India: SEBI's Year End Bonanza To Investors And Fund Managers – Volume II

Reeling under the after-effects of the demonetisation policy introduced in late 2016, India had entered 2017 with the aim to maintain strong macro-economic fundamentals, restore historic growth levels and tackle the surmounting stressed assets problem. As 2018 approaches, the Indian economy is displaying signs of recovery from the temporary slowdown caused by the introduction of the GST regime, has an improved ease of doing business score, and is gradually restoring the euphoric levels of foreign investment inflows amidst a bull market frenzy. Against this backdrop, the final board meeting of the Securities and Exchange Board of India (SEBI) in 2017, with its intensive reform agenda conceptualised to enhance corporate governance and further improve the ease of doing business standards, projects the tone for 2018 and paves the way for several changes to the securities market regulatory framework in respect of the investment funds industry.

In this newsletter, we analyse the key regulatory changes approved by SEBI in their board meeting held on 28 December 2017 (Board Meeting). For ease of reference, we have divided this newsletter into 2 volumes.

Volume I of this newsletter will focus on updates to the following regulatory regime:

  • Foreign Portfolio Investors (FPI)

Volume II of this newsletter will focus on updates to the following regulatory regimes:

  • Real Estate Investment Trusts (REITs)
  • Investment Advisors (IA)
  • Security Receipts of Asset Reconstruction Companies (ARCs)
  • Mutual Funds (MFs)

VOLUME II

Real Estate Investment Trusts (REITs)

With a view to facilitate growth of real estate investment trusts (REITs), the SEBI has approved the following key changes to the REITs regime in its Board Meeting:

  • Permitting REITS to acquire at least 50% stake in the Holding Company (Holdco)/ Special Purpose Vehicle (SPV) and the Holdco to acquire at least 50% in the SPVs

As per the REITs Regulations 2014 (Regulations), a REIT must hold at least 51% of the equity share capital or interest in the Holdco and the REITs or Holdco must hold at least 51% of the equity share capital or interest in the SPV. Further, as per Regulation 18(3A)(a) of the REITs Regulations, REITs investing in properties through Holdco must ensure that it has an ultimate holding interest of at least 26% in the underlying SPV.

The SEBI has now reduced the minimum holding requirement from the existing 51% to 50%. A REIT is now required to invest a minimum of 50% of the equity share capital or interest in the Holdcos or SPVs and the Holdco is required to invest a minimum of 50% of the equity share capital or interest in the SPV, subject to meeting the following conditions:

  • the REIT shall continue to have an ultimate holding interest of at least 26% in the underlying SPV;
  • the REIT manager, in consultation with the trustee, must appoint directors on the board of the Holdco and/or SPV in proportion to the shareholding or interest in the Holdco and/or SPV; and
  • the provisions of the REITs Regulations will prevail in case of any inconsistency between the obligations applicable to the REIT under the REITs Regulations and the provisions of any shareholders' agreement or partnership agreement entered in that regard.

Comment: SEBI has introduced this change to bolster 50:50 joint venture arrangements in respect of Holdcos and SPVs, which was not possible under the earlier regime as it required a minimum holding of 51% by the REITs or the Holdcos.

  • Permitting REITS to Invest in Unlisted Shares under the 20% Limit in respect of Investments in Assets other than Completed and Rent Generating Projects

As per Regulation 18(4) of the REITs Regulations, REITS are required to invest a minimum of 80% of their asset value in assets in completed and rent generating projects. As per Regulation 18(5), not more than 20% of their asset value may be invested in assets such as certain under-construction properties, developmental properties, listed or unlisted corporate debt, government securities and cash equivalents etc. To widen the scope of investment opportunities for REITs, the SEBI has now permitted REITs to invest in unlisted shares in accordance Regulation 18(5) of the REITS Regulations.

  • Rationalising the definition of Sponsor Group in case of REITs

SEBI had issued a consultation paper dated 18 July 2016[1] (REITs Consultation Paper) which recommended the introduction of the concept of 'sponsor group' comprising of multiple schemes or fund or affiliates who are under common control. In line with the REITs Consultation Paper, SEBI had amended the REITs Regulation to introduce the definition of 'sponsor group' which included the body corporate that acts as the sponsor, entities controlled by the sponsor, and downstream entities controlled by its subsidiaries. The entire sponsor group is required to meet the eligibility criteria stipulated on a sponsor under the REITs Regulations, which inter alia include net worth criteria, relevant experience requirements etc.

