SEBI Notifies modifications to Master Circular on Anti-Money Laundering/Combating the Financing of Terrorism

On Wednesday, 12^th March, 2014, Securities and Exchange Board of India (“SEBI”) has notified a circular through which the Master Circular on Anti Money Laundering (AML) Standards/ Combating the Financing of Terrorism (CFT), issued on December 31, 2010 (“Master Circular”), has been modified. The circular, issued in view of the amendments to the Prevention of Money-laundering Act, 2002 (“PML Act”) and related rules, has modified the obligations of intermediaries with respect to risk assessment, recording keeping requirement etc. Following points provide a brief overview of the modifications, as stipulated under the circular:

1.Risk Assessment: In clause 5 (Client Due Diligence), Part II (Detailed Directives), of the Master Circular, a new sub-clause (5.3.2.) has been inserted which requires the registered intermediaries to carry out risk assessment for mitigating its money laundering and terrorist financing risk w.r.t. its clients, countries or geographical area etc. The risk assessment, carried out by the concerned intermediary, shall be updated regularly.

2.Reliance on Third Party for carrying out Client Due Diligence (“CDD”): Again in clause 5, Part II, of the Master Circular, a new sub-clause (5.6) has been inserted to allow registered intermediaries to rely on third party for identification and verification of the client, including the determination as to whether client is acting on behalf of a beneficial owner. Such third party should be regulated and supervised; however, the ultimate responsibility for CDD and due diligence will be that of the registered intermediary.

3. Record Keeping Requirements: Instead of maintaining and preserving transaction records for ‘ten years’ from the date of cessation of the transactions with clients, intermediaries will now have to maintain transaction records, including that of unusual and complex transactions, for a period of ‘five years'. Intermediaries will also have to maintain and preserve records evidencing the identity of clients and the beneficial owners (apart from maintain records of concerned account files and business correspondence). They will have to maintain and preserve records of documents such as passports, driving licenses etc.).

Dawn for REITs in India: SEBI issues consultative paper on Draft SEBI (Real Estate Investment Trust) Regulation, 2013

SEBI has finally released the CONSULTATIVE PAPER on the draft regulation for paving the way for the introduction of Real Estate Investment Trust (REIT) in India. SEBI had, in 2008, issued the first draft regulation for introduction of REITs but since then nothing happened. Finally, SEBI has woken up and issued a consultative paper in order to introduce REITs.

Now, let’s understand what exactly REIT is and how it functions. Real estate investment trusts (“REITs”) allow individuals to invest in large-scale, income-producing real estate. A REIT is a company that owns and typically operates income-producing real estate or related assets. These may include office buildings, shopping malls, apartments, hotels, resorts, self-storage facilities, warehouses, and mortgages or loans. Further, these REITs are publicly traded on recognized stock exchanges. Globally, REITs have been a key driver towards development of the real estate sector, by providing a platform for retail and institutional investors to invest in real estate properties, with the benefits of a regulated structure and risk diversification. The opportunity to take an interest in completed and yield generating real estate assets with the option to obtain regular flow of income from REITs, makes them a popular instrument amongst investors.

STRUCTURE OF REIT IN INDIA

The draft regulation envisage a REIT as a trust set up under the provisions of the Indian Trust Act, 1882 which would raise funds through an initial public offer and be listed on stock exchanges. Further, REITs are required to invest at least 90 % of their funds in completed and rent generating properties. Also, the roles and responsibilities of various key parties to a REIT such as Trustee, the sponsor, the manager and the Principal Valuer appointed by manager are set out in detail.

SEBI finally releases Draft Regulation on Consent Order i.e. SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2013

SEBI has finally issued draft regulation on Consent order i.e. SEBI (Settlement ofAdministrative and Civil Proceedings), Regulations 2013. Now, before moving on to discuss the main features of the draft regulations, certain important point needs to be discussed here. The need to have a regulation for consent and settlement order became increasingly necessary following the promulgation of the Securities Law Amendment Ordinance, 2013. Now, I shall bring out one important fallacy currently prevailing in matters relating to Consent orders passed by SEBI.

[Image Source- Click here]

The Ordinance granted statutory approval and sanction to the consent orders of the SEBI passed over the several past years from any challenge. It may be recalled HERE that the legal basis for guidelines relating to consent order was challenged before the Delhi High Court. However, the PIL was not successful. Thus, it appears that to overcome this and other related concern that the securities ordinance has specifically inserted Section 15JB to empower SEBI to settlement of proceedings with retrospective effect from 20th April, 2007. Also, the first GUIDELINES relating to consent order was issued on 20th April, 2007.

