS, manner of updation of KIT and preparation of scheme offer document in a manner which facilitates automated processing. Guidelines for the public issue of units by a scheme of SM REIT including allocation in the public issue, subscription period, price band, allotment procedure in case of oversubscription and minimum subscription amount and alignment of certain provisions pertaining to investment conditions and borrowings for SM REITs vis-à-vis REITs are also proposed by SEBI.
 
The SEBI board approved amendments to SEBI (Mutual Funds) Regulations, 1996 for relaxing the regulatory framework related to 'alignment of interest of the designated employees of the AMCs with the interest of the unitholders' to facilitate ease of doing business for mutual funds while mandating disclosure of results of stress testing of all mutual fund schemes. "The relaxations inter alia pertain to the reduction of the minimum investment amount, reduction of frequency of disclosure, the lower lock-in period for employees who have resigned, empowering nomination and remuneration committee to verify compliances by the designated employee, relaxed requirements for employees managing liquid funds and relaxed redemption norms."
 
To provide a timeline within which the fund manager would be required to deploy the funds garnered in a new fund offer (NFO) as per the required asset allocation of the scheme, the market regulator says the amendment encourages AMCs to collect only as much funds in NFOs as can be deployed in a reasonable period of time (i.e., ordinarily 30 days), since in the open-ended funds investors always have the option to enter the scheme at a later date at the prevailing net asset value (NAV).
 
The market regulator also decided to amend SEBI (Prohibition of Insider Trading) Regulations, 2015 to include UPSI events in the illustrative list 17 out of the 27 items not already covered from events considered as material events requiring disclosures. "Further, for events emanating from outside the company, flexibility has been provided to make entries in the structured digital database on a deferred basis, within two days, as well as to not have mandatory trading window closure. This has been done to enhance the ease of doing business (EODB) for listed companies," SEBI says.
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