As per the text of the Board Meeting, we understand that SEBI has now sought to further rationalise the definition of sponsor group.

Comment: The exact nature of the change has not been specified and we await the final text of the amendments. In any event, SEBI should consider relaxing the definition of the sponsor group whereby it should be sufficient for any one member of the group to meet the prescribed eligibility requirements, as opposed to requiring all the members to meet such requirements.

It is also pertinent to note that the SEBI, in a prior board meeting on 18 September 2017, had proposed various changes to the REITs regime, to harmonise the provisions of the REITs Regulations with that of the SEBI (Infrastructure Investment Trusts) Regulations 2014. These changes include: (i) introduction of the concept of strategic investor; (ii) permitting the issue of debt securities by REITS and InvITs; (iii) permitting single asset REITs etc. By way of the SEBI (REITs) (Amendment) Regulations 2017 and SEBI (InvITs) (Amendment) Regulations 2017, dated 15 December 2017, SEBI has notified the changes to these regulations. Our newsflash dated 4 January 2018 analyses these amendments.

Investment Advisors

SEBI had issued 2 Consultation Papers dated 7 October 2016[2] (2016 IA Consultation Paper) and 22 June 2017[3] (2017 IA Consultation Paper) to seek views from the public vis-à-vis amendments and clarifications to SEBI (Investment Advisers) Regulations 2013 (IA Regulations).

  • Compulsory Registration for Mutual Fund Distributors (MFDs) who provide Investment Advisory Services on Mutual Fund Products

Currently, under Regulation 4(d) of the IA Regulations, mutual fund distributors (MFDs) who are members of a self-regulatory organisation recognised by SEBI or are registered with association of asset management companies (AMCs) of mutual funds, who provide investment advisory services to clients which are incidental to its primary activity, are exempt from registration under the IA Regulations. Accordingly, under the current framework, MFDs are engaged in the primary activity of distribution of mutual fund products and also provide incidental investment advice and execution services regarding the same. Consequently, MFDs are receiving commission from AMCs and also charging execution and/ or advisory fees to the client.

The 2016 IA Consultation Paper and the 2017 IA Consultation Paper proposed that MFDs should not provide incidental advisory services on mutual fund products without registering under the IA Regulations. Further, MFDs shall be permitted to provide incidental investment advice in respect of mutual fund products only to the extent of describing specification of the products which are appropriate to the risk profile of the investors.

  • Investment Advisory Services to be provided by a Separate Subsidiary

Presently under the IA Regulations, IAs which are banks or NBFCs providing distribution and/or execution services to their clients are required to segregate their investment advisory services (from its other activities) through a subsidiary or a separately identifiable department or division (SIDD) within the same entity. Similarly, body corporates are also required to segregate their investment advisory services (from its other activities) through a SIDD within the same entity. The 2016 IA Consultation Paper and the 2017 IA Consultation Paper, with a view to bring uniformity across intermediaries and to address the issues arising on account of conflicts of interest, proposed to permit banks, NBFCs and body corporates to offer investment advisory services through a separate subsidiary only, instead of providing the same through a SIDD. In this regard, the 2017 IA Consultation Paper sought to provide a 6 month timeline for the above-mentioned entities to ensure that investment advisory services are being provided through a separate subsidiary. Additionally, the 2017 IA Consultation Paper has suggested that an entity engaged 'solely' in the business of advising on investment products should not be permitted to sell any products by itself.

Recognising the need for further stake-holder consultation, SEBI has issued another Consultation Paper on 2 January 2018[4] (2018 IA Consultation Paper) clarifying that individuals who intend to be registered as IAs cannot provide any distribution services in financial products and vice-versa, either directly or through any immediate relatives. Immediate relatives shall mean a person's spouse, parent, brother, sister or child or the child's spouse as defined in the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011. Similarly, banks, NBFCs, body corporates, LLPs and firms intending to seek registration as an IA cannot provide any distribution services in any financial products and vice-versa, either directly or through any holding or associate or subsidiary company. In this regards, associate company shall mean a body corporate in which the entity or its director or partner holds, either individually or collectively, more than fifteen percent of its paid-up equity share capital or partnership interest, as the case may be.

