Regulatory updates

SEBI, vide notifications dated 14 February 2023 issued certain amendments to the SEBI (Infrastructure Investment Trusts) Regulations, 2014 (InvIT Regulations) and SEBI (Real Estate Investment Trusts) Regulations, 2014 (REIT Regulations) (amendments). Some of the key changes introduced include.

• Amendment in the definition of ‘change in control’
• Definition of ‘independent director’ and ‘senior management’
• Rules pertaining to the appointment of an auditor
• Rules pertaining to the appointment of an auditor
• Insertion of Chapter VIB ‘Obligations of the investment managers/manager’ in the InvIT Regulations and REIT Regulations respectively

These are further explained below.

• Revised definition of ‘change in control’: The amendment has substituted the definition of “change in control” in InvIT Regulations and REIT Regulations respectively. As per the revised definition, ‘change in control’ refers to:

• Definition of ‘independent director’ and ‘senior management’: The amendment has inserted the definition of Independent Director (ID)⁴ The definition of independent director is in line with the LODR Regulations- i.e., the independent director should be a person of integrity and possess relevant expertise and experience, should not be a promoter of the InvIT or REIT or its group, should not hold any pecuniary relationship, etc. and senior management⁵ Senior management would include the following:
  •  Members of the core management team (excluding the board of directors)
  •  Members of management one level below the CEO, MD, whole-time director, manager
  •  Specifically include compliance officer and chief financial officer in the REIT and InvIT Regulations. The definitions introduced are in line with the requirements specified in the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations), in this regard.

• Appointment of an auditor: The amendment has specified certain clarifications relating to the reappointment of auditor. As per the amendments, the investment manager of the InvIT/manager of the REIT should appoint an individual or a firm as the auditor, who would hold office from the date of conclusion of the annual meeting in which he/she has been appointed till the date of conclusion of the sixth annual meeting of the unitholders. Further, it has been stated that an InvIT/REIT should not appoint or reappoint:

1. An individual as auditor for more than one term of five consecutive years, and
2. An audit firm as auditor for more than two terms of five consecutive years.

The cooling off period for re-appointment for the auditor is five years from the date of completion of the term.

• Limited review: The amendments specify that the auditor must undertake a limited review of the audit of all the entities or companies whose accounts are to be consolidated with the accounts of the InvIT/REIT as per the applicable Ind AS, and any addendum thereto as defined in Rule 2(1)(a) of the Companies (Indian Accounting Standards) Rules, 2015 (Ind AS Rules).

• Obligation of the investment manager/manager: The amendment has inserted a new chapter stipulating the obligations of the investment manager/manager, thereby making certain corporate governance provisions prescribed in the LODR Regulations applicable to InvITs and REITs. It further states that:

1. The board of directors should consist of a minimum of six directors and have at least one woman ID
2. Quorum must be one-third of its total strength or three directors, whichever is higher, including at least one ID
3. Board of directors should review compliance reports every quarter⁶ The compliance reports would be submitted by the chief executive officer, chief financial officer and the compliance officer along with supporting documents. SEBI has, accordingly, added a new schedule on governance norms in both, the InvIT Regulations and REIT Regulations. Part A of the new schedule prescribes the minimum information to be placed before the board of directors of the investment manager/manager and Part B of the new schedule stipulates what a compliance certificate should include. pertaining to all the applicable laws and initiate steps to rectify instances of non-compliances, if any.

• Vigil Mechanism:The investment manager/manager should formulate a vigil mechanism, including a whistle blower policy for directors and employees to report genuine concern(s). In this regard, an independent service provider may be engaged for providing or operating the vigil mechanism who should report to the audit committee. Further, the audit committee must review the functioning of the vigil mechanism.

• Submission of reports: The investment manager/manager should submit the following:

• Secretarial compliance report: The secretarial compliance report, as provided by a practicing company secretary would be annexed to the annual report of the InvIT/REIT and submitted to the stock exchange within 60 days from the end of each financial year.
• Quarterly compliance report: The quarterly compliance report on governance in the specified format, signed either by the compliance officer or the chief executive officer of the investment manager/manager should be submitted to the stock exchange within 21 days from the end of each quarter.

Effective date: The amendments are effective from 1 April 2023, except for the one relating to limited review, which is effective from the date of publication in the Official Gazette, i.e., 14 February 2023.

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To access the text of the amendments introduced to the InvIT Regulations, please click here

To access the text of the amendments introduced to the REIT Regulations, please click here

The LODR Regulations requires companies to comply with the minimum public shareholding requirements as prescribed in the Securities Contracts (Regulation) Rules, 1957 (SCRR)⁷ MPS requirements are mandated under Rule 19(2)(b) and 19A of the SCRR read with Regulation 38 of the LODR Regulations in the manner prescribed by SEBI. As per Rule 19A of SCRR, every listed company should maintain a minimum public shareholding of at least 25 per cent. Further, as per Rule 19(2)(b) of SCRR, a prescribed percentage of each class or kind of equity shares or debentures convertible into equity shares should be offered and allotted to public in terms of an offer document.

In February 2018, SEBI had specified different methods that can be used to achieve compliance with the Minimum Public Shareholding (MPS) requirements. However, based on various representations for providing relaxation from the conditions specified in the existing methods and instead permit certain other methods to achieve the MPS compliance, on 3 February 2023, SEBI issued a circular, thereby rationalising the existing methods and introduced two additional methods for MPS compliance.

Thus, a listed entity may adopt any of the following methods in order to achieve compliance with the MPS requirements:

1. Issuance of shares to public through prospectus
2. Offer for sale of shares held by promoter(s)/promoter group to the public through a prospectus
3. Offer for sale of shares held by promoter(s)/promoter group through the stock exchange mechanism i.e., the secondary market
4. Sale of shares held by promoter(s)/promoter group in the open market in the manner as prescribed in the circular and subject to stipulated conditions
5. Rights issue to public shareholders, provided the promoter(s)/promoter group shareholders forgo their entitlement to equity shares that may arise from such issue
6. Bonus issue to public shareholders, provided the promoter(s)/promoter group shareholders forgo their entitlement to equity shares that may arise from such an issue
7. Allotment of equity shares under Qualified Institutions Placement (QIP) in accordance with SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations)
8. Increase in public holding in accordance with the exercise of options and allotment of shares under an Employee Stock Option (ESOP) scheme, subject to a maximum of two per cent of the paid-up equity share capital of the listed entity. However, the ESOP scheme should comply with the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 and the promoter(s)/promoter group must not be allotted any shares
9. Transfer of shares held by promoter(s)/promoter group to an Exchange Traded Fund (ETF) managed by a SEBI registered mutual fund, subject to a maximum of five per cent of the paid-up equity share capital of the listed entity. The listed entity is also required to comply with certain conditions stipulated in the circular with respect to this method.
10. Any other method as may be approved by SEBI on a caseto-case basis.

Further, the stock exchange(s) would monitor the methods adopted by the listed entities to increase their public holding and comply with the MPS requirements, as specified in this regard.

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To access the text of the circular dated 3 February 2023, please click here

To access the text of the circular dated 22 February 2018, please click here

SEBI had constituted a sub-group for reviewing the existing rules prescribed in the SEBI (Buy-back of Securities) Regulations, 2018 (buy-back regulations), and to recommend the manner of streamlining the overall buy-back process.

Based on the report of the sub-group, in November 2022, SEBI had issued a consultation paper which proposed:

1. Amendments to certain existing regulations, and
2. New requirements.

On 7 February 2023, SEBI reviewed the comments received on its consultation paper and issued certain amendments to the buy-back regulations (amendments). The key amendments are discussed below:

• Conditions for buy-back: Certain amendments have been made to the basis of computation of the limit of buy-back and the ratio of the debts to paid-up capital and free reserves post buy-back. Earlier, the limits for buy-back were computed based on both the standalone and consolidated financial statements of the company, however, it will now be computed on the basis of the standalone or consolidated financial statements of the company, whichever sets out a lower amount⁸ Accordingly, the revised basis for computation of maximum limit of buy-back is:
  i. The maximum number of equity shares that can be bought back in any financial year should be 25 per cent or less of the aggregate of paid-up capital and free reserves of the company based on the standalone or consolidated financial statements of the company, whichever is lower
  ii. The ratio of the aggregate of secured and unsecured debts owed by the company to the paid-up capital and free reserves after buy-back should be less than or equal to 2:1, based on either of the following:
  ‑ Standalone or consolidated financial statements of the company, whichever sets out a lower amount. However, if a higher ratio of the debt to capital and free reserves has been notified under the Companies Act, 2013, then such higher ratio would prevail, or
  ‑ Standalone or consolidated financial statements of the company, whichever sets out a lower amount, after excluding financial statements of all subsidiaries that are Non-Banking Finance Companies (NBFCs) and Housing Finance Companies (HFCs) regulated by the RBI or National Housing Bank, as the case may be.
  However, buy-back of securities should be permitted only if all such excluded subsidiaries have their ratio of aggregate of secured and unsecured debts to the paid-up capital and free reserves of not more than 6:1 on a standalone basis.
  [Emphasis laid on amendments made] .

• Authorisation for buy-backs: Currently, every buy-back needs to be authorised by the articles of association of the company and most buy-back arrangements need to be approved by the shareholders by way of a special resolution. The amendments now require companies to also obtain a prior consent of their lenders in case of a breach of a covenant with such lenders. Such a consent should be included in the letter of offer prepared by the company.

• Buy-back from open market: Buy-back from open market:

1. Minimum amount to be utilised: The limit for minimum amount to be utilised for buy-back has been increased from 50 per cent to 75 per cent of the amount earmarked for buy-back, and a minimum of 40 per cent of the amount earmarked for the buyback should be utilised within half the duration specified in the buy-back regulations.
2. Frequently traded shares⁹ ‘Frequently traded shares’ shall have the same meaning as assigned to them under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. : Only frequently traded shares should be bought back, and such buyback is subject to restrictions on placement of bids, price and volume as specified by SEBI.

• Buy-back from the open market through stock exchanges: Following amendments for buy-backs from the open market (through the stock exchange route) have been made:

• Phasing out of buy-back: For open market buy-backs under the stock exchange route, there is a possibility of one shareholder’s entire trade getting matched with the purchase order placed by the company, and thus depriving other shareholders to avail the benefit of buy-back. This runs contrary to the underlying principle of equitable treatment which forms the basis of all corporate actions. Accordingly, buy-back from open market mechanism through stock exchange will be phased out in the following manner:

Further, with effect from 1 April 2025, the buy-back from the open market through the stock exchange would not be allowed.

• Separate window for buy-back: Since shares are bought back at prevailing market price, acceptance of shares under buyback is matter of chance for most shareholders and thus there is no clarity as to whether shares are accepted under buyback or sold in the open market and thus shareholders are unable to claim the benefits arising out of buybacks. In order to remove this ambiguity, the amendments have now created a separate window on the stock exchange for undertaking buyback through this route.
• Other requirements: Requirements pertaining to public announcement, escrow account, timelines for extinguishment of securities and issuance of certificates by the company to SEBI will be similar to the requirements prescribed for buy-back through tender offer.

• Buy-back through tender offer: The following amendments have been recommended under the regulations for buy-back through tender offer.

• Revision in buy-back price: : Currently, the buy-back regulations do not allow companies to revise the maximum buy-back price once approved by the board of directors or shareholders, as applicable. The amendments now permit the Board of Directors of a company, to increase the maximum buy-back price till one working day prior to the record date. The Board of Directors may decrease the number of securities proposed to be bought back, such that there is no change in the aggregate size of the buy-back¹⁰ The rationale for this change is that there may be a substantial delay between the time when the buy-back is approved by the Board of Directors or shareholders and the time when the offer is actually opened to the public, the amendments now permit such revision in the buy-back price. .
• Public announcement of buy-back: While making a public announcement for buy-back in newspapers, a company would also file a public announcement in electronic mode with SEBI and stock exchanges on which its shares are listed and also on the websites of stock exchanges, merchant bankers, and the company.
• Draft letter of offer concept omitted: The buy-back regulations require a Draft Letter of Offer (DLOF) to be submitted to SEBI for review. A window is provided to SEBI to submit its comments on the DLOF. The merchant banker is then required to submit a Letter of Offer (LOF) incorporating the SEBI’s comments. To simplify the process and reduce timelines, the amendments have removed the concept of DLOF. Merchant bankers¹¹ Such merchant bankers should not be an associate of the company. will be allowed to directly disseminate the LOF to the shareholders within two working days of the record date. Merchant bankers will be required to certify compliance with the buy-back regulations in the LOF and to the SEBI prior to the opening of an offer.
• Time period of offer: As per the current regulations, the tender offer would open within five days from the date of dispatch of the letter of offer and remain open for 10 working days. These timelines have been amended and now the tender offer would open within four working days from the record date and remain open for five working days.
• Escrow account: For buy-backs through the tender offer route, the buy-back regulations require the escrow account to be opened before the opening of the offer but do not specify an exact date. The amendment now requires the escrow account to be opened within two working days from the date of the public announcement. SEBI has also now permitted additional methods of escrow deposit. These are:
  1. Cash including bank deposits with any scheduled commercial bank
  2. Deposit of frequently traded and freely transferable securities
  3. Government securities
  4. Units of mutual funds invested in gilt funds and overnight schemes, or
  5. A combination of foregoing¹²Where part of the escrow account is in a form other than cash, the amendments require the company to deposit with a scheduled commercial bank, in cash, a sum of not less than two and half per cent of the total amount earmarked for buyback..

• Timelines for closure and payment to security holders and extinguishment of certificates Post closure of the offer, a company should verify the offers received, make payment of consideration to those holders of securities whose offer has been accepted and return the remaining shares or other specified securities to the security holders within five working days (earlier, this requirement was seven days) of the closure of the offer. The company should extinguish and physically destroy the security certificates so bought back in the presence of a registrar to an issue or the Merchant Banker and the secretarial auditor (earlier, this was to be done in the presence of a statutory auditor) within 15 days of the date of acceptance of the shares or other specified securities. The company will also furnish a certificate to SEBI certifying compliance with the extinguishment of security timelines as prescribed in the buy -back regulations. Such certificate will be duly verified by:
  1. Registrar (or a merchant banker, where there is no registrar)
  2. Two directors of the company (one of which is a managing director)
  3. Secretarial auditor (earlier, a statutory auditor

• Buy-back through book building process: Buy-back mechanism under the book-building process has been revised. The amendment lays down the revised provisions for disclosure requirements, timelines for public announcement, offer procedure, methodology for acceptance of bids etc. for buy-back under the book building process.

• Elimination of odd-lot buy backs: The amendments have eliminated odd-lot buy-backs.

• Methodology to be adopted prior to opening of an offer: The amendments have inserted a Schedule VI, which stipulates the methodology to be adopted prior to opening of an offer.

Effective date: The amendments would come into force from the thirtieth day from the date of publication in the Official Gazette (i.e., on 9 March 2023).

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To access the text of the amendments, please click here

To access the text of the amendments, please click here

On 2 February 2023 SEBI issued certain amendments to the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (NCS Regulations). Some of the key amendments introduced are discussed below:

• Revised definition of ‘Green Debt Security’ (GDS): The amendment to the definition of GDS expands the scope of the existing definition and now includes:

1. Projects/activities under pollution prevention and control sectors (including reduction of air emissions, greenhouse gas control, soil remediation, waste prevention, waste reduction, waste recycling and energy efficient or emission efficient waste to energy) and sectors mentioned under the India Cooling Action Plan launched by the Ministry of Environment, Forest and Climate Change
2. Circular economy adapted products, production technologies and processes
3. Blue bonds¹³ Funds raised for sustainable water management, including clean water and water recycling, and sustainable maritime sector including sustainable shipping, sustainable fishing, fully traceable sustainable seafood, ocean energy and ocean mapping. , yellow bonds¹⁴Funds raised for solar energy generation and the upstream and downstreamindustries associated with it. and transition bonds¹⁵Funds raised for transitioning to a more sustainable form of operations, in line with India’s Intended Nationally Determined Contributions (INDCs)..

Additionally, SEBI issued a circular on 3 February 2023, in order to address the concerns of market participants with respect to greenwashing¹⁶Greenwashing refers to the practice of making false, misleading, unsubstantiated, or otherwise incomplete claims about the sustainability of a product, service, or business operation by an issuer of GDS.. The circular specifies the dos and don’ts that an issuer of GDS should ensure for avoiding greenwashing.

• Recall or redemption prior to maturity: An issuer of NCS has the right to recall or redeem the securities prior to the maturity date, subject to the conditions specified. In this regard, the provisions with respect to the dissemination of information for recall or redemption of securities prior to the maturity date have been amended. As per the amendment introduced, issuers are now required to send a notice for recall or redemption prior to maturity of NCS to all the eligible holders and debenture trustees at least 21 days prior to the date on which such a right is exercisable.

• Appointment of a director: The Articles of Association (AoA) as well as the trust deed should include a provision that the debenture trustee(s) should nominate a person as a director on the board of directors of the issuer. However, an issuer whose debt securities are already listed should ensure compliance with this provision by 30 September 2023 by amending the AoA and trust deed. Further, in case the issuer has defaulted in the payment of interest or repayment of principal amount, then such a director should be appointed within one month from the date of receipt of nomination from the debenture trustee(s) or the date of publication of the amendments in the Official Gazette, whichever is later.

• Period of subscription: The NCS public issue should be kept open for a minimum period of three working days and a maximum of 10 working days. In case of revision in the price band or yield, the issuer should extend the bidding issue period disclosed in the offer document for a minimum period of three working days subject to a maximum cap of 10 working days.

• Regulatory fee: The amendments introduced also prescribe the regulatory fee required to be paid at the time of filing the draft offer document.

Effective date: The amendments are applicable from the date of publication in the Official Gazette (i.e., 2 February 2023).

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To access the text of the amendments, please click here

To access the text of the circular on dos and don’ts relating to GDS to avoid occurrences of green washing, please click here