Now, the newly inserted SECTION 15JB (2) states that SEBI ‘may’ agree to a proposal for settlement on such terms “as may be determined by the Board in accordance with the regulations made under this Act”

SECTION 15JB (3) further reads as follows:-

“The settlement proceedings under this section shall be conducted in accordance with the procedure specified in the regulations made under this Act.”

Interestingly, no such Regulations, as mandated, have ever been framed for the settlement proceedings. Only guidelines were issued in the form of Circular by the SEBI. It seems that the earlier Guidelines relating to consent order are liable to be set aside as not being Regulations. Therefore, the SEBI has finally come up with the draft regulations to overcome this difficulty.

Now, we shall move on to discuss the salient features of the Draft regulations released by SEBI.

Modifications in the existing Buy Back Regime: SEBI’s new ‘Buy Back of Securities (Amendment) Regulations, 2013’

SEBI has recently amended the existing buy back regime (Buy Back of Securities Regulations, 1998) concerning the securities market vide notification dated 8^th August, 2013. Thus, the new buy back regime has kicked in by the way of SEBI (Buy Back of Securities) Regulations,2013. Various changes have been introduced in the new regulations to ensure that there is lower volatility in the capitals market. Further, the new regulations has taken a substantial amount of flexibility and leeway, the companies earlier enjoyed concerning the time lines attached to open market purchase of the securities.

Now, before moving on to discuss the changes and modifications introduced in the new buy back regime, a little understanding of what exactly is ‘buy back of securities’ would be useful.  

[Image Source-taxmantra.com]

Buy Back of securities basically means the purchase of securities by a company from its existing shareholders. Thus a company purchases backs its own share in order to reduce the number of shares in the market. Buy back of shares is usually done by a company due to of following reasons-

i.            Return surplus cash to the shareholders

ii.   Support share price during periods of temporary weakness

iii.         Increase the underlying share value

iv.          To increase the value of shares still available (by reducing the supply)

v.      To eliminate any threats by shareholders who may be looking for controlling stake(hostile takeover)

Now, we shall discuss the modifications and amendments introduced by the new Buy Back of Securities, Regulations 2013.

Any 'THIRD PERSON' other than an Intermediary could also be held liable for "Front Running": Securities Appellate Tribunal (SAT)

In a landmark judgment (Vibha Sharma & Anr. v. SEBI) passed by the Securities Appellate Tribunal (SAT) on 4^th Sept. 2013, the tribunal has held that even a “third person” other than an intermediary could also be held liable for ‘front running’ under SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (“FUTP Regulations”). This case is of immense importance as SAT has finally clarified the position of law on matters concerning front running by third persons. Also, the ruling of SAT in the instant case is significant for the reason that SAT had on the contrary, in 2012, in the case of "Dipak Patel" held that only intermediary could be held liable for the offence of front running and not third person under the FUTP regulations.

Now, before moving on to discuss the reasoning of the tribunal, let’s first comprehend what exactly is “front running”. Front running means buying or selling of securities ahead of a large order so as to benefit from the subsequent price move. This denotes persons dealing in the market, knowing that a large transaction will take place in the near future and that parties are likely to move in their favour[1]. Now, this can be best understood through an illustration: Stockbrokers and traders often have access to inside information regarding the investment plans of their firm. Brokers and traders might be lured to use this insider information to make investments that benefit them personally. Suppose a stockbroker at an investment bank has learned that his bank's executive board will purchase 100,000 shares of Company XYZ stock in the coming week. Knowing that this large purchase will push up the price of the stock, the stockbroker purchases 100 shares of Company XYZ for his personal account, hoping to profit from the price jump.

Now, we shall discuss the facts, arguments advanced by both the parties and the tribunal’s reasoning for holding the appellants guilty of ‘front running’.

