Regulatory updates

For AMCs, currently, the requirement for an Audit Committee is at the level of trustees of Mutual Funds. Based on the recommendation of Mutual Fund Advisory Committee (MFAC), SEBI, vide circular has decided that with effect from 1 August 2022, the AMCs of mutual funds would be required to constitute an Audit Committee. While the circular prescribes certain guidelines for the audit committee of the AMC, it requires the audit committee members to also comply with the relevant provisions of the Companies Act, 2013 and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations).

Key features of the Audit committee of the AMC are as follows:

Role

The Audit Committee of the AMC is responsible for oversight of the financial reporting process, audit process, company’s system of internal controls, compliance to laws and regulations and other related process, with specific reference to operation of the Mutual Fund business of the AMC. It should also ensure that the rectifications suggested by the internal and external auditors have been implemented.

Membership

The audit committee of AMC would have:

• Minimum three directors as members
• At least two-third members⁵ of the audit committee should be independent directors of AMC
• The members of the audit committee would be appointed by the Board of Directors of AMC
• All members of audit committee should be persons with ability to read and understand the financial statements and at least one member should have experience and background in finance and accounts
• The Chairperson of the audit committee should be an independent director, with adequate experience in the areas of finance and financial services.

Meetings

The Chairperson of the audit committee can call for meetings, as and when required. However, the following should be noted:

• At least four meetings should be called in a financial year and not more than 120 days should elapse between two meetings
• The quorum for meeting should either be two members or one third of the members of the Audit Committee⁵, whichever is greater, with at least two independent directors.

Reporting

• The internal auditor is required to submit its report to the Audit Committees of AMC and the Board of AMC.
• The Audit Committee of AMC should forward their observations on internal audit to the Trustees.

Powers and responsibility

The powers and responsibility of the audit committee is given hereunder:

• Financial reporting: This includes oversight of the financial reporting process, considering all accounting policy issues, including changes in accounting policies and practices, reviewing the audit opinion of statutory auditor, recommending to the AMC board regarding adoption of financial statements, and other relevant matters.
• Audit matters (both internal and statutory audit) and internal controls: Recommending the appointment, re-appointment, replacement, or removal of statutory or internal auditor, and fixing fees for audit and other services of statutory auditor. With regard to internal audit, the audit committee is required to review the scope of internal audit and internal audit reports. With regard to investigations and inspections of the entity, the audit committee is required to review the findings of internal investigations, regulatory inspection reports, adequacy of internal control systems, etc. Audit committee should also Interact with internal and statutory auditor and audit committee of the trustees at least once in a year.
• Regulatory, compliance and other functions: Reviewing compliance reports under all applicable laws, policy on insider trading, etc.

In addition to these responsibilities, the AMC Board may also assign such other responsibilities as it may deem fit.

---

5. Where this results into a fraction, it should be rounded up to a higher number

To access the text of SEBI circular, please click here

On 25 January 2022, SEBI has issued various amendments to the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (UTP Regulations)

Some of the key amendments issued are as follows:

List of fraudulent and unfair trade practices (Regulation 4) – Regulation 4 of the UTP regulations deals with prohibition of manipulative, fraudulent and unfair trade practices. Sub-regulation (2) of regulation 4 of the UTP regulations provides a list of practices that would be considered manipulative, fraudulent or an unfair trade practice.

One such practice, for which an amendment has been issued includes, ‘disseminating information or advice through any media, whether physical or digital, which the disseminator knows to be false or misleading in a reckless or careless manner and which is designed to, or likely to influence the decision of investors dealing in securities’ (emphasis added to highlight the change)

Power of investigative authority (Regulation 6): Regulation 6 prescribes the powers of investigative authority with regard to conduct of investigation.

• One such power includes to keep the books, registers, other documents, and records (records) produced in custody. Earlier, investigative authorities were permitted to keep custody of the said records for a maximum period of one month, which could be extended to six months. The amendments have now increased the maximum period up to which the investigative authorities can keep the records to six months.
• Additionally, other powers have been given to the investigative authorities, such as to call for information or records from any person, bank, authority, board, or corporation in respect of transactions in securities under investigation, make an application to the judge of the designated court for seizure of records, and retaining custody of records for a stipulated period.

Manner of service of summons and notices issued by the Board (Regulation 11A) – The amendments have also prescribed the modes by which summons and notices can be issued by SEBI to the person under investigation. The following modes have been prescribed:

1. By delivering or tendering it to that person or his duly authorised agent; or
2. By sending it to the person by fax or electronic mail or electronic instant messaging services along with electronic mail or by courier or speed post or registered post
3. In case of failure to serve a summons or notice through any one of the modes provided above, the summons or notice may be affixed on the outer door or some other conspicuous part of the premises in which the person resides or is known to have last resided, or carried on business or personally works, or last worked, for gain and a written report thereof should be prepared in the presence of two witnesses.
4. In case of failure to affix the summons or notice on the outer door as provided, the summons or notice should be published in at least two newspapers, one of which should be in an English daily newspaper having nationwide circulation and another should be in a newspaper in the regional language where that person was last known to have resided or carried on business or personally worked for gain.

Effective date: These amendments are effective from 25 January 2022.

