Monday, March 23, 2015

SEBI Board Decisions

SEBI announced a slew of decisions taken at its board meeting yesterday, which are excpected to have an impact on the capital markets, both primary and secondary.

International Financial Services Centres (IFSCs)

SEBI’s board has approved the SEBI (International Financial Services Centres) Guidelines, 2015, which will help establish IFSCs such as the proposed Gujarat International Finance Tec-City. The idea appears to be to create an environment for attracting domestic and global players to engender vibrant financial markets. This requires several steps to be taken including upgrading securities regulation to meet the requirements (an effort that SEBI has undertaken with this decision), and several other aspects including capital controls and taxation. As a post by Anjali Sharma on Ajay Shah’s Blog argues, there is still a long way to go in creating the required ecosystem. Nevertheless, SEBI’s changes are an important step in the direction. While SEBI’s press release indicates some of the changes, it would be necessary to await the fineprint before expressing detailed comments.

Conversion of Debt into Equity by Banks and Financial Institutions

The current regime is inefficient in its ability to provide an option to banks and financial institutions (Fis) to convert their loans into equity, especialy when the loans turn bad and the company and the lenders wish to restructure them. This because the terms of the conversion are dictated by the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (“ICDR Regulations”), which impose minimum pricing requirements based on the past track record of the stock price of the company. This may make it unviable for lenders to convert at such a minimum price, which may not truly reflect the value of the company that is unable to pay its debts. Moreover, any conversion of debt and acquisition of control would possibly attract the provisions of the SEBI (Substantial Acquisitoin of Shares and Takeovers) Regulations, 2011 (“Takeover Regulations”) triggering a mandatory offer requirement.

In order to overcome these hurdles, SEBI has proposed amendments to the ICDR Regulations and the Takeover Regulations whereby banks and FIs may convert their debt into equity  at a “price being as per a fair price formula prescribed and not being less than the face value of the shares”. Of course, more details are awaited regarding the precise mechanisms, but it is clear that the conversion may be possible at either fair price or face value, whichever is higher. The more onerous pricing norms set out in the ICDR Regulations would not be applicable.

This would confer greater options to lenders facing repayment issues to exercise the right of conversion, and tackle bad loans. It would also create additional options for restructuring by enabling lenders to obtain control over the borrower company, and thereby reduce the moral hazard problems for the borrower’s management.

Continuous Disclosure Requirements

In an ongoing effort to enhance secondary market disclosures and to bring it to the same level of stringency imposed on primary market disclosures, SEBI has set out a list of proposals. For example, every company is required to disclose the outcome of board meetings within 30 minutes of closure of the meeting. Other episodic disclosures are to be made within 24 hours of occurrence of the relevant events. Similarly, there is an express requirement for the company to clarify to the stock exchanges regarding rumours, and also to confirm or deny any reported information to the stock exchanges.

This last requirement makes it important for companies to contain the information with significant transactions are being undertaken (and before they are announced). Any leakage of information would lead to rumours that would cause stock exchanges to confront company managements who need to be prepared to provide updated positions. This is especially cumbersome when the transaction that is the subject matter of the rumour is still in early stages of discussion or negotiation where neither are the details clear nor is there even any level of certainty that the deal will in fact happen. Companies need to be cautious about such information management and must have detailed plans to address such situations.

Municipal Bonds

A few months ago, SEBI had issued a discussion paper on creating a regime for isssue of debt securities by municipal authorities. This is now being operationalized through the proposed SEBI (Issue and Listing of Debt Securities by Municipality) Regulations, 2015. This will likely see another important segment in the securities markets, but its depth and time for evolution is yet unclear.


SEBI’s announcements yesterday include a few other decisions which are contained in SEBI’s press release.

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