SEBI BROADENS THE SCOPE OF INSIDER TRADING REGULATIONS
Amendment to the definition of Unpublished Price Sensitive Information
The Securities and Exchange Board of India (SEBI) has recently broadened the scope of insider trading regulations by amending the definition of Unpublished Price Sensitive Information (UPSI) under the SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations).
UPSI refers to exclusive/sensitive information (such as financial results, change in capital structure, and mergers) related to a company that could substantially influence its stock prices if revealed, and constitutes a fundamental element of insider trading. Listed entities would often adopt a restrictive interpretation of the existing definition of UPSI that was limited to the specific events expressly mentioned as illustrations below its broad and generic description under Regulation 2(1)(n) of the PIT Regulations, resulting in significant disclosure gaps, inconsistencies in compliance practices, and a lack of clarity in the application of the PIT Regulations. To address these issues and enable informed investor-decisions, the revised definition incorporates 17 additional material events from the 27 listed under Schedule III of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations).
Events recommended by SEBI for inclusion in the definition of UPSI include the following:
- Changes in ratings, excluding ESG ratings.
- Fundraising activities proposed by the company.
- Management or control agreements, regardless of nomenclature.
- Fraud or defaults by the company, promoters, or key personnel, including arrests.
- Key personnel changes, excluding superannuation or end of term, and resignation of statutory/secretarial auditors.
- Resolution plans and one-time loan settlements related to borrowings.
- Admission of winding-up petitions and insolvency resolutions under the Insolvency and Bankruptcy Code, 2016.
- Initiation of forensic audits and related reports.
- Regulatory or judicial actions against the company or key personnel.
- Award or termination of contracts not in the normal course of business.
- Litigation outcomes impacting the company.
- Issuance or withdrawal of guarantees or indemnities outside normal business operations.
- Grant or cancellation of licenses or regulatory approvals.
For the identification of these events, SEBI has applied the existing threshold limits prescribed under Schedule III of the LODR Regulations.
Other recent changes to insider trading laws:
- Structured Digital Database (SDD) flexibility: Entries for events originating outside the company can now be made on a deferred basis within two days, removing the requirement for mandatory trading window closures.
- Expanded definition of 'connected person': The term now includes 'relatives' instead of just 'immediate relatives', widening the scope of individuals subject to the PIT Regulations.
- Reduction in trading plan cooling-off period: The mandatory cooling-off period for trading plans has been reduced from 6 months to 4 months, and a 20% price range for buying or selling shares under such plans has been introduced.
- Price range flexibility: According discretion to insiders to defer trades if execution prices exceed pre-established limits, provided they notify the company's compliance officer within 2 trading days and furnish justifications.
- Adjustments to trading plans: Trading plans can now be adjusted for corporate actions such as stock splits or bonus issuances, with transparent disclosures required to stock exchanges.
- Application to Asset Management Companies (AMCs): Insider trading regulations now extend to AMC employees managing mutual funds to ensure transparency.
SEBI's move signals its commitment to balancing investor protection with market dynamics by strengthening disclosure practices and enhancing safeguards against insider trading.
SEBI INTRODUCES CIRCULAR FOR PASSIVE INVESTMENT SCHEMES
Mutual Funds Lite framework to be e5ective from March 16, 2025
The Securities and Exchange Board of India (SEBI) issued a Circular dated December 31, 2024, introducing Mutual Funds Lite (MF Lite), a framework designed to encourage innovation and accessibility while reducing compliance burdens for eligible passive funds (funds that track indices) such as index funds, exchange-traded funds (ETFs), and fund-of-funds (FoFs), that will be effective from March 16, 2025.
Key features:
- Relaxed regulatory framework: MF Lite reduces compliance and regulatory requirements for specific categories of passive funds allowing for simpler management. This includes a reduction in administrative burden (simplifying registration processes and minimising reporting) and streamlining disclosure requirements (such as combining the Scheme Information Document with the Key Information Memorandum). This improves operational efficiencies and transparency, and reduces operational costs (possibly lowering expense ratios), allowing smaller AMCs to enter the passive investment space.
- Phase I coverage:
-
- Domestic equity passive funds: Funds tracking domestic equity indices with collective Assets Under Management (AUM) of INR 5,000 crore or more.
- Debt-based passive funds: Includes government securities (G-secs), Treasury Bills (T-bills), State Development Loans (SDLs), and constant-duration passive debt funds meeting the same AUM threshold.
- Overseas ETFs and FoFs having a single underlying overseas passive fund with a minimum underlying index AUM exceeding USD 20 billion (approximately INR 1,73,000 crore).
- Commodity-based ETFs and FoFs: Funds based on gold and silver.
- Hybrid passive funds: Introduction of hybrid ETFs/index funds that replicate composite indices comprising both equity and debt components. These are categorised into equity-oriented (65-80% equity), debt-oriented (65-80% debt), and balanced schemes. Asset Management Companies (AMCs) are permitted to launch one ETF and one index fund per category, with a minimum subscription amount of INR 10 crore during the New Fund Offer (NFO) period. By offering investors diversified exposure in a single offering, this introduction deepens the market and encourages broad participation.
- Sponsor eligibility: The framework permits private equity funds to sponsor MF Lite schemes with relaxed eligibility criteria if they meet conditions like a minimum capital requirement of INR 2,500 crore and a demonstrated fund management track record. By diversifying the sponsor base, this is likely to foster competition and innovation.
- Prohibited investments: MF Lite schemes are prohibited from investing in unlisted debt instruments, complex debt products, securities with special features, short selling, and unrated debt and money market instruments.
