Thursday, October 10, 2013

Listing of Specified Securities on Institutional Trading Platform

On 8th October 2013 SEBI has come up with a new regulation Securities and Exchange Board of India (Listing of Specified Securities on Institutional Trading Platform) Regulations, 2013. The objective of this regulation is to grant securities of small and medium enterprise trading option exclusively on the institutional trading platform.

"Institutional trading platform" means the trading platform in a SME exchange for listing and trading of specified securities of small and medium enterprises for informed investors.

Eligibility Norms:
SME shall satisfy the following conditions to get its securities listed –
a.       the company, its promoter, group company or director does not appear in the wilful defaulters list of RBI;
b.      there is no winding up petition against the company that has been admitted by a competent court;
c.       the company, group companies or subsidiaries have not been referred to the Board for Industrial and Financial Reconstruction within a period of 5 years prior to the date of application for listing;
d.      no regulatory action has been taken against the company, its promoter or director, by the Board, RBI, IRDA or MCA within a period of 5 years prior to the date of application for listing;
e.      the company has not completed a period of more than 10 years after incorporation and its revenues have not exceeded Rs. 100 cr. in any of the previous financial years;
f.        the paid up capital of the company has not exceeded Rs. 25 cr. in any of the previous financial years;
g.       the company has atleast one full year’s audited financial statements, for the immediately preceding financial year at the time of making listing application;
In addition to the above it should also satisfy any one of the following criteria –
a.       Atleast one AIF, venture capital fund or other category of investors/lenders approved by the Board has invested a minimum amount of Rs. 50 lakhs in equity shares of the company, or
b.      Atleast one angel investor, has invested a minimum amount of Rs. 50 lakhs in the equity shares of the company through such association/group, or
c.       The company has received finance from a scheduled bank for its project financing or working capital requirements and a period of 3 years has elapsed from the date of such financing and the funds so received have been fully utilized, or
d.      A registered merchant banker has exercised due diligence and has invested not less than Rs. 50 lakhs in equity shares of the company which shall be locked in for a period of three years from the date of listing, or
e.      A QIB has invested not less than Rs. 50 lakhs in the equity shares of the company which shall be locked in for a period of three years from the date of listing, or
f.        A specialized international multilateral agency or domestic agency or a public financial institution as defined under section 4A of the Companies Act, 1956 has invested in the equity capital of the company

Listing of Securities:
On fulfilling the above criteria the company can get its securities listed on Institutional trading Platform. However, such listing shall not be accompanied by any issue of securities.
It can raise capital through private placement or rights issue without an option for renunciation of rights.

Objective:
In my opinion the main objective of coming up with this regulation is to provide greater liquidity to the SME securities and to make the security more stable by putting mandatory investments from the VCF, AIF, Merchant Bankers, etc.
However, there seems to be a contradiction from the concept of SME IPO recently launched by SEBI.



Tuesday, August 27, 2013

Amendment in SEBI (ICDR) Regulation

SEBI with its notification dated 26th August' 2013 has made certain amendments in the chapter of Preferential Issue of SEBI (ICDR) Regulations. The regulations after the aforesaid amendment is read as under -


Regulation 73: Disclosure in case of Preferential Issue

1.       The issuer shall, in addition to the disclosures required under section 173 of the Companies Act, 1956 or any other applicable law, disclose the following in the explanatory statement to the notice for the general meeting proposed for passing special resolution: 

a.       the objects of the preferential issue; 
b.      the proposal of the promoters, directors or key management personnel of the issuer to subscribe to the offer; 
c.       the shareholding pattern of the issuer before and after the preferential issue; 
d.      the time within which the preferential issue shall be completed; 
e.      the identity of the natural persons who are the ultimate beneficial owners of the shares proposed to be allotted and/or who ultimately control the proposed allottees, the percentage of post preferential issue capital that  may be held by them and change in control, if any, in the issuer consequent to the  preferential issue:
"Provided that if there is any listed company, mutual fund, bank or insurance company in the chain of ownership of the proposed allottee, no further disclosure will be necessary."
f.        an undertaking that the issuer shall re-compute the price of the specified securities in terms of the provision of these regulations where it is required to do so; 
g.       an undertaking that if the amount payable on account of the re-computation of price is not paid within the time stipulated in these regulations, the specified securities shall continue to be locked- in till the time such amount is paid by the allottees. 
2.       The issuer shall place a copy of the certificate of its statutory auditor before the general meeting of the shareholders, considering the proposed preferential issue, certifying that the issue is being made in accordance with the requirements of these regulations
3.       Where specified securities are issued on a preferential basis to promoters, their relatives,  associates and related entities for consideration other than cash, the valuation of the assets in consideration for which the equity shares are issued shall be done by an independent qualified valuer, which shall be submitted to the recognised stock exchanges where the equity shares of the issuer are listed: 
Provided that if the recognised stock exchange is not satisfied with the appropriateness of the valuation, it may get the valuation done by any other valuer and for this purpose it may obtain any information, as deemed necessary, from the issuer
4.       The special resolution shall specify the relevant date on the basis of which price of the equity  shares to be allotted on conversion or exchange of convertible securities shall be calculated

