Legalaxy - October 2024

SEBI (FOREIGN VENTURE CAPITAL INVESTOR) REGULATIONS, 2000 – AMENDED

Securities and Exchange Board of India ("SEBI"), vide its notification dated September 4, 2024, has notified the SEBI (Foreign Venture Capital Investors) (Amendment) Regulations, 2024 ("FVCI Amendment Regulations"), thereby amending the SEBI (Foreign Venture Capital Investors) Regulations, 2000 ("FVCI Regulations").

The key amendments introduced are:

1. Application for grant of certificate as a foreign venture capital investor ("FVCI") - No person shall buy, sell or otherwise deal in securities as a FVCI unless it has obtained a certificate granted by a designated depository participant ("DDP") on behalf of SEBI, to whom such application shall be made in the form and manner as specified by government or SEBI. FVCI shall pay registration fees of $2500 for registration to the DDP. FVCIs who have already been granted a registration certificate prior to notification of the FVCI Amendment Regulations shall engage a DDP, as specified by SEBI.
2. Eligibility criteria - Application for grant of registration certificate shall be considered upon satisfaction of all the conditions enumerated in the FVCI Amendment Regulations such as applicant being an entity incorporated or established outside India or in International Financial Services Centre, applicant is a resident of the country whose securities market regulator is a signatory to the International Organization of Securities Commission's Multilateral Memorandum of Understanding or a signatory to a bilateral Memorandum of Understanding with SEBI, the applicant being a bank is a resident of a country whose central bank is a member of Bank for International Settlements, applicant or its beneficial owners shall not be a person mentioned in the Sanctions List notified from time to time by the United Nations Security Council, applicant is a fit and proper person based on the criteria specified in the SEBI (Intermediaries) Regulations, 2008, etc.
3. Furnishing of information and personal representation - The applicant may be required to furnish further information or clarification or appear for personal representation before SEBI or the DDP, as may be considered necessary for the grant of the registration certificate.
4. Application to conform to the requirements - An application for grant of registration certificate, which is not complete in all respects or is false or misleading in any material particular or does not satisfy the requirements specified in the FVCI Amendment Regulations shall be deemed to be deficient and liable to be rejected by the DDP. A reasonable opportunity of being heard and to remove deficiency shall be granted and any rejection shall be provided in writing to the applicant. An applicant can apply to SEBI for reconsideration of decision within 30 days from receipt of communication regarding rejection.
5. Registration certificate - Upon fulfilment of requirements under the FVCI Regulations, registration certificate shall be granted to the applicant, bearing a registration number. Application for grant of registration certificate shall be disposed-off within 30 days from the receipt of application by the DDP or after additional information called for has been furnished; whichever is later.
6. Conditions of certificate - The conditions for grant of registration certificate are the same as provided in the FVCI Regulations, i.e., (i) applicant shall abide by the provisions of the SEBI Act, 1992 and the FVCI Regulations; (ii) it shall appoint a domestic custodian for purpose of custody of securities; (iii) it shall enter into arrangement with a designated bank for the purpose of operating a special non-resident rupee or foreign currency account. However, additional obligation has been imposed on the FVCI to inform SEBI and DDP in writing within 7 working days, if it no longer satisfies the eligibility criteria.
7. Renewal of registration and surrender of certificate - The registration granted by the DDP hereunder shall be permanent unless suspended or cancelled by SEBI or surrendered by the FVCI. FVCI shall pay renewal fee of $100, for every block of 5 years from the beginning of the 6^th year from the date of grant of registration certificate and the fee shall be paid before expiry of the block for which fee has been paid. If the FVCI fails to pay the renewal fee along with the late fee as specified in the Second Schedule to the FVCI Amendment Regulations to keep the registration in force, such FVCI shall be deemed to have applied for surrender of its registration. The suspension and cancellation of registration certificate shall be dealt with in the manner as provided in Chapter V of the SEBI (Intermediaries) Regulations, 2008. FVCI can also raise a request for surrender of the registration certificate.
8. Appointment of custodian - FVCI or a global custodian acting on behalf of the FVCI shall enter into an agreement with a DDP and a custodian, before making any investment hereunder. The custodian shall be responsible for: (a) monitoring of investment of FVCI in India; (b) furnishing of periodic reports and such information as called by SEBI; (c) ensuring that the FVCI does not make any new investment or sell its existing investment until renewal fee is paid; and (d) any other condition as may be specified by SEBI.
9. Obligations and responsibilities of FVCI - FVCI shall comply with all the obligations and responsibilities as detailed in Regulation 15A of the FVCI Amendment Regulations which, inter alia, includes compliance with law, inform SEBI or DDP in case any information furnished by it previously are found to be false or misleading in any material respect or if there is any change in the information, inform of any material change in the information including any direct or indirect change in its structure or ownership or control, obtain a Permanent Account Number, etc.
10. Obligations and responsibilities of DDP - The DDP shall open a dematerialised account for the applicant as specified in the FVCI Amendment Regulations, carry out necessary due diligence to ensure that no other depository account per depository is held by any of the concerned applicant as a FVCI, collect and remit fees to SEBI and in case of change in structure or constitution or direct or indirect change in common ownership or control reported by the FVCI, re-assess the eligibility of such FVCI. It shall ensure that only registered FVCI are allowed to invest in securities market. It shall maintain the relevant true and fair records, books of accounts, and documents including the physical or electronic records relating to registration of FVCIs and intimate about its location to SEBI.

