SEBI | Corporate Debt Market Development Fund (CDMDF) framework
The Securities and Exchange Board of India (SEBI) unveiled the Corporate Debt Market Development Fund (CDMDF) framework on July 27, 2023, which establishes an Alternative Investment Fund with the objective of enhancing market stability during times of market dislocation.
- Debt-oriented schemes will be required to contribute 25 basis points (bps) of their Assets Under Management (AUM) in CDMDF units. This contribution will increase proportionally with the growth of their AUM and will be subject to review every 6 months.
- The Asset Management Company (AMC) responsible for specified
debt-oriented mutual fund schemes will subscribe to units of the
CDMDF, per the following terms:
- The Association of Mutual Funds in India (AMFI) will calculate the contribution amount for each AMC and its mutual fund schemes. The AMCs and CDMDF will then be informed of these contributions.
- AMCs will make a one-time contribution of 2% of their specified debt-oriented schemes' AUM to the CDMDF.
- The contribution, along with any appreciation on the scheme, will be locked in until the fund is wound up.
- Delay in contributions will attract a penalty of 15% per annum on the respective AMC for the delayed period.
- CDMDF will purchase listed corporate debt securities from specified debt-oriented mutual fund schemes, and SEBI will determine the triggers and the time frame for such actions.
- In times of market dislocation, the CDMDF will acquire securities from the secondary market with a remaining maturity period of no more than 5 years, provided they hold an investment-grade credit rating. Sellers will receive 90% of the payment in cash and 10% in the form of CDMDF units.
- Mutual funds will have the option to sell corporate debt securities from their contributing schemes' portfolios to the CDMDF. The access to this sell facility will be proportionate to the mutual fund's contribution to the CDMDF.
- AMCs will include information about contributing to the CDMDF in their Scheme Information Document by issuing an addendum before initiating the contribution process.
SEBI | Regulatory framework for ESG service providers
Environmental, Social and Governance (ESG) rating providers (ERPs) are regulated under the provisions of Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999 (Regulations) that prescribe guidelines for registration, general obligations, manner of inspection and code of conduct applicable to ERPs. The Securities and Exchange Board of India (SEBI) has recently introduced amendments to the Regulations through the Securities and Exchange Board of India (Credit Rating Agencies) (Amendment) Regulations, 2023 in order to stipulate additional registration and regulation requirements applicable to ERPs.
In this regard, a new Chapter IV A has been introduced in the Regulations, which outlines the requirements for registration, approval, surrender, and stipulates operational guidelines for ERPs. The chapter also covers procedural aspects, reporting and disclosure obligations, internal audit, and general guidelines for ERPs.
- Eligibility conditions for registration of
ERPs: Any entity intending to operate as an ERP can apply
for the grant of a registration certificate from SEBI by applying
in Form A, as prescribed in the fifth schedule of the Regulations,
as Category 1 or Category 2 ERP. Such an applicant shall fulfil the
below mentioned general eligibility criteria (applicable to both
Category 1 and 2 ERPs):
- The applicant must be incorporated as a company under the Indian Companies Act
- Such a company's main objective in the Memorandum of Association should be specified as ESG rating activity
- The applicant should submit a business plan related to providing ESG ratings, including a target breakeven date, target revenue, the number of clients it plans to service within two years, and projected cash losses until the target breakeven date
- The targets set by the applicant should be limited to operations in the securities markets, focusing on listed or proposed-to-be-listed issuers on a recognized stock exchange, and they should be reasonable
- The applicant should declare that it will not engage in any activity or offer any product or service except ESG rating of issuers or securities listed or proposed to be listed on a recognized stock exchange, or other activities specified by SEBI
- Category II ERP cannot undertake certification of green debt securities or other activities specified by the board
- The applicant should maintain a positive liquid net worth as required under the regulations
- The applicant must have the necessary infrastructure, office space, technology, equipment, and manpower to provide ESG rating services as per the Regulations
- The applicant should not be registered as a credit rating agency or any other intermediary registered with SEBI
- The applicant should appoint a compliance officer
- It must have employees with adequate professional and relevant experience to the satisfaction of SEBI
- The applicant and its promoter(s) should be considered fit and proper person as per Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008
- The applicant should not have been refused a certificate under the regulations, deemed not fit and proper by the SEBI, or subject to any enforcement action for a violation of the SEBI Act, 1992 or related rules and regulations
- Granting a certificate to the applicant should be in the interest of investors
- Additional conditions: The Regulations,
amongst others, also provides for certain conditions which are to
be complied by the ERPs, such as:
- In case of any change in control of the ESG rating provider, it shall obtain the prior approval of SEBI for continuing to act as such after the change
- It shall at all times maintain the minimum liquid net worth as required under the provisions of the Regulations
- The ESG rating provider shall meet the targets declared at the time of its application to SEBI within the specified time
- The ESG rating provider does not undertake any activity or offer any product or service, except services related to ESG ratings, etc.
- Additionally, for ERPs to maintain independence in their ratings, SEBI has imposed restrictions on shareholding of ERPs in other ERPs. In this regard, an ERP cannot hold more than 10% of shares or voting rights in another ERP or have representation on its board without approval of SEBI. Similarly, a shareholder owning 10% or more shares or voting rights in an ERP cannot hold the same amount in any other ERP, with exceptions for pension funds, insurance schemes, and mutual fund schemes.
- To provide further clarity and facilitate compliance for ERPs, SEBI has issued a master circular on July 12, 2023, consolidating all relevant directions applicable to ERPs.
SEBI | Circular explaining the 2023 amendment to Mutual Fund Regulations
The Securities and Exchange Board of India (SEBI) through Circular dated July 7, 2023 clarified the amendment notified for SEBI (Mutual Funds) Regulations, 1996 (MF Regulations) dated June 27, 2023 which had introduced a set of new responsibilities for trustees appointed on behalf of mutual fund unit holders, and the board of directors of Asset Management Companies (AMCs) managing such mutual funds to ensure that such persons act in the best interests of the unit holders. This amendment is to be effective from January 1, 2024.
Since certain aspects regarding the responsibilities of trustees and board of directors of AMCs managing mutual funds were found to be unclear/ambiguous, a working group was constituted by SEBI in order to streamline the same. Based on the recommendations made by this working group, which were subsequently deliberated with Mutual Fund Advisory Committee (MFAC), amendments were made to the MF Regulations, specifying the core responsibilities of the trustees and mandating the constitution of unit holder protection committees (UPHCs) for all AMCs.
- Core responsibilities of trustees:
- The trustees have been entrusted with the responsibility to
conduct independent due diligence on certain core areas to
safeguard the interests of unitholders as mentioned below:
- Ensuring fairness of fees and expenses involved o Reviewing performance of AMCs
- Preventing mis-selling and unfair practices
- Ensuring the independence of operations
- Preventing unfair advantage from accruing to associates o Addressing cases involving conflicts of interest o Preventing misconduct in operations
- Additionally, to prevent fraudulent transactions and misconduct, the trustees have been entrusted with the responsibility of devising system level checks at the AMC's end.
- The MF Regulations allow the trustees of a mutual fund to rely upon third-party fiduciaries such as audit firms, legal firms, and merchant bankers to carry out due diligence on their behalf with respect to non-core responsibilities.
- The trustees have been entrusted with the responsibility to conduct independent due diligence on certain core areas to safeguard the interests of unitholders as mentioned below:
- Unit Holder Protection Committees (UPHC):
- The UHPC for a mutual fund is tasked with protecting the interests of unit holders across all products and services provided by an AMC. It is responsible for ensuring adherence to healthy market practices, compliance with laws and regulations, and redressal of unit holder grievances.
- The UHPC is also responsible for reviewing compliance issues and keeping unit holders informed and educated about mutual fund products and investor charters.
- Membership/constitution of the UHPC:
- The Chairperson of the UHPC shall be an independent director, and a minimum of 3 directors would be appointed as members of the UHPC.
- At least two-thirds of the UHPC members shall be independent directors of the AMC. o The members of the UHPC shall be appointed by the board of directors of the AMC.
- Additionally, the UHPC shall have the authority to invite experts or representatives of unit holders as invitees for matters deemed necessary.
- Meetings: The UHPC shall convene a minimum of four meetings in a financial year, where the quorum for meetings shall consist of either two members or onethird of the total UHPC members, whichever is greater, and at least two independent directors shall be present.
- Reporting requirement: The AMC shall present the UHPC's agenda to its members, including the reports on findings and observations related to the protection of unit holders' interests arising from audits, reviews, etc., conducted by the AMC and its internal auditors.
- Powers and responsibilities of UHPC:
- The UHPC shall periodically review unit holders' complaints, including ageing and outstanding ones, relating to mis-selling and fraud as well as assessing the AMC's complaint handling system.
- The UHPC shall lay down guidelines for utilization of the funds earmarked for investor's education and awareness.
- The UHPC will also manage conflicts of interest, address the instances market abuse, evaluate compensation payable to investors and review unitholder protection metrics.
- Other provisions of the amendment
- Appointment of a company as trustee: The amendment dated June 27, 2023 further mandates that in case a company is appointed as the trustee of a mutual fund, the chairperson of its board of directors must be an independent director. The companies already appointed as trustees shall have to comply with this requirement within a period of six months.
- Meetings between the trustee company and the AMC: The board of directors of the trustee company and the board of directors of the AMC, including any of their committees, are mandated to meet at least once a year to discuss the issues concerning the mutual fund, if any, and future course of action, wherever required.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.