SEBI Updates: Circular on Investor Grievance Redressal Mechanism

In order to make investor grievance redressal mechanism at Stock Exchanges more effective, Securities and Exchange Board of India (“SEBI”) has decided to shorten the time taken for the proceedings as well as to give monetary relief to the investors. Further, it has been decided to provide monetary relief to the investor. Vide circular dated October 28, 2004, SEBI had notified Comprehensive guidelines for Investor Protection Fund/ Customer Protection Fund at Stock Exchanges. Further, other two circulars, dated August 11, 2010 and January 20, 2010, had notified Arbitration Mechanism and Investor Grievance Redressal Mechanism respectively. The latest circular [favourable to investors], dated September 26, 2013 has the following important features:

         

(Image Source: Smart Business Solutions)

Ø  ØStock Exchanges shall ensure that all complaints are resolved at their end within 15 days. The correspondence with the Member & investor (who is client of a Member) may be done on email.

Ø  ØWhere the matter is not resolved, the conciliation process will start. The Investor Grievance Redressal Committee (IGRC), while resolving the dispute amicably, should adopt a two-fold approach: (i) Consumer Related Complaints - Direction to the Member to render required service; (ii) Trade Related Complaints - an order concluding admissibility of the complaint or otherwise.

Overview of SEBI Notification on 'Angel Funds" and Investors

Recently, Securities and Exchange Board of India (“SEBI”) had notified amendments to SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”) which seek to insert new provisions for “Angel Funds”. The amendments will play an important role especially since they intend to provide a framework for angel funds and angel investors. In this post, I am highlighting the important features of the “Amendments”, i.e., Securities and Exchange Board of India (Alternative Investment Funds) (Amendment) Regulations, 2013].

(Image Source: Growing Business Website)

What are Angel Funds: According to the newly inserted regulation 19A, an “Angel Fund” is a sub-category of Venture Capital Fund under Category I – Alternative Investment Fund (“AIF”). The definition of “Venture Capital Fund”, provided under Regulation 2(1)(z) of AIF Regulations, has been amended accordingly.

As per the amendments, Angel Funds can only be raised by issuing units to angel investors. The corpus of an Angel Fund shall be of at least ten crore rupees. In addition to this, up to a maximum of three years, Angel Funds shall accept an investment of not less than Rs. 25 lakhs (Of Course, through angel investors only!)

Securities Law Amendment Ordinance, 2013: Why SEBI should use its new power with much restraint & caution

As we have already discussed here the wide powers conferred upon SEBI by the virtue of Securities Law Amendment Ordinance 2013, I shall be discussing, in this post, as to why the newly unfettered powers granted to SEBI must be exercised with great caution and restraint. Further, the powers which are handed over to SEBI by way of an Ordinance are sought to be vested permanently by the Parliament. Thus, an analysis of some anomalous amendments emanating in Securities Law Amendment Ordinance 2013 would follow now.

Now the Ordinance has proposed five fundamental and essential changes to the prevailing statutory framework of securities regulations in India. The five changes, as introduced, are listed below-

I.       Giving explicit statutory recognition to the process of Consent Order.

II.    Widening of regulatory net for Collective Investment Schemes (CIS) and Ponzi Schemes

III.  According statutory approval and sanction for taking away fraudulent and ill gotten gains from the violators commonly known as disgorgement.

IV. Granting search and seizure powers to SEBI

V.    Enhancement of power to seek information pertaining to its investigative role.

Securities Amendment Ordinance, 2013: More powers to SEBI to tackle fraudulent schemes

[Note: Author and Contributor of this blog post is Risabh A. Gupta, 3rd Year Student, B.B.A. LL.B. (Hons.), National Law University, Odisha]

Recently, the Securities Amendment Ordinance 2013 has been approved by the Union Cabinet and promulgated by the President of India to give Securities Exchange Board of India (SEBI) more regulatory powers to tackle widespread fraudulent investment schemes across the country. Among various other pertinent things, the ordinance grants jurisdiction to SEBI to effectively regulate various collective investment schemes (CIS) which were allegedly run by the Saradha Group. Thus, before outlining the features of the Securities Amendment Ordinance, it would be very pertinent to know what exactly happened in Saradha scam and then the features of the Ordinance would be discussed as to how it tries to plug in the regulatory and enforcement loopholes.

Saradha group activities and the subsequent scam

     The Saradha group was allegedly running a vast array of collective investment schemes (CIS). Under the scheme, agents were appointed and recruited from the local rural communities and these agents were supposed to collect money from the people by issuing secured debentures and redeemable preferential bonds on commission basis.  Thus, using this scheme huge amount of money was raised by over 100 companies under the Saradha Group. While all along this multi crore scam was taking place, SEBI completely failed to tackle and stop the scam from perpetuating even when it had detected a foul play by the Saradha Group way back in 2009.  Add to this, there were over multitudes of companies which were running similar fraudulent collective investment schemes (CIS), chit funds and multi level marketing scam which the SEBI has utterly failed to regulate and keep a check on their functioning. This in turn has duped a wide number of innocent investors mostly from rural areas.