The notification shall come into effect from January 1, 2025.

To read the FVCI Amendment Regulations click here

SEBI MODIFIES VALUATION FRAMEWORK OF INVESTMENT PORTFOLIO OF AIFs

SEBI, vide its circular dated September 19, 2024 ("AIF Amendment Circular") has introduced amendments to the Master Circular for Alternative Investment Funds ("AIF(s)") dated May 7, 2024 ("AIF Master Circular") regarding the valuation framework of investment portfolio of AIFs.

The key amendments include:

1. Valuation norms for securities - Subsequent to the AIF Amendment Circular, the revised valuation framework for AIFs is as under:
   1. Valuation of securities for which valuation norms have been prescribed under the SEBI (Mutual Funds) Regulations, 1996 ("MF Regulations") - In case of such securities, which are mostly listed securities, the valuation shall be carried out as per the norms prescribed under the MF Regulations.
   2. Valuation of unlisted securities, thinly traded and non-traded securities - Valuation of securities which are not covered in the MF Regulations, which are mostly unlisted securities, thinly traded and non-traded securities, shall be carried out as per the International Private Equity and Venture Capital Valuation Guidelines (IPEV Guidelines). It is envisaged that the valuation norms for such securities shall be harmonized across entities within SEBI's regulatory purview by March 31, 2025.
2. Change in valuation methodology and approach - no longer a 'material change' - Pursuant to the AIF Amendment Circular, change in valuation methodology/approach shall not be construed as 'material change'. Prior to the amendment, any change in the valuation methodology was construed as material change significantly influencing the decision of the investor to continue to be invested in the scheme of the AIF. Accordingly, such AIFs were required to provide an exit option to existing investors who did not wish to continue post the valuation methodology change.
   
   The AIF Amendment Circular further mandates that subsequent to any valuation methodology change, the valuation of the investment carried out based on valuation methodologies/ approaches, both old and new, shall be disclosed to the investors to ensure transparency.
3. Eligibility criteria for independent valuer - Investment manager of an AIF is required to ensure that the AIF appoints an independent valuer, which satisfies the criteria specified by SEBI in the AIF Master Circular, for valuing investment portfolio of AIFs. The AIF industry had sought a clarification whether valuers who are set up as an entity are required to be Insolvency and Bankruptcy Board of India ("IBBI") registered valuer entity and at the same time, whether all of its members are required to have a membership. SEBI has provided a clarification by introducing the following eligibility criteria for independent valuer for a partnership entity or company:
   1. Such entity or company shall be a 'Registered Valuer Entity' registered with IBBI; and
   2. The deputed/authorized person(s) of such 'Registered Valuer Entity', who undertake(s) the valuation of investment portfolio of AIFs, shall have a membership of the Institute of Chartered Accountants of India or the Institute of Company Secretaries of India or the Institute of Cost Accountants of India or a Chartered Financial Analyst (CFA) Charter from the CFA Institute.
4. Timelines for reporting of valuation of investments of AIF to performance benchmarking agencies - AIFs have now been provided 7 months (erstwhile 6 months) to report valuations based on audited data from investee companies to the performance benchmarking agencies, by October 31^st of each year.