Possible challenges:
- Reduced oversight: The relaxed role of trustees, who traditionally ensure compliance and safeguard investor interests, could lead to weaker oversight and potential risks for investors.
- Limited market participation: The high AUM thresholds for indices – INR 5,000 crore for domestic and USD 20 billion (approximately INR 1,73,000 crore) for overseas – may restrict market participation for smaller and emerging indices, reducing the variety of benchmarks and potentially stifling innovation.
- Segregation of active and passive operations: AMCs must completely segregate active and passive operations including infrastructure, technology, and staff. This poses significant operational challenges and may deter existing AMCs due to the additional expenses and resource allocation required.
The MF Lite framework has the potential to transform India's mutual fund industry by promoting cost-effective, diversified, and accessible investment options, particularly for retail investors, as SEBI aims to drive innovation and financial inclusion. However, SEBI's continued oversight and clear implementation guidelines will be critical to overcoming the challenges involved and balance operational efficiency with investor protection, ensuring the framework achieves its objectives of reshaping India's passive investment landscape.
RBI EASES NORMS FOR ARCS TO SETTLE WITH DEFAULTERS
Amendment to RBI (Asset Reconstruction Companies) Directions, 2024
The Reserve Bank of India (RBI) recently amended the Master Direction – RBI (Asset Reconstruction Companies) Directions, 2024 (Directions) to simplify the process for Asset Reconstruction Companies (ARCs) to settle with defaulters. The following changes, specifically in paragraph 15 of the Directions, aim to streamline the settlement process, with different provisions for loans of varying sizes and categories:
- Changes in the approval process: Earlier, the process for settlement required the proposal to be examined by an Independent Advisory Committee (IAC) made up of professionals with expertise in finance, law, or technical fields. After receiving the IAC'S recommendations, the settlement proposal would go to the ARC's Board, which included at least 2 independent directors, who would then evaluate the suitability of settlement. The amended Directions now introduce differentiated settlement procedures depending on the loan size:
-
- For an outstanding principal of up to INR 1 crore, settlements will now be handled as per the board-approved policy, with specific stipulations (covering aspects such as the cut-off date for one-time settlement eligibility, permissible sacrifice for various categories of exposures while arriving at the settlement amount, methodology for arriving at the realisable value of the security), subject to a key condition that no official who was involved in acquisition of the financial asset can be part of the settlement approval process.
- For an outstanding principal exceeding INR 1 crore, while an IAC will still review the proposal, the final approval can be made by a Committee of the Board (comprising of at least 2 independent directors including the Chair and at least 3 or one-third strength of the ARC's Board), rather than the entire Board. This change is expected to make the decision-making process more efficient.
- For loans related to fraudulent or wilful defaulters, the procedure applied to loans above INR 1 crore will be applicable irrespective of the above classification, ensuring heightened scrutiny in high-risk cases, even when the loan size is smaller.
- Exhaustion of recovery options: The amended Directions have also relaxed the earlier requirement for ARCs to exhaust all possible recovery options before agreeing to a settlement. Now, ARCs are only required to examine other recovery avenues before determining settlement as the best option. However, in situations where recovery proceedings are still pending, any settlement reached will need to be ratified through a consent decree by the concerned judicial authority.
These amendments are expected to create a more efficient framework for ARCs to settle bad loans, reducing delays and administrative burden, particularly for smaller loans. The new guidelines aim to strike a balance between facilitating quicker settlements and ensuring the integrity of the process, which could enhance the overall recovery rate in the banking sector.
STREAMLINED FRAMEWORK FOR INVESTMENT IN DEBT SECURITIES BY NON-RESIDENTS
RBI (Non-resident Investment in Debt Instruments) Directions, 2025
To consolidate various circulars and directions issues by the Reserve Bank of India (RBI) on investment in debt instruments by non-residents from time to time, the RBI released Master Directions on non-resident investment in debt instruments on January 7, 2025.
Key features:
- Consolidation of laws: The Master Directions consolidate multiple earlier circulars issued under various Regulations under the Foreign Exchange Management Act, 1999 (FEMA) – Permissible Capital Accounts Transactions Regulations, 2000; Borrowing and Lending Regulations, 2018; and Debt Instruments Regulations, 2019 – and directions issued under the RBI Act, 1934 in relation to non-resident investment in debt instruments, creating a comprehensive framework that simplifies governance and compliance.
- Introduction of additional investment channels:
-
- The General Route permits investments in government securities and corporate debts within specified limits.
- The Voluntary Retention Route (VRR) offers long-term investors greater flexibility by exempting them from specific prudential limits if they commit to retaining their investments for a minimum period.
- The Fully Accessible Route (FAR) allows unrestricted investments in specified government securities.
- Sovereign Green Bonds facilitate environmentally sustainable investments through the International Financial Services Centre (IFSC).
- Graded regulatory approach: The Master Directions introduce a differentiated regulatory framework based on the profile of Foreign Portfolio Investors (FPIs). Long-term FPIs benefit from fewer restrictions and lighter compliance obligations, while short-term FPIs are subject to stricter regulatory requirements.
By aligning with global best practices, the Master Directions seek to enhance transparency and reduce compliance for sustainable and long-term investments, as increased participation by non-resident investors will support India's fiscal objectives, deepen debt markets, and improve overall market liquidity. This will also enhance confidence for FPIs, particularly for long-term investors utilising the VRR and FAR. The inclusion of Sovereign Green Bond provisions underscores India's commitment to international environmental standards, fostering sustainable investment opportunities while maintaining fiscal discipline.
To read this Newsletter in full, please click here.
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.