To access the text of SEBI circular, please click here

According to Regulation 22(e) of Mutual Fund Regulations (MF regulations)⁶, no change in the control of the Asset Management Company (AMC), directly or indirectly, can be made unless the following conditions are complied with:

• Prior approval of the trustees and SEBI is obtained
• A written communication about the proposed change is sent to each unitholder and an advertisement is given in one English daily newspaper having nationwide circulation and, in a newspaper published in the language of the region where the Head Office of the mutual fund is situated; and
• The unitholders are given an option to exit on the prevailing Net Asset Value (NAV) without any exit load within a time period not less than 30 calendar days from the date of communication.

SEBI circular dated 4 March 2021, inter alia, prescribed the same procedure to be followed for the change in control of an AMC.

However, the Companies Act, 2013 requires sanction of National Company Law Tribunal (NCLT) to the proposed change in control of an AMC involving scheme of arrangement.

Clarification

To streamline the process of providing approval to the proposal for change in control of an AMC under a scheme of arrangement, the following procedure has been clarified by SEBI vide circular dated 31 January 2022:

• The application seeking approval for the proposed change in control of the AMC should be filed with SEBI for an in-principle approval prior to filing the application with the NCLT
• The validity of such in-principle approval would be three months from the date of issuance, within which the relevant application should be made to NCLT
• Once an order is received from NCLT, the applicant would be required to submit prescribed documents for a final approval of SEBI

Effective date: The provisions of this circular would be applicable to all the applications for change in control of AMC for which the scheme(s) of arrangement are filed with NCLT on or after 1 March 2022

---

6. Regulation 22 of the MF regulations specifies the terms and conditions to be complied by the AMC

To access the text of SEBI circular dated 31 January 2022, please click here

To access the text of the SEBI circular dated 4 March 2021, please click here

In November 2021, SEBI had issued certain amendments to its master circular on schemes of arrangement for listed entities dated 22 December 2020. The amendments mainly prescribe additional documents to be submitted with the stock exchanges before the scheme is sanctioned by the National Company Law Tribunal (NCLT). The documents, inter alia, included a No Objection Certificate (NOC) from lending scheduled commercial banks/financial institutions/ debenture trustees.

Amendment

SEBI vide circular dated 1 February 2022 has made amendments to the circular issued in November 2021, clarifying that a No Objection Certificate (NOC) from the lending scheduled commercial banks / financial institutions / debenture trustees, should be received from not less than 75 per cent of the secured creditors in value. (Emphasis added to highlight the change).

Effective date: This circular would be applicable for all the schemes filed with the stock exchanges after 16 November 2021.

---

To access the text of SEBI circular dated 1 February 2022, please click here

To access the text of SEBI master circular dated 22 December 2020, please click here

SEBI in its board meeting dated 15 February 2022 took some key decisions pertaining to the following:

Separation of role of Chairperson and MD/CEO

Currently, Regulation 17(1B) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations), requires the top 500 listed entities⁷ to ensure that with effect from 1 April 2022:

• The chairperson of the listed entity is a non-executive director, and
• The chairperson of the listed entity is not related to the Managing Director (MD) or the Chief Executive Officer (CEO)

Amendments

SEBI has received representations from industry bodies and corporates, providing compelling reasons and challenges in complying with the requirement that the chairperson of the listed entity is not related to the MD or CEO. Further, basis SEBI’s review, as on 31 December 2021, the compliance level on this requirement stood at 54 per cent amongst the top 500 listed companies. Accordingly, SEBI in its board meeting held in February 2022 has decided that the provision to ensure that the chairperson of the listed entity is not related to the CEO/MD of the listed entity may not be retained as a mandatory requirement and instead be made applicable to the listed entities on a ‘voluntary basis’.

SEBI has not mentioned the date from which this requirement would be applicable on a mandatory basis.

Alignment of regulatory framework for ‘security cover’, disclosure of credit ratings and due diligence certificate

SEBI has approved certain amendments to SEBI (Debenture Trustee) Regulations, 1993 (Debenture Trustee Regulations), SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 and (Listing Regulations). The amendments bring uniformity and consistency in these regulations with respect to the following:

• The term ‘asset cover’ has been substituted with term ‘security cover’ in Debenture Trustee Regulations and Listing Regulations
• Requirement to maintain security cover which is sufficient to discharge both principal and interest thereon, has been prescribed in the Listing Regulations
• References with respect to disclosure of credit ratings has been rationalised and due diligence certificate for unsecured debt securities has been prescribed in SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021.

Amendment to SEBI (Alternative Investment Funds) Regulations, 2012

Alternative Investment Fund (AIF) is a privately pooled investment vehicle which collects funds from investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors.

It consists of three categories:

Category I - AIFs which invest in start-up or early-stage ventures or social ventures or SMEs or infrastructure or other sectors or areas which the government or regulators consider as socially or economically desirable

Category II – Real estate funds, private equity funds (PE funds), funds for distressed assets etc.

Category III - AIFs which employ diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives. For example, hedge funds, etc.

Amendments

SEBI has provided flexibility to category III Alternate Investment Funds (AIFs) to calculate the investment concentration norm based either on investable funds or net asset value of the fund while investing in listed equity of investee company, subject to the conditions as may be specified by SEBI.

---

7. The top 500 entities should be determined on the basis of market capitalisation, as at the end of the immediate previous financial year

To access the text of SEBI board meeting dated 15 February 2022, please click here