Explanation: For the purpose of sub-regulation (3), the term ‘valuer’ has the same meaning as is assigned to it under clause (r) of sub-regulation (1) of regulation 2 of the Securities and Exchange Board of India (Issue of Sweat Equity) Regulations, 2002. 


Regulation 74: Allotment Pursuant to Special Regulations - Preferential Issue

1.       Allotment pursuant to the special resolution shall be completed within a period of fifteen days from the date of passing of such resolution:
Provided that where any application for exemption from the applicability of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 or any approval or permission by any regulatory authority or the Central Government for allotment is pending, the period of fifteen days shall be counted from the date of order on such application or the date of approval or permission, as the case may be:
Provided further that where the Board has granted relaxation to the issuer in terms of Regulation 29A of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, the preferential issue of equity shares and compulsorily convertible debt instruments, whether fully or partly, shall be made by it within such time as may be specified by the Board in its order granting the relaxation:
Provided further that requirement of allotment within fifteen days shall not apply to allotment of specified securities on preferential basis pursuant to a scheme of corporate debt restructuring as per the corporate debt restructuring framework specified by the Reserve Bank of India
2.       If the allotment of specified securities is not completed within fifteen days from the date of special resolution, a fresh special resolution shall be passed and the relevant date for determining the price of specified securities under this Chapter will be taken with reference to the date of latter special resolution.
3.       Notwithstanding anything contained in this regulation, where a preferential allotment is made that attracts an obligation to make an open offer for shares of the issuer under Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulation, 2011, and there is no offer made under sub-regulation (1) of regulation 20 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulation, 2011, the period of fifteen days shall be counted from the expiry of the period specified in sub-regulation (1) of regulation 20 or date of receipt of all statutory approvals required for the completion of an open offer under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulation, 2011:
Provided that if an offer is made under sub-regulation (1) of regulation 20 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulation, 2011, the period of fifteen days shall be counted from the expiry of the offer period as defined in the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulation, 2011:
Provided further that the provisions of this sub-regulation shall not apply to an offer made under sub-regulation (1) of regulation 20 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulation, 2011, pursuant to a preferential allotment”
4.       Allotment shall only be made in dematerialised form

Explanation.-The requirement of allotment in dematerialised form shall also be applicable for the equity shares to be allotted pursuant to exercise of option attached to warrant or conversion of convertible securities

Regulation – 77: Payment of Considerations

1.       Full consideration of specified securities other than warrants issued under this Chapter shall be paid by the allottees at the time of allotment of such specified securities:
Provided that in case of a preferential issue of specified securities pursuant to a scheme of corporate debt restructuring as per the corporate debt restructuring framework specified by the Reserve Bank of India, the allottee may pay the consideration in terms of such scheme.
2.       An amount equivalent to at least twenty five per cent. of the consideration determined in terms of regulation 76 shall be paid against each warrant on the date of allotment of warrants.
3.       The balance seventy five per cent. of the consideration shall be paid at the time of allotment of equity shares pursuant to exercise of option against each such warrant by the warrant holder.
4.       In case the warrant holder does not exercise the option to take equity shares against any of the warrants held by him, the consideration paid in respect of such warrant in terms of sub-regulation (2) shall be forfeited by the issuer.
5.       The issuer shall ensure that the consideration of specified securities, if paid in cash, shall be received from respective allottee's bank account
6.       The issuer shall submit a certificate of the statutory auditor to the stock exchange where the equity shares of the issuer are listed stating that the issuer is in compliance of sub-regulation (5) and the relevant documents thereof are maintained by the issuer as on the date of certification."

