Ministry of Finance | Foreign Exchange Management (Non-debt Instruments) Amendment Rules, 2022

Ministry of Finance (Department of Economic Affairs) on April 12, 2022 vide Notification S.O. 1802(E) notified the Foreign Exchange Management (Non-debt Instruments) Amendment Rules, 2022 (Amendment) amending the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (Rules). The Amendment was issued to bring the Rules in consonance with the modifications in the consolidated FDI Policy, 2020 issued by the government vide Press Note 1 (2022) dated March 14, 2022 which shall come into force from the date of its publication in the Official Gazette.

Key takeaways from the Amendment

  • Increase in the conversion period of convertible notes
    The Amendment has been made with regard to the issue of convertible notes by start-ups. According to the new Amendment, start-ups can now issue convertible notes which are to be converted into equity shares of the company within 10 years from the date of the issue of convertible note. Earlier, the convertible notes had to be converted within 5 years.
  • Broader definition of 'Indian Company'
    As per the Rules, 'Indian Company' means a company incorporated in India. However, the Amendment modified the definition to include a body corporate established or constituted by or under any central or state act. Further, the Amendment also clarified that a reference to 'Company', 'Investee Company', 'Transferor Company' and 'Transferee Company' shall include body corporate as well. However, an Indian company shall not include a society, trust or any entity which is not eligible as an investee as per the FDI Policy.
  • Inclusion of Share Based Employee Benefits
    The Amendment now enables an Indian company to issue 'Share Based Employee Benefits' in addition to employees stock options and sweat equity shares to its employees and directors. Furthermore, the definition of Share Based Employee Benefits has also been inserted.
  • Broader scope of merger or demerger or amalgamation of Indian companies
    The Amendment has widened the scope of this provision whereby the provisions of the said Rules shall now apply to:
    • Scheme of merger or amalgamation of two or more Indian companies, or
    • A reconstruction by way of demerger or otherwise of an Indian company, or
    • A transfer of undertaking of one or more Indian company to another Indian company, or
    • Involving division of one or more Indian company
  • Further, the Amendment also clarifies that the government approval shall not be required for mergers and acquisitions taking place in sectors under the automatic route.
  • Removal of certain activities which were earlier considered as real estate business
    The Rules in Schedule 1 specify the sectors which are prohibited for FDI, which include real estate businesses. In pursuance of the same, the explanation has been substituted by the Amendment and the following activities are exempted from inclusion in real estate business:
    • Development of townships
    • Construction of residential or commercial premises
    • Construction of roads or bridges
    • Educational institutions
    • Recreational facilities
    • City and regional level infrastructure
    • Townships
    • Real estate broking services and Real Estate Investment Trusts (REITs) registered and regulated under the SEBI (REITs) Regulations 2014 and earning rent or income not amounting to transfer
  • Allowing FDI in Life Insurance Corporation of India (LIC)
    As per the earlier Rules, insurance companies regulated by the Insurance Act, 1938 can receive 49% FDI under the automatic route which was not applicable to LIC. The Amendment therefore inserted a new Sub-Clause and as a result LIC can now receive FDI up to 20% through the automatic route.

The Amendment aims to align the existing foreign exchange laws with the modifications issued in the FDI Policy in March 2022. The Amendment has widened the scope in relation of mergers and amalgamations, definition of an Indian company, granting of employee benefits and extension in the conversion period for convertible notes all of which are being highly appreciated by the public in general. However, the Amendment which has generated the most public interest is the insertion of the Sub-Clause F.8.1A which has allowed LIC to receive FDI ahead of its scheduled Initial Public Offer later this year.

SEBI | Stock exchanges to issue SOP under the stock exchange arbitration mechanism

SEBI vide Circular No. SEBI/HO/CFD/SSEP/CIR/P/2022/48 dated April 08, 2022 directed the stock exchanges to put in place a Standard of Operations (SOP) for dispute resolution under the stock exchange arbitration mechanism between a listed company and its shareholders or investors.

As per the circular, the stock exchanges shall have the SOP by June 01, 2022 for operationalizing the resolution of all disputes pertaining to or emanating from investor services such as transfer/transmission of shares, Demat/Remat, issue of duplicate shares, transposition of holders, etc. and investor entitlements like corporate benefits, dividend, bonus shares, rights entitlements, credit of securities in the public issue, interest/coupon payments on securities, etc.

The circular further clarifies that the Registrars and Share Transfer Agents offering services to shareholders on behalf of listed companies, shall continue to be subjected to the stock exchange arbitration mechanism.

Further, the stock exchanges shall notify the listed companies in this regard and disseminate the same on their website.

SEBI | Operational guidelines for covenant monitoring with DLT

Securities market regulator SEBI has recently issued a fresh set of operational guidelines (Guidelines) for security and covenant monitoring using Distributed Ledger Technology (DLT). According to the guidelines, relaxation has been given to the issuers who are unable to record details in the system, meanwhile existing outstanding non-convertible securities issuers have to submit all details in their DLT before September end. The recording of asset details, allotment, listing and payment of interest has been made available in the DLT system with effect from April 01, 2022.

Earlier in August 2021, SEBI had notified specific manner in which the recording of charges by issuers and monitoring by debenture trustees and credit rating agencies are to be carried out, to improve the process of security creation and monitoring of securities.

Key features of the Guidelines

  • Validation checks based on parameters identified for each asset type have been added in the system to ensure the uniqueness of the assets of the issuer offered as security.
  • Debenture trustees, on a yearly basis, shall reconcile and eliminate duplicate entries for an asset in the system.
  • A unique 12-digit alphanumeric asset ID has been allotted to every asset for data exchange and verification across depositories.
  • Movable assets, current assets and any other assets of similar nature will be tracked at the portfolio level.
  • This system directed by SEBI will be applicable to all issuers proposing to issue non-convertible securities on or after April 01, 2022, and every issuer will have to record the details in the system before activation of ISIN.
  • All depositories will be allowed to allot or unfreeze an existing ISIN only after confirming recording of details by issuers as prescribed by SEBI.
  • SEBI has provided relaxation till July 01, 2022 for issuers who are unable to record details in the system after explaining to the depositories. ISIN will not be allotted in case of default or non-compliance to the prescribed rules after the date mentioned by the regulator.
  • For existing outstanding non-convertible securities, SEBI has directed the issuers to submit the details into the DLT system on or before September 30, 2022.

SEBI | Amendment to debenture trustee norms

SEBI vide Notification dated April 12, 2022 notified amendments with respect to the norms related to security cover, disclosure of credit ratings and due diligence certificate for unsecured debt securities. SEBI has also revised the rules pertaining to trustee norms, issue and listing of non-convertible securities norms and LODR (Listing Obligations and Disclosure Requirements) Rules.

Key features

  • The term 'Asset Cover' has been changed to 'Security Cover' in debenture trustee rules and LODR norms as a part of aligning framework and terminology.
  • SEBI has amended the rules in relation to maintenance of security cover sufficient to discharge both principal and interest. In accordance with amended rules related to non-convertible securities, SEBI has directed the issuer to ensure that the debt securities are secured by security cover as per the terms of the document or debenture trust deed sufficient to discharge principal and interest.
  • The notification also explains the need for disclosure requirement with regard to credit ratings and has introduced the requirement of due diligence certificate for unsecured debt securities in the SEBI (Issue and Listing of Non-Convertible Securities) Rules.
  • Details of the credit rating along with latest press release of the credit rating agency declaring validity on the date of issuance and listing, needs to be mentioned in the prospectus.

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