Regulatory updates

Regulations 43 and 44(1) of the Securities and Exchange Board of India (SEBI) (Mutual Funds) Regulations, 1996 (MF regulations) permit mutual funds to invest moneys collected under their schemes in certain assets, which inter alia includes securities. Such investments can be made subject to certain restrictions prescribed in the Seventh Schedule of the MF regulations. As per clause 9(c) of the Seventh Schedule to the MF regulations, mutual fund schemes are not permitted to invest more than 25 per cent of their net assets in the listed securities of group companies of the sponsor¹Sponsor means any person who, acting individually or in concert with another body corporate, establishes a mutual fund. (group companies). However, SEBI noted that risks associated with passively managed MF schemes (such as Exchange Traded Funds (ETFs) and Index funds), were lower as compared to active MF schemes²This is because passively managed funds replicate an underlying index wherein the portfolios of ETFs/Index funds can be easily tracked as the underlying index compositions are available in public domain.. Accordingly, to institute ease of compliance with regulatory requirement s for passively managed MFs, on 2 July 2024, the SEBI notified the SEBI (Mutual Funds) (Amendment) Regulations, 2024 (the amendment) to amend clause 9(c) of the Seventh Schedule of the MF regulations. As per the amendment, equity-oriented ETFs and index funds, may invest more than 25 per cent of their net assets in listed securities of group companies, subject to certain conditions specified by SEBI (the conditions). Subsequently, on 8 July 2024, SEBI vide a circular (the circular) stipulated the following conditions: Outer limit of investment: Equity oriented ETFs and index funds, which use widely tracked and non-bespoke indices, can make investments in accordance with the weightage of the constituents of the underlying index subject to an overall cap of 35 per cent of net asset value of the scheme, in the group companies. Definition of widely tracked and non-bespoke indices: Widely tracked and non-bespoke indices have been defined as indices that are tracked by passive funds or act as primary benchmark for actively managed funds with collective Asset under Management (AUM) of INR20,000 crore and above (AUM threshold). Frequency of tracking indices: The list of indices would be listed on a half yearly basis as per the AUM threshold as on 31 March and 30 September respectively. The list of indices would be updated by Association of Mutual Funds in India (AMFI) and published on its website by 15 April and 15 October respectively, every year post seeking SEBI approval. The list of such indices as on 30 June 2024 was provided in Annexure A of the circular. Rebalancing of portfolios: Passive schemes based on underlying indices other than those prescribed in Annexure A to the circular are required to rebalance within 30 business days from the issuance of this circular. Failure to rebalance would involve certain repercussions³ These repercussions include: – Provide a justification in writing – Details of efforts taken to rebalance to be placed before the Investment Committee of the AMC – Investment committee may grant an extension of 60 business days from mandated period of completing rebalancing – AMCs would not be permitted to launch any new scheme till the portfolio is rebalanced – No exit load on exiting investors of schemes including restrictions from launching new schemes by the Asset Management Company (AMC).

Effective date: These regulations come into effect on 2 July 2024.

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To access the text of the amendments issued on 2 July 2024, please click click here

To access the text of the circular dated 8 July 2024, please click click here

SEBI has issued the following amendments that are applicable to issuers of non-convertible securities.

A. Requirement to publish a window newspaper advertisement by issuers of non-convertible securities

Currently, the following regulations inter alia require issuers of Non-Convertible Securities (NCS) to issue financial results to the users:

• Part B of Schedule IIIto the LODR Regulations: requires issuers of NCS to disclose financial results to the Stock Exchange within thirty minutes of the closure of the meeting of the board of directors
• Regulation 52 of the LODR Regulations: publish financial results in the newspapers within two working days from the conclusion of the meeting of board of directors
• Regulation 62 of the LODR Regulations: mandates disclosure of financial results on the website of the listed entity.

Based on these requirements, financial results are available to investors on the day of the meeting of the board of directors on the website of the stock exchange and on the website of the company. Accordingly, market participants suggested that publishing the same information in the newspapers becomes redundant as it is already accessible to the investors.

With this context, in order to reduce cost of compliance, SEBI issued the SEBI (LODR) (Second Amendment) Regulations, 2024 on 8 July 2024, thereby making it optional for issuers of NCS to publish detailed advertisements in newspapers providing their financial results under Regulation 52(8) of the LODR Regulations⁴ This amendment was earlier proposed by SEBI in its consultation paper-Consultation paper on review of provisions of NCS Regulations and LODR Regulations for ease of doing business and introduction of fast track public issuance of debt securities issued on 9 December 2023 . The amendment states that listed entities can provide a small section in the newspaper with details of QR code and weblink of the page of the listed entity’s website which provides details of the financial results of the issuer of NCS for the benefit of investors.

This option may be availed by issuers of NCS subject to the following conditions:

• For NCS outstanding as on the date of notification of this proviso, where prior approval from the debenture trustee is obtained;
• In case of any issuances after the date of notification of this proviso, the issuer of NCS should either make disclosure in the offer document regarding the window advertisement in the newspapers or obtain prior approval from the debenture trustee.

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To access the text of the SEBI notification, please click click here

B.Other amendments

On 8 July 2024, SEBI issued the SEBI (Issue and Listing of NCS) (Amendment) Regulations, 2024 (NCS amendment regulations) which are effective from the date of their publication in the official gazette (i.e. 10 July 2024). The NCS amendment regulations deal with the following:

• Fixing of record date: Record date is the specific day on which listed entities determine the list of holders eligible for forthcoming payment of interest/dividend/principal obligation. Currently, the LODR Regulations⁵ Regulation 60 of the LODR Regulations require the listed entity to fix a record date for purposes of payment of interest, dividend and payment of redemption or repayment amount or for such other purposes as specified by the stock exchange. require issuers of NCS to fix a record date and the SEBI (Issue and Listing of NCS) Regulations, 2021 (NCS regulations)⁶Schedule I of the NCS regulations require issuers of NCS to disclose such record date in the offer document. However, prior to the amendment there was no uniformity in market practice in terms of duration between the record date and due date for payment obligations. Accordingly, to standardize the requirements, the NCS amendment regulations now require issuers of NCS to fix a record date for the purposes of payment of interest or dividend, repayment of principal or any other corporate actions. Such record date should be fixed at 15 days prior to the relevant due date.⁷A new sub-regulation (7), under Regulation 23 has been inserted for this amendment.
• Due diligence by debenture trustees: Regulations 40⁸ Regulation 40 of NCS Regulations deals with issuance of due diligence certificate by debenture trustees in case of a public issue and listing of debt securities. and 44⁹ Regulation 44 of NCS Regulations inter alia deals with issuance of due diligence certificate by debenture trustee in case of private placement of debt securities and non-convertible redeemable preference shares. of the NCS Regulations inter alia deal with issuance of due diligence certificate by debenture trustees. The NCS amendment regulations have made the following amendments with regard to due diligence certificates by debenture trustees: Additional due diligence certificate Prior to the amendment, Regulation 40 of the NCS regulations required debenture trustees to issue a due diligence certificate¹⁰to SEBI and to stock exchanges. only at the time of filing the draft offer document with stock exchanges. However, the NCS amendment regulations now require debenture trustees to issue a due diligence certificate even at the time of filing of the listing application by the issuer of NCS¹¹This is because the debenture trustee would be providing a confirmation on additional aspects at the time of filing for listing..
• Disclosure of due diligence certificate on website The stock exchanges are now required to disclose the offer document (in case of public issue) and placement memorandum (in case of private placement) and due diligence certificates issued by the debenture trustee on their websites (Additional requirements inserted under Regulation 40(3) and Regulation 44(3A) of NCS regulations).
• Harmonisation of format of due diligence certificate The format of due diligence certificates (as provided in Schedule IV and IVA of NCS Regulations) has been harmonized with the format of certificate provided in the Master Circular for Debenture Trustees.
• QR code for financial information in offer document: Schedule I of the NCS regulations¹²Schedule I prescribes the disclosure requirements in an offer document or placement memorandum by an issuer of NCS. inter alia requires the disclosure of financial information for three years in the offer document or placement memorandum (together referred to as offer document) in a stipulated manner. In order to reduce the size of the offer document, issuers of NCS that are already listed as on date of filing of the offer document may only provide a web link and a static QR code of the audited financial information in the offer document, subject to the following conditions:

• Comparative key operational and financial parameters on a standalone and consolidated basis, audited by the statutory auditors should be disclosed in the offer document
• The web-link or QR code should lead to the website of the stock exchange which has hosted such financial information.

Currently, there are two regulations which govern venture capital funds:

• The SEBI (Venture Capital Funds) Regulations, 1996- which lays down the framework for registration, operation and investment processes for venture capital funds (VCF regulations)
• The SEBI (Alternative Investment Fund) Regulations, 2012- which regulates social venture funds, SME funds infrastructure funds, etc. besides venture capital funds (AIF regulations)

To enable venture capital funds registered under the VCF regulations to register under the broader AIF regulations, SEBI issued the SEBI (Alternative Investment Funds) (Third Amendment) Regulations, 2024 on 11 July 2024 (amendment regulations). Some of the key amendments are as follows:

• 'Migrated venture capital fund’¹³Migrated venture capital fund' means a fund that was previously registered as a venture capital fund under the SEBI (Venture Capital Funds) Regulations, 1996 and subsequently registered under these regulations as a sub-category of Venture Capital Fund under Category I - AIFs has been added to the definition of venture capital fund and a new chapter 'Chapter III-D' has been inserted to specify the applicability, eligibility criteria, registration procedure, etc. of migrated venture capital funds.
• It has been specified that venture capital funds may seek registration as migrated venture capital funds within 12 months from the date of notification of the amendment regulations.

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To access the text of the notification, please click click here

Regulation 9(f) and 28E(d) of SEBI (Credit Rating Agencies) Regulations,1999 provides that CRAs and ERPs respectively, can offer rating services of any product or issuer based on the requirement and guidelines of a financial sector regulator or authority.

In order to allow CRAs and ERPs to undertake rating activities in the International Financial Services Centre – Gujarat International Finance Tech-city (IFSC-GIFT City), SEBI has added the International Financial Services Centres Authority (IFSCA) to the list of financial sector regulators/authorities for CRAs and ERPs.

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To access the text of the circular for ERPs, please click here

To access the text of the circular for CRAs, please click here