Regulation – 78: Lock in of Specified Securities
1.       The specified securities allotted on preferential basis to promoter or promoter group and the equity shares allotted pursuant to exercise of options attached to warrants issued on preferential basis to promoter or promoter group, shall be locked-in for a period of three years from the date of trading approval granted specified securities or equity shares allotted pursuant to exercise of the option attached to warrant, as the case may be:
Provided that not more than twenty per cent of the total capital of the issuer shall be locked-in for three years from the date of trading approval:
Provided further that equity shares allotted in excess of the twenty per cent shall be locked-in for one year from the date of trading approval pursuant to exercise of options or otherwise, as the case may be.
2.       The specified securities allotted on preferential basis to persons other than promoter and promoter group and the equity shares allotted pursuant to exercise of options attached to warrants issued on preferential basis to such persons shall be locked in for a period of one year from the date of trading approval.
3.       The lock-in of equity shares allotted pursuant to conversion of convertible securities other than warrants, issued on preferential basis shall be reduced to the extent the convertible securities have already been locked-in.
4.       The equity shares issued on preferential basis pursuant to a scheme of corporate debt restructuring as per the Corporate Debt Restructuring framework specified by the Reserve Bank of India shall be locked-in for a period of one year from the date of trading approval:
Provided that partly paid up equity shares, if any, shall be locked-in from the date of trading approval and the lock-in shall end on the expiry of one year from the date when such equity shares become fully paid up.
5.       If the amount payable by the allottee, in case of re-calculation of price under sub-regulation (3) of regulation 76 is not paid till the expiry of lock-in period, the equity shares shall continue to be locked in till such amount is paid by the allottee.
6.       The entire pre-trading approval shareholding of the allottees, if any, shall be locked-in from the relevant date upto a period of six months from the date of preferential allotment.
Explanation 1: For the purpose of this regulation:
I) The expression “total capital of the issuer” means:
a. equity share capital issued by way of public issue or rights issue including equity shares issued pursuant to conversion of specified securities which are convertible; and
b. specified securities issued on a preferential basis to promoter or promoter group.
II) (a) For the computation of twenty per cent. of the total capital of the issuer, the amount of minimum promoters’ contribution held and locked-in, in the past in terms of Securities and
Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000 or these regulations shall be taken into account.
b) The minimum promoters’ contribution shall not again be put under fresh lock-in, even though it is considered for computing the requirement of twenty per cent. of the total capital of the issuer, in case the said minimum promoters’ contribution is free of lock-in at the time of the preferential issue
Explanation 2 - For the purposes of this regulation, the date of trading approval shall mean the latest date when trading approval has been granted by all the recognised stock exchanges where the equity shares of the issuer are listed, for specified securities allotted as per the provisions of this Chapter

Regulation – 79: Transferability of Locked in Specified Securities and warrants issued on Preferential basis
(1)    Subject to the provisions of Securities and Exchange Board of India (Substantial Acquisition of shares and Takeovers) Regulations, 1997, specified securities held by promoters and locked-in in terms of sub-regulation (1) of regulation 78 may be transferred among promoters or promoter group or to a new promoter or persons in control of the issuer:

Provided that lock-in on such specified securities shall continue for the remaining period with the transferee

(2)    The specified securities allotted on preferential basis shall not be transferred by the allottee till trading approval is granted for such securities by all the recognised stock exchanges where the equity shares of the issuer are listed

Tuesday, August 13, 2013

Amendment to the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003

SEBI in its Board Meeting held on 12th August 2013 gave affect to the proposal to declare illegal mobilization of funds without obtaining a certificate under the SEBI (Collective Investment Schemes) Regulations, 1999 as a fraudulent and unfair trade practice. As such, it has been decided to amend the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003, accordingly. This amendment has been made to impose deterrent adjudication penalties on unregistered CIS entities mobilizing money.


Saturday, June 1, 2013

SHELL India Case - a Blow by IT dept. or a Dodge

Background of the Case:

In the year 2009, Shell India issued 87.63 crores shares to Two of its parent companies at the par value of Rs. 10 each. Income Tax (IT) Department found a flaw in the valuation of shares and revalued the shares using DCF @ Rs. 183.
This case can cause the company approximately Rs. 15,000 crs. i.e. the single largest transfer price case ever in India.

IT Dept. View:

It was alleged that the undervaluation has amounted to underselling of an Indian asset which comprise the capital base of the country. The Transfer Pricing Officer (TPO) calculated this short receipt of Rs. 15,200 crore as a loan or receivable extended by Shell to its parent company and deemed the entire amount receivable as tax, adding to it tax on the annual interest that should have accrued to such a loan.

