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| SEBI amends buyback rules, NCS regulations and introduces governance norms for listed REITs and InvITs |
In a recent meeting, the Securities and Exchange Board of India (SEBI) approved the gradual phasing out of share buyback through the stock exchange route as it has several limitations. Furthermore, changes are also proposed in buyback through a tender offer route so as to make it more investor friendly.
In addition to this, SEBI has also streamlined the process for appointment of nominee director in case of default by Debt Listed entities and defined timelines for the listing of Debt Securities or Non-Convertible Redeemable Preference Shares (NCRPS). Furthermore, SEBI has also introduced governance norms for listed Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) in line with corporate governance norms for listed companies.
A gist of the important amendments proposed in the SEBI meeting is summarized in below table:
| I. Amendment to SEBI (Buyback of Securities) Regulations, 2018 |
| Amendment |
Comments |
A. Buyback through Stock Exchange Route:
- Buyback through the stock exchange route to be phased out in a gradual manner.
- Increasing the minimum utilization of the amount earmarked for buyback through the stock exchange route from the existing 50% to 75%.
- Creation of a separate window on stock exchanges for undertaking buyback till the time buyback through the stock exchange is permitted.
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- The method for buyback of securities through stock exchanges suffers various limitations, for instance – It runs contrary to the principle of equitable treatment to all shareholders since there is no concept of proportionate participation. Furthermore, an artificial demand may be created during the buyback period that exaggerates the prices of shares, prevents efficient price discovery, and may be instrumental in manipulating the stock price.
- Accordingly, SEBI has decided to gradually phase out this method of buyback and create a separate window on the stock exchanges to conduct buybacks until then.
- Furthermore, SEBI has also increased the minimum amount to be utilized for buyback to 75%, failure of which attracts forfeiture of a percentage of the escrow amount and hence prevents companies from announcing buybacks in cases where there is no real intention to complete the buyback for the entire amount.
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B. Buyback through Tender Offer Route:
- Reduction in the timeline for completion of buyback by 18 days by removing the requirement of filing a draft letter of offer with SEBI and its observations thereof and reduction of the duration of the tendering period and period available for payment of consideration to the shareholders.
- Permitting upward revision of buyback price until one working day prior to the record date.
- Making it mandatory to place the relevant advertisements/documents with respect to buybacks, such as a copy of the public announcement, letter of offer, etc., on the respective website of the stock exchange(s), merchant banker, and the company for better dissemination of information to shareholders.
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- Reduction in timelines and enhancement in disclosure norms for buyback through tender route is mostly aimed towards improving the efficiency of the process and providing operational convenience to listed companies.
- Furthermore, permitting upward revision in the buyback price will help a company retain the attractiveness of the offer as there usually is a time gap between the board/ shareholders’ approval and the actual commencement of the buyback offer.
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| II. Amendment to SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (NCS Regulations) |
| Amendment |
Comments |
Amendment of AOA by Debt Listed companies by 30 September 2023
With a view to better protect the interests of debenture holders, it has been decided that Issuers of listed debt securities shall incorporate suitable provisions in their Articles of Association (AOA) to cast an obligation on the Board of Directors of the issuer to appoint the person nominated by its Debenture Trustee (DT) as a Director in the event of default. Corresponding amendments are to be made in the Debenture Trust Deed. The existing listed debt issuers are required to do the needful by 30 September 2023.
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- NCS Regulations empower the debenture trustee with a right to appoint a nominee Director on the Board of a defaulting Company to protect the interest of holders of debt securities. However, enforcement of such right was difficult as there was no enabling provision in AOA allowing Debenture Trustees to appoint nominees.
- To fill this gap, SEBI has directed all issuers of listed debt securities to incorporate suitable provisions in their AOA and cast an obligation on the Board of Directors to appoint the person nominated by its DT as a Director in the event of default and also make Corresponding amendments in the Deed.
- All existing Debt Listed entities will have to amend their AOA and DT by 30 September 2023.
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Prescribing timelines for opening and closing of subscription window
Presently, there are no stipulations with respect to the duration for which a public issue of debt securities, or NCRPS, should be kept open. With a view to address any possible inefficiencies and delays due to such lack of regulatory mandate, it has been decided that the public issue of Debt Securities and NCRPS shall be kept open for subscription for a minimum of three working days and a maximum of 10 working days.
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- SEBI has now prescribed the timelines for the public issue of Debt Securities and NCRPS in alignment with timelines provided for specified securities under SEBI (ICDR) Regulations, 2018 and it shall be kept open for a minimum of three working days and a maximum of 10 working days.
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| III. Amendment to the SEBI (Real Estate Investment Trusts) Regulations, 2014 and SEBI (Infrastructure Investment Trusts) Regulations, 2014 |
| Amendment |
Comments |
Introduction of governance norms
With the intention to introduce governance norms for REITs and InvITs in line with SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, it has been decided to amend the SEBI (Real Estate Investment Trusts) Regulations, 2014, SEBI (Infrastructure Investment Trusts) Regulations, 2014 and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 to provide as under:
- The corporate governance norms applicable for listed companies are to be applicable to REITs and InvITs, irrespective of whether they issued any debt security.
- However, certain provisions of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, which are not directly applicable or are already specified for REIT / InvIT under respective Regulations, have been carved out.
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- SEBI has decided to make corporate governance norms as prescribed under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, applicable to all listed REITs and InvITs, regardless of whether they issue any debt security.
- This is to bring the corporate governance standards in all listed REITs and InvITs in line with other listed companies.
- However, this is subject to certain exceptions, which will be clarified once SEBI releases the notification in this regard.
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Streamlining provisions related to the tenure of auditor, computation of leverage, unclaimed/unpaid distribution and other provisions for REITs and InvITs
With the intention to streamline the tenure of auditor, computation of leverage, unclaimed/unpaid distribution, etc., SEBI (Real Estate Investment Trusts) Regulations, 2014 and SEBI (Infrastructure Investment Trusts) Regulations, 2014 will be amended to provide as under:
- Tenure of auditor to be till the conclusion of the fifth annual general meeting of unit holders.
- Statutory auditor of REIT/ InvIT to undertake a limited review of audit of all the entities or companies whose accounts are to be consolidated.
- Investment in an overnight fund to be considered as cash and cash equivalent for the purpose of computation of leverage.
- Unclaimed/unpaid distributions for REIT/InvIT to be transferred to the ‘Investor Protection and Education Fund’ constituted by SEBI.
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- The term for an auditor’s appointment in REIT/ InvIT is now fixed at five years in line with the auditor’s term in companies.
- Similarly, unclaimed/unpaid distributions for REIT/InvIT is now required to be transferred to the Investor Education Protection Fund (IEPF), the fund constituted by SEBI for transferring unclaimed/unpaid dividend of companies.
- With these amendments, SEBI has tried to streamline and align certain governance provisions for REIT/ InvIT in line with those of companies.
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Our Comments
The decisions made by SEBI are mostly inclined towards providing a more efficient and investor-friendly process for the buyback of securities of listed companies and do away with the existing loopholes in the same. Furthermore, making one-time amendments to the AOA and DT will increase the compliance burden of Debt Listed companies. However, this will help protect the interests of debenture holders in the event of default. Also, introducing corporate governance norms for listed REIT/InvIT will bring their governance standards at par with other listed entities, boosting the overall investor morale. The actual market response can be known only after the notification rolls out, but the decisions prima facie seems to be acceptable with a welcoming approach.
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