Regulatory updates

The Securities and Exchange Board of India (SEBI) in its board meeting dated 20 December 2022 took some key decisions pertaining to the following:

1. Amendment to SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (NCS Regulations) to facilitate sustainable finance while safeguarding against greenwashing⁶

With an increasing emphasis towards sustainable finance in India as well as around the globe, SEBI undertook a review of the regulatory framework for Green Debt Securities (GDS)⁷. The review is aimed to align it with the updated Green Bond Principles (GBP)⁸ recognised by the International Organisation of Securities Commission (IOSCO). Based on the review, SEBI has decided to make the following amendments to the NCS Regulations:

• Enhance the scope of the definition of GDS by including new modes of sustainable finance with respect to pollution prevention and control, eco-efficient products, etc.
• Introduce the concept of blue bonds (related to water management and marine sector)⁹, yellow bonds (related to solar energy) and transition bonds¹⁰ as sub categories of GDS. Additionally, in order to mitigate and address the concerns around green washing, SEBI would also prescribe certain basic dos and don’ts with respect to GDS

• Amendment to NCS Regulations to streamline appointment of nominee director and specify public issue timelines

SEBI approved the following amendments with a view to improve the regulatory mechanism of the corporate bond market:

• Appointment of a nominee director: SEBI in its board meeting decided that the issuers of listed debt securities must incorporate suitable provisions in their Articles of Association (AoA) regarding the obligation of the Board of Directors of the issuer to appoint the person nominated by its debenture trustee as a director in the event of default. Corresponding amendments are required to be made in the debenture trust deed. The existing listed debt issuers are required to ensure compliance with the same by 30 September 2023.
• Public issue timelines: Currently, there are no stipulations regarding the duration for which a public issue of debt securities or Non-Convertible Redeemable Preference Shares (NCRPS) should be kept open. In this regard, SEBI decided that public issue of debt securities and NCRPS must be kept open for subscription for a minimum period of three working days and a maximum period of 10 working days. The timelines are aligned with timelines provided for specified securities¹¹ under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations).

• Amendments regarding applicability of corporate governance norms, tenure of an auditor, computation of leverage and other provisions for REITs and InvITs

SEBI is its board meeting has specified that the corporate governance norms applicable for listed companies would also be applicable to Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs), irrespective of whether any debt security is issued by them. However, certain provisions of the SEBI (Listing Obligations and Disclosure Requirement) Regulations, 2015 (LODR Regulations) which are not directly applicable or are already specified for REIT/InvIT under respective Regulations would be carved out.

Further, in order to streamline the tenure of an auditor, computation of leverage, unclaimed/unpaid distribution, etc., SEBI has decided to introduce the following amendments to the SEBI (REIT) Regulations, 2014 and SEBI (InvIT) Regulations, 2014:

• Tenure of an auditor will be till the conclusion of the fifth annual general meeting of the unit holders
• Statutory auditor of REITs/ InvITs must undertake limited review of audit of all the entities or companies whose accounts are to be consolidated
• Investment in overnight fund would need to be considered as cash and cash equivalent, for the purpose of computation of leverage, and
• Unclaimed/unpaid distributions for REITs/InvITs must be transferred to the Investor Protection and Education Fund.

• Other amendments: Some other key amendments introduced by SEBI include:

• Strengthening focus and governance mechanisms in MIIs: Market Infrastructure Institutions (MIIS) are key pillars of a security market. Amendments have been made to their governance structure to strengthen focus and governance of MIIs, thus enhance stakeholder trust in the market.
• Amendment to SEBI (Buy-back of Securities) Regulations, 2018: In November 2022, SEBI had issued a public consultation with respect to buy-back of shares. Based on suggestions received from stakeholders, SEBI has issued certain amendments pertaining to buyback through stock exchange route and through tender offer route.
• Foreign Portfolio Investors (FPIs): SEBI has approved certain procedural requirements to streamline the onboarding process. This is likely to facilitate ease of doing business and reduce the time taken for registration of FPIs (such as acceptance of digital signatures, etc.).
• Alternative Investment Funds (AIFs) in credit default swaps: SEBI has permitted AIFs to participate in Credit Default Swaps (CDS) as protection buyers and sellers, subject to certain conditions.

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To access the text of the minutes of the SEBI board meeting, please click here

6. Greenwashing is a term used for describing a false, misleading or untrue action or set of claims made by an organisation regarding the positive impact that a company, product or service has on the environment.
7. The NCS Regulations define GDS as “a debt security issued for raising funds that are to be utilised for project(s) and/or asset(s) falling under any of the following categories, subject to the conditions as may be specified by SEBI from time to time”:
   1. Renewable and sustainable energy including wind, solar, bioenergy, other sources of energy which use clean technology,
   2. Clean transportation including mass/public transportation,
   3. Sustainable water management including clean and/or drinking water, water recycling,
   4. Climate change adaptation,
   5. Energy efficiency including efficient and green buildings,
   6. . Sustainable waste management including recycling, waste to energy, efficient disposal of wastage,
   7. Sustainable land use including sustainable forestry and agriculture, afforestation,
   8. Biodiversity conservation, or
   9. A category as may be specified by SEBI, from time to time.
8. The GBP issued by the International Capital Market Association (ICMA) are voluntary process guidelines that recommend transparency and disclosure and promote integrity in the development of the Green Bond market by clarifying the approach for issuance of a Green Bond. The four core components for alignment with the GBP are – Use of proceeds, Process for project evaluation and selection, Management of proceeds and Reporting
9. The Government of India has announced an initiative to develop country’s blue economy by rolling out the road map of project Sagarmala. According to the World Bank, blue economy refers to the “sustainable use of ocean resources for economic growth, improved livelihoods, and jobs while preserving the health of ocean ecosystem”. In this regard, deployment of blue bonds can emerge as an important source of finance for various aspects of the blue economy.
10. Transition bonds and transition financing are emerging concepts wherein the proceeds of issue would be utilised to fund a firm’s transition towards a reduced environmental impact and/or reduce the carbon emissions. Climate transition finance is most relevant and required by those industries with high greenhouse gas emissions which face the most complex climate-related transition challenges.
11. Specified securities refer to the equity shares and convertible securities

Regulation 102 of the LODR Regulations empowers SEBI to exempt certain entities from the strict enforcement of the requirement(s) of the LODR Regulations under certain circumstances, which include:

1. Any provision of Act(s), Rule(s), Regulation(s) under which a listed entity is established or is governed by, or is required to be given precedence to
2. The requirement may cause undue hardship to investors
3. The disclosure requirement is not relevant for a particular industry or class of listed entities
4. The requirement is technical in nature
5. The non-compliance is caused due to factors affecting a class of entities but being beyond the control of the entities.

Recently, SEBI, vide a notification dated 5 December 2022 issued certain amendments¹² to Regulation 102 of the LODR Regulations (the amendments). The amendments have inserted an additional criterion to the above specified circumstances and provide that SEBI may, after taking into consideration the interest of investors and securities market, relax the strict enforcement of the requirement(s) of the LODR Regulations, if an application is made by the Central Government with respect to its strategic disinvestment in a listed entity.

Effective date: The amendments are effective from the date of publication in the Official Gazette, i.e., 5 December 2022.

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12. The amendment has been issued vide the SEBI LODR (Seventh Amendment) Regulations, 2022 (LODR Amendment Regulations).

To access the text of the notification, please click here