The Securities Amendment Ordinance, 2013: Features

This perceptible regulatory gap is now sought to be addressed through the ordinance route. The Ordinance seeks to address the visible regulatory gap currently prevailing pertaining to CIS, chit funds scams.  The Ordinance brings out noteworthy changes, predominantly on the enforcement powers and authorities of SEBI. Also, there has been a substantial change relating to the expansion of the ambit and scope of collective investment schemes (CIS).

The Ordinance has formulated amendments to the three securities laws in India, which are (i) the SEBI Act, 1992, (ii) the Securities Contracts (Regulation) Act, 1956 and (iii) the Depositories Act, 1996. The key changes are as follows:

I.         Collective Investment Schemes

The scope of the CIS has been clarified in order to avert any uncertainty pertaining to SEBI’s domain over new methods of raising funds from the investors.

Under section 11AA of the SEBI Act, which details the parameters of a CIS, it is now stated that “pooling of funds under any scheme or arrangement” involving a corpus of Rs. 100 crores or more shall be deemed to be a CIS whether or not it is registered with SEBI. Hence, registration with SEBI is not a precondition and pre-requisite for such scheme to fall within the regulatory purview of SEBI.

II.         Enforcement Methods and Remedies

There have been many instances where although the SEBI has been successful in getting favourable conviction against the defaulters, quite often the enforcement has been very liberal and not desirable at all. The recent Sahara case aptly portrays the enforcement difficulties faced by the SEBI even when the former has been successfully convicted.  There have been considerable hindrances and log jams in enforcing the Court’s order against the persons guilty of non-compliance. These are sought to be rectified by the Ordinance by granting specific powers to SEBI to attach the violators’ property, bank accounts, and also the arrest and detention of the violator.

III.         Special Courts

One of the chief and pertinent sections of the Ordinance is that it seeks to establish a special court in order to ensure that cases involving securities regulation which go to the court are handled in a timely manner. However, the fact remains that visibly there has been no track record of criminal prosecution of securities offenders that may act as a deterrent. But again, as we have seen the constitutional challenge to the NCLT (National Company Law Tribunal) formed under the aegis of Companies Act, it remains to be seen whether such impediments would be faced by the securities law special court in its establishment and functioning.

IV.         Investigative Powers

Additional powers have been conferred upon the SEBI under Section 11C of the SEBI Act which deals with investigation of the fraudulent practices. The additional powers of search and seizure, recording of statements under oath would further strengthen the currently available powers of SEBI.

Furthermore, this ordinance has tried to resolve a bone of contention in various insider trading cases by conferring upon SEBI the right to call for information and record relevant information, including telephone data records. Thus this negates the requirement of direct evidence which is rarely available. Also, international developments like the conviction of Rajat Gupta and Rajaratnam in insider trading cases also demanded that SEBI ought to granted more power. The conviction of these persons in U.S. was obtained on the basis of call records.

Also, the power of SEBI is extended to obtaining information from international sources through regulators in other countries with whom it has entered into an arrangement for sharing of information.

Lastly, the Securities Amendment Ordinance has endeavoured to bring in worthy steps forward in fostering greater stringent regulations in securities, predominantly in the area of effective enforcement.

Amendment to SEBI Regulations - Issue of Capital and Disclosure Requirements

SEBI has recently issued notification on 23^rd September 2011 by means of which it has amendment Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 (“Regulations”) for the second time. This post will throw light on the important issues pertaining to this amendment –

Rights Issue of Indian Depository Receipts – Requirement of Satisfaction of Certain Conditions by the Issuer (Insertion of Chapter XA)

Chapter XA has been inserted in the Regulations related to rights issue of Indian Depository Receipts (“IDR”). Section 106A states, in addition to compliance with Chapter X of Regulations, issuer has to fulfil the conditions mentioned therein under Chapter XA. Ath the same time, these provisions will not be applicable to the rights issue under Regulation 98, 102 and 103, of the Regulations which connotes Conditions for issue of IDR, Display of Bid Data, and Disclosure in prospectus and Abridged Prospectus respectively. Further, Section 106A obliges an issuer to prepare the offer document in accordance with the home country requirements Section 106B signifies the eligibility criteria of an issuer in relation to IDR. Further, Section 106C provides regulations as regards Renunciation by IDR holder. Other provisions under this Chapter are as follows

Regulation 106D – Steps to be taken by Domestic Depository for IDR holders

Regulation 106E – Announcement of record date for determining eligible shareholders

Regulation 106F – Provisions relating to disclosures in the offer document and the addendum for the rights offering.