Shell's Claim: 

1. The transaction is a capital receipt and not a revenue item and hence not taxable
2. Transfer Pricing (TP) adjustment cannot be maid for a balance sheet item
3. Even if the shares would have been issued @183 the excess would have been securities premium not chargeable not tax
4. TPO cannot characterize a subscription into a sale
5. Fresh issuance of shares is not an International Transaction under Section 92B
6. Transfer Pricing provisions do not provide for making a secondary adjustment i.e. first consider an issue of shares as an internal transaction and apply arms length price and then treat the difference as debt accruing interest

In my Opinion -

There are some basic questions that need to be looked into -

1. Whether the transaction is an issue of share or a sale of share
2. Should the TP adjustment be made
3. It is a capital receipt or a revenue receipt
4. Whether it is an international transaction within the meaning of Section 92B

Let us take this one by one -

Prima facie it is clear that the transaction is a FDI and not a sale of share. Since the company has made a fresh issue of shares it cannot be characterized as sell of shares.
Since it is an issue of shares the amount received is a capital receipt and therefore not chargeable to tax. Even if the company has issued it @183 the excess would have been securities premium not chargeable to tax. Now, if the transaction is not taxable in case it was issued @183 it cannot be taxable if issued @10.

If the view of IT department is taken to be correct this means that if an Indian company issues its shares to the public it is selling its asset and thus the amount received should be capital gain.

Now, whether such transaction is covered within the meaning of Section 92B. On a plain reading it can be considered that such transaction is covered by section 92B as this section includes both capital and revenue transaction. However the charging section i.e. Section 92(1) clearly states that any transaction which has an effect of reducing income. This means that capital transaction which is not taxable is not included here.




Thursday, May 30, 2013

Press Release on Investment Adviser Regulation

SEBI with its press release dated 29th May 2013 has clarified that the application for registration as an investment adviser under the Investment Adviser regulation should be filled with the concerned regional office (RO) / Local Office (LO) of the Board under the jurisdiction of which the registered address of the applicant falls.

At present SEBI has 4 Regional Office, 9 local office and its Head Office is situated at Mumbai.

This is done with a view to decentralize and to make the operation more convenient.

Wednesday, May 22, 2013

SEBI Guidelines on Algorithmic Trading

Large numbers of traders are using technology to enter into trading transactions wherein the transactions are automatically entered on the basis of a pre-determined logic or instructions without any human instructions these tradings are known as Algorithmic Trading. 

Although these transactions are permitted by SEBI yet the need for a mechanism to control such system was felt essential to avoid any manipulation. 

SEBI Guidelines vide circular dated 30th March 2012

In order to regulate such system board came up with a guidelines which states that - 

  • The Stock Exchanges shall have the arrangements to manage the load on their system in such a manner so as to achieve consistent response time to all stock brokers
  • Stock Exchange should ensure that all algorithmic orders are routed through brokers servers in India and proper risk control mechanism are in place
  • There should be a Price Check, which ensures that the price quoted does not violate the price band defined by the exchange for the security. For securities with no price band dummy filters should be incorporated. 
  • Quantity Check shall ensure that quantity uploaded in the order does not violate the maximum permissible quantity per order as defined by exchange
  • The stock exchange need to include a report on algorithmic trading on the stock exchange in the Monthly Development Report (MDR) submitted to SEBI after incorporating details of algorithmic trading as a percentage of total trading, number of stock brokers, etc. 
SEBI Guidelines vide circular dated 21st May 2013
In order to ensure that all the stock brokers/ trading members are using a system which fulfills all the requirements of the above circular SEBI has revised the requirement of System Audit of trading algorithm/software used by the brokers. 

It requires that all the stock brokers/trading members that provide facility of algorithmic trading shall conduct a system audit every 6 months in order to ensure that all the requirements are fulfilled. The audit should be conducted by a system auditor who possess any of the following certification - CISA, DISA, CISM and CISSP. 

Any deficiency identified during the audit shall be reported immediately and in case of serious deficiency no trading through algorithmic software shall be permitted unless the deficiency is rectified. 

SEBI has also strengthen the surveillance mechanism.    

Thursday, April 4, 2013

Introduction of Automatic Process and Common Pool of Arbitrators for Stock Exchanges

Currently, the arbitration mechanism of the stock exchanges is decentralized i.e. the selection of arbitrators is done by the respective stock exchanges. However with a view to bring greater transparency and in order to protect the interest of the investors SEBI has made the following changes -


  • List of arbitrators maintained by all the stock exchanges having nation wide terminals will be pooled centrally and will be known as "Common Pool" this will be displayed on the website of the stock exchanges
  • The arbitrators will be chosen by the parties to the arbitration and the parties fails to choose the Arbitrator it will be chosen by an "Automatic Process" where neither the parties to the arbitration nor the concerned stock exchange will be directly involved. It will be done through automatic computer process
  • The Automatic Process will also send a real time alerts to all the entities involved
Arbitration process is widely used by the parties and a centralized process will avoid manipulation.