SEBI approves new asset class for HNIs, passive fund framework; rights issue timeline slashed: 5 key highlights

Capital markets regulator Securities and Exchange Board of India (SEBI) conducted its board meeting on Monday, September 30 and approved key measures for easing trading practices for regular investors and simplifying norms in the mutual funds (MF) industry. The market watchdog surprised investors by refraining from announcing measures to limit a surge in derivatives trading, as was widely expected by D-Street experts and traders.

SEBI Chairperson Madhabi Puri Buch had described the surge in derivative trading as a ‘macro issue’ that diverts capital from productive use in the economy. Her warnings — and tax hikes coming into effect next month — have helped lower the volume of contracts traded from a record $6 trillion in February.

Also Read: SEBI okays new product bridging MF, PMS

SEBI Board Meeting Outcome: Here are five key highlights

1.New asset class for HNIs with higher risk appetite

SEBI stated that asset management companies can now offer riskier strategies, like long-short equity, to high-risk investors with a minimum investment of ₹10 lakh. Positioned between tightly regulated MFs and lighter-touch portfolio services, this class will give high net worth (HNI) investors exposure to equity derivatives. 

This is a new investment product under the existing mutual fund framework to bridge the gap between mutual funds and Portfolio Management Services (PMS) regarding flexibility in portfolio construction.

“Offerings under the new product will be referred to as ‘Investment Strategies’, to maintain clear distinction from the schemes offered under the traditional MFs. The minimum investment limit for the new product will be ₹10 lakh per investor across all investment strategies of the new product in a particular AMC. The new product is intended to add depth and variety to the country's investment landscape through a new asset class,” said SEBI.

Also Read: SEBI board meeting today amid growing pressure on Chairperson Madhabi Buch over conflict of interest

The safeguards for the new product will include no leverage, no investment in unlisted and unrated instruments beyond those already permitted for mutual funds and derivatives exposure limited to 25 per cent of assets under management (AUM) for purposes other than hedging and rebalancing.

2.Introduction of MF Lite framework for passive funds

SEBI introduced a relaxed framework with light-touch regulations, ‘MF Lite,’ for entities desirous of launching only passive mutual fund schemes. The MF Lite framework or light-touch regulations include relaxed requirements relating to eligibility criteria for sponsors, including net worth, track record, profitability, the responsibility of trustees, approval process, and disclosures.

The framework intends to promote ease of entry, encourage new players, reduce compliance requirements, increase penetration, enhance market liquidity, facilitate investment diversification and foster innovation.

Also Read: SEBI cuts down timeline for debt securities from T+6 to T+3

Various provisions of the existing regulatory framework may not be relevant for passively managed schemes. A relaxed framework with light-touch regulations has been approved as MF Lite Regulations for passive MF schemes.

SEBI said that existing AMCs with active and passive schemes will have the option to hive off respective passive schemes, if they so desire, to a different group entity, resulting in the management of active and passive schemes by separate AMCs under a common sponsor.

If they choose to continue the passively managed schemes within the existing AMCs under the existing MF Regulations, the relaxed disclosures and other regulatory requirements for the passive schemes based on indices covered under the MF Lite framework will also apply to them.

Also Read: Risk managers in demand as Sebi wants another 1,000 firms to tighten control
 

3.Rights issue timeline slashed to 23 days

SEBI has approved norms to enable faster rights issues through the preferential allotment route. This new route can be completed in 23 days from the issuer's board meeting approving the rights issue, versus the present timeline of 317 days, and faster than the 40 working days needed to complete the preferential allotment.

SEBI approved discontinuing the current requirement of filing a draft letter of rights offer with Sebi of its observation. Instead, it will be filed with stock exchanges for its in-principle approval, as the entity is already listed. Stock exchanges would confirm that the issuer complies with LODR disclosure requirements.

SEBI called for “rationalization of the content of Letter of Offer to contain only the relevant incremental information regarding rights issue viz. object of issue, price, record date, entitlement ratio, etc.” SEBI also dispensed with the mandatory requirement that an issuer appoint a merchant banker and made it optional subject to completion of rights issue within 23 working days.

Also Read: SEBI may adopt all Padmanabhan committee measures to curb retail F&O frenzy

"With reduced timelines, corporates can have faster access to funds through rights issues. Revised rights issue timelines would make it a preferred option for fundraising as it allows all existing shareholders to be a part of the company's growth story,” said Makarand M Joshi, Founder MMJC and Associates, a corporate compliance firm.
 

4.Expansion of ‘connected person’ under insider trading norms

SEBI expanded the definition of “connected person” and “immediate relative” under insider trading regulations to facilitate effective investigation and enforcement against insider trading. The spouse, child, parent, and sibling of the person have been added under the definition of ‘relative’.

“SEBI's decision to expand the scope of connected persons would increase the scope of the prohibition of insider trading regulations,” said Makarand M Joshi.

“It would bring within its ambit many more persons (viz, a person sharing a household or residence with a ‘connected person, a firm or its partner or its employee in which a ‘connected person’ is also a partner, etc). who are indirectly associated with the securities market through intermediaries, fiduciaries or distant relatives of persons working in listed companies,” he added.

Also Read: SEBI's UDiFF cuts reporting formats from 200 to 23, members to save ₹200 crore
 

5.Eligibility norms for IAs, RAs relaxed; UPI options to trade

Qualified stock brokers will mandatorily offer investors the option to trade in the secondary market - cash segment using a UPI block mechanism (ASBA-like for secondary markets) or a three-in-one trading facility in addition to the current trading mode. SEBI also relaxed the eligibility criteria for registration and simplified the compliance requirements for Investment Advisers (IAs) and Research Analysts (RAs).

Other key announcements:

-The number of scrips eligible for trading under optional T+0 settlement will be increased in a phased manner from the 25 to top 500 in terms of market capitalization. Foreign Portfolio Investors (FPIs), and mutual funds will be able to access the optional T+0 settlement cycle.

-The optional block deal window mechanism will be introduced under the T+0 settlement cycle as an 8.45 a.m. to 9.00 a.m. session. An earlier proposal to move from optional T+0 settlement to optional instantaneous settlement is not under consideration for now.

Also Read: Strengthen stewardship to give voice to retail investors: SEBI chief to MFs

-Introduction of a single filing system for the listed entities to file relevant reports, documents, etc., on one stock exchange, which will be automatically disseminated at the other exchange.

-The rights of the investors in investments in and distributions of the returns from a scheme of an alternative investment fund (AIF) will be pro-rata to their commitment to the scheme. In all other respects, the rights of the investors of a scheme of an AIF will be pari passu.

- Existing schemes of AIFs that had prioritised distribution to certain classes of investors over others while continuing with the existing investments will not be permitted to raise fresh commitments or make investments in a new investee company, directly or indirectly. 

Also Read: Investors must use UPI to block funds for buying debt securities up to ₹5 lakh: SEBI

-Offshore derivative instruments (ODIs, or P-Notes) and segregated portfolios of FPIs will be subject to disclosure requirements on par with FPIs. This prohibits ODI-issuing FPIs from (i) issuing ODIs with derivatives as reference/ underlying and (ii) hedging their ODIs with derivative positions on stock exchanges.

-ODIs will have cash equity/debt securities/other non-derivative permissible investments by FPI as the underlying. They will be fully hedged with the same securities on a one-to-one basis throughout the ODI's life. Existing ODIs hedged with derivatives will be redeemed or hedged with cash positions on a one-to-one basis within one year from the date of issuance of guidelines.