Regulation 106G – Provision as regards filing of draft offer document and the addendum for rights offering.

Regulation 106H – Applicability of sub-regulations (1), (2), (3), and (4) of Regulation 106G when certain condition provided therein under Regulation 106H are satisfied.

Regulation 106I – Provision as regards Dispatch of abridged letter of offer and application form.

Regulation 106J – Period of subscription of rights issue as applicable under the laws of the home country of the issuer, but shall not be less than 10 days in any case.

Regulation 106K – Provisions as regards Pre-Issue Advertisement for rights issue.

Regulation 106L – Provisions as regards Utilisation of funds raised in rights issue.

Amendment of Provisions as regards Disclosures in Abridged Prospectus – PART D of Schedule VIII [See regulation 58(1)] –

Provisions relating to Part D of Schedule VIII have been amended by this notification. It basically consists of the provisions relating to the disclosures which ought to be made in Abridged Products.

General Instructions – Information of generic form and not specific form should be brought out under the General Information Document (“GID”). Size of the paper should be A4. Further, provisions relating to the font size and other matters have been included under this new notification.

Disclosures – The requirements of the cover page have been specified under the notification. Also, the provisions as regards the inside cover page have also been provided under the notification. Table of Content should be in tabular form.

History of the issuer and the details of any demergers, mergers and acquisitions to be provided.

Promoters and their background to be provided.

Shareholding pattern and information as regards Boards of Directors. Information in relation to Group Companies, subsidiaries have been provided under this Part of the notification. Summary of Our Business as appearing in offer document. Attention of investor should be invited to refer to RHP for details with regards to business. Summary Statement of Assets and Liabilities, as restated, appearing in offer document in tabular form. The risk factors should be classified. Provisions as regards Particulars of Issue and Basis of Issue Price have been provided. Also, provisions as regards Details of Bidding Centres have been provided.

Disclosures in the Addendum to the Offer Document for Rights Issue of Indian Depository Receipts – Schedule XXI , PART A [Regulation 106F (2)]

The listed issuer making a rights issue of IDRs shall make the disclosures as specified in this Part in the form of an addendum to the offer document.

I. Cover Page – It includes Front Cover Page and Back Cover Pages

II. Instructions for Applications

III. General Information

IV. Management (Board of Directors)

V. Financial Information of the Issuer

VI. Risk Factors and Management Perception, If any.

VII. Capital Structure.

VIII. Particulars of the Issue.

IX. Market price information and other information concerning the shares/IDRs

X. Exchange Rates.

XI. Material Litigations and Defaults

XII. Material Development.

XIII. Material Contracts and Documents for Inspection

XIV. Other Regulatory and Statutory Disclosures.

XV. Undertakings by the issuer in connection with the issue.

XVI. Utilisation of Issue Proceeds.

XVII. Restrictions on foreign ownership of Indian securities, if any.

XVIII. Any other material disclosures (as deemed necessary)

XIX. Declaration.

Disclosures in Abridged Letter of Officer for Rights Issue of Indian Depository Receipts – Schedule XXI PART B [Regulation 106I (1)]

A listed issuer making a rights issue of IDRs shall make disclosures, as required under its home country regulations, if any and as specified in Part B of this Schedule, in the abridged letter of offer for rights offering.

I. Instructions for applicants.

II. General Information.

III. Capital Structure of the Issuing Company.

IV. Terms of the Parent Issue.

V. Particulars of the Issue

VI. Company, Management and Project.

VII. Outstanding Material Litigations and Defaults (in a summarised tabular form).

VIII. Material Development.

IX. Time and Place of Inspection of material contracts. (List of material contracts not required)

X. Financial Performance of the Issuing company as per last completed accounting year for which audit has been completed and for the latest stub period for which audit/limited review has been completed.

XI. Disclosure on Investor Grievances and Redressal System.

XII. Brief details of the Domestic Depository, Overseas Custodian Bank and

Depository Agreement

XIII. Signatories to the Letter of offer