To read the AIF Amendment Circular click here

SEBI (DELISTING OF EQUITY SHARES) (AMENDMENT) REGULATIONS, 2024 – NOTIFIED

SEBI, vide its notification dated September 25, 2024, has notified the SEBI (Delisting of Equity Shares) (Amendment) Regulations, 2024 ("Delisting Amendment"), pursuant to which SEBI has aimed to facilitate the delisting process through the introduction of fixed price mechanism for delisting in addition to the existing reverse book building process and by introducing special provisions for delisting of listed Investment Holding Companies ("IHCs") that meet specified criteria.

Key aspects of the Delisting Amendment are as follows:

1. Fixed-Price Mechanism – In addition to the reverse book building process, listed companies can undertake delisting through the fixed price process which would result in the acquirers getting more certainty on the pricing of the delisting offer. However, this process can only be adopted if the shares of the listed company are being frequently traded. Further, the acquirer is required to provide a fixed price which shall be at least 15% more than the floor price. The acquirer will be bound to accept the equity shares if the post-offer shareholding of the acquirer along with the shares tendered by the public shareholders reaches 90% of the issued share capital of that class.
2. Counter-Offer Conditions – Under the reverse book building process, a counter-price can be provided by the acquirer, however, the same being, inter alia, subject to: (i) the post-offer shareholding of the acquirer, along with the shares tendered by public shareholders, being not less than 75% of the issued share capital; and (ii) not less than 50% of the public shareholding having tendered their shares. The counter-price cannot be less than the higher of: (i) the volume weighted average price of the shares tendered/offered in the reverse book building process; and (ii) indicative price, if any.
3. Computation of the floor price – The Delisting Amendment provides a revised formula for the computation of floor price which considers factors such as volume weighted average market price, adjusted book value, volume weighted average price paid for acquisitions, etc. Floor price means the minimum price offered by the acquirer, while making the proposal for voluntarily delisting of the equity shares of the company.
4. Delisting of IHCs – A separate framework for delisting of IHCs has been introduced wherein IHCs can apply for delisting pursuant to a scheme of arrangement under an order of the National Company Law Tribunal ("NCLT") by way of a selective reduction of share-capital under the Companies Act, 2013 ("Companies Act"). In such delisting, consideration has to be discharged in cash and shares in the following manner: (i) IHC shall transfer the equity shares held by it in other listed companies to its public shareholders (in proportion to their shareholding); and (ii) make payment in cash (value as calculated on a net of pro-rata liabilities) in exchange for the underlying shares or investments made by such investment holding company in unlisted companies or any other assets. The said public shareholding of the IHC would be extinguished upon transfer of the shares mentioned in point (i) and on payment as mentioned in point (ii), by the way of a scheme of selective reduction of capital under Section 66 of the Companies Act.
   
   Such delisting is, inter alia, also subject to the condition that: (i) the IHC shall have not less than 75% of its fair value comprising of direct investments in equity shares of other listed companies; (ii) the IHC shall comply with the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015; (iii) there shall be e-voting by shareholders of such IHC wherein votes cast by public shareholders of the listed investment holding company in favour of the proposal are not less than 2 times the number of votes cast against it; (iv) the material disclosures in relation to calculation of the entitlement ratio and per share consideration shall be included in the explanatory statement of the notice for the shareholders meeting; and (v) the shares of the IHC shall have been listed for not less than 3 years and shall not be suspended at the time of taking this route, etc.
5. Effectiveness of Delisting Amendment – The Delisting Amendment has come into force with effect from September 25, 2024 ("Effective Date"), however, these provisions shall be applicable to such delisting offers whose initial public announcement is made on or after the Effective Date. It is also further provided that that an acquirer may make the delisting offer in terms of the erstwhile delisting provisions, as they existed prior to the Delisting Amendment, till the 60th day from the Effective Date.

To read the Delisting Amendment click here

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