Further, the 2018 IA Consultation Paper proposes that existing persons who are registered IAs and offer distribution services and distributors offering advisory services, directly or indirectly, must elect between providing investment advise or distribution services before 31 March 2019. Therefore, from 1 April 2019 any person, including their immediate relatives or holding/subsidiary/associate entity, shall offer either investment advice or distribution services. Additionally, MFDs must disclose to the client the list of mutual funds they are associated with and are permitted to describe the specification vis-à-vis only these mutual fund products and they must inform the client that he/she may consider other products not distributed by the MFDs. MFDs must also abide by the principle of 'appropriateness' while recommending products which entails selling only those products which are identified as best suited for that client.

Comment: While the intention of SEBI to address the conflicts of interest must be appreciated, considering that it is difficult to separate the distribution and incidental investment advice function of MFDs, the impact study on the mutual fund sector and cost-benefit analysis of requiring them to compulsorily elect between acting as distributors or investment advisors must be undertaken. The 2018 IA Consultation Paper has far reaching impact as group companies must now evaluate whether the entities in their group should provide either investment advise or distribution services. Further, the client must be provided the autonomy to determine if they would like to avail of the execution services recommended by the IAs, after disclosure of any conflict in respect of the same by the IAs. The 2018 IA Consultation Paper also leaves open the issue of commissions which may be received by the IAs from the entity providing execution services in relation to the Client. Further, SEBI should also consider the issue of soft dollar arrangements between the IAs and the broker-dealer.

Security Receipts of Asset Reconstruction Companies (ARCs)

  • Listing of Security Receipts

To complement the wave of changes brought about by the Insolvency and Bankruptcy Code 2016, and in line with the 2017-18 Union Budget Speech, SEBI proposes to lay down the roadmap for the listing of security receipts (SRs) issued by ARCs. We understand that a separate chapter will be incorporated in the SEBI (Public Offer and Listing of Securitised Debt Instruments) Regulations 2008 to provide for this framework.

Comment: This change is in line with the Government's efforts to transform over the counter SRs into exchange traded instruments. The fact that FPIs, AIFs and mutual funds can now trade in SRs on the floor of the exchanges, is expected to translate into greater liquidity, effective price discovery, and enhanced capital flows for SRs.

Mutual Funds (MFs)

  • Limits to Cross Holdings and Board Representation in Multiple AMCs/ Trustees

In order to boost governance and prevent to potential conflicts of interest situations in the mutual fund industry, the SEBI proposes to limit cross holdings to 10% and prohibit board representation in AMCs or trustee companies of multiple mutual funds. More specifically, SEBI provides that: (i) the sponsor of a mutual fund; (ii) its associate and/or its group company; and (iii) its AMC through the schemes, or otherwise collectively, may not be permitted to hold more than 10% of the stake or have board representation in the AMC or the trustee company of any other mutual fund. Similar limitations have been imposed on shareholders against holding more than 10% stake or having board representation in the AMCs or trustee companies of multiple mutual funds.

The SEBI has also declared that any existing non-conformity should be resolved within reasonable time, which the SEBI chairman has prompted to mean a period of 1 year.

Comment: The decision comes in the backdrop of the RBI impelling banks to liquidate their holdings in multiple AMCs to 10% or less in light of them having their own AMCs along with having significant shareholdings in other AMCs. A good example would be the case of UTI Asset Management Company (UTI AMC) where several banking conglomerates such as Bank of Baroda, Life Insurance Corporation of India, Punjab National Bank and State Bank of India have holdings of more than 10% each. Each of these entities run their own fund houses, and therefore will be required to dilute their individual holdings in UTI AMC to less than 10%.

  • Khaitan & Co Funds Team

Footnotes

[1]A copy of the REITs Consultation Paper is available at https://www.sebi.gov.in/sebi_data/attachdocs/1468840545048.pdf.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions