SEBI meet focuses on supporting RBI address NPA problem…

The SEBI board meeting on 21^st June 2017 was critical in more ways than one. Apart from a routine implementation of ideas that have already been discussed, there is a detailed note on the decisions taken by the SEBI with respect to distressed assets. The RBI has recently pushed through 12 large debt-ridden groups into forced resolution of their debt problem, failing which the companies will go into liquidation under the Insolvency and Bankruptcy Code (IBC). However, one of the big practical hurdles was to be the delineation of jurisdiction between SEBI and RBI in these cases since many of these resolutions will involve change of ownership. Being a capital market transaction pertaining to a listed company, these will obviously come under the purview of SEBI. The SEBI, in its latest Board Meeting, has decided to remove this confusion by excusing SEBI rules in these special IBC cases. Here is how it will work…

No need for open offer in case of sale of distressed assets…

This was one of the key concerns that banks and other potential investors in distressed assets had. Under the current regulations, if an investor takes over the distressed assets under the scheme, they will have to make an open offer to the other shareholders. This was likely to put an immense financial burden as it would reduce the resources available with the investors. That would have acted as a disincentive for investors and banks to participating in these stressed assets. However, SEBI has now clarified that the sale of distressed assets under the IBC code will be entirely regulated and monitored only under RBI regulations and the SEBI will not be applying its open offer requirements to such cases. This is already applicable in the case of CDR cases, but by extending the definition to IBC also, the SEBI has clarified the point beyond doubt.

What price to consider for listed companies?

This has been another moot area in case of listed companies. Since stock prices of such distressed companies can be extremely speculative, using the average of the last 6 months price, as is the norm, may not be the right approach. A better way would be to use the book value of the share or the certified fair value of the share as a base for valuation of such companies. Under SEBI regulations, the base would have to be the average of last 6-months price. SEBI has also agreed to exempt distressed assets from these provisions. Effectively, by giving the full control to the RBI for all aspects concerning the resolution of distressed assets, SEBI has paved the way for a much smoother resolution of the distressed assets problem. However, SEBI regulations on minimum lock-in period of shares acquired through this mode will continue to apply.

A preference for the FPI route over the P-Notes route…

The regulator, for long, had expressed concerns over the quality and colour of money coming into India through the P-Notes route. Since the ultimate investor in case of P-Notes was always hard to establish, SEBI had preferred the direct FPI route over P-Note route for inflows. The regulator has taken two important steps in this direction in the latest board meeting. Firstly, the regulator has officially announced that a fee of $1000 will be charged per P-Note opened by the FPI. This is likely to substantially increase the cost of a P-Note and induce more foreign investors to take up the normal FPI route. Secondly, the SEBI has also made an attempt to ease the FPI regulations both in terms of the fund infusion process and in terms of compliance and regulatory requirements. SEBI has already drawn a consultation paper to facilitate this process. As an immediate booster to FPI investments, SEBI is also looking at expanding the FPI-I status to all countries with whom India has a diplomatic relationship and not just nations with whom India has a DTAA.

A bottom-up re-look at the derivatives market in India…

SEBI is also looking to appoint an expert committee to take a bottom-up approach to the derivatives market. It has been a long time since the regulator made any major changes to the F&O market after the introduction of algorithmic trading and HFT in India. The regulator will put up a discussion paper with a complete review of the F&O market with suggestions to make the Indian F&O market more globally inclined and also in tune with the changing times. The idea is to incorporate the global best practices into the F&O market.

While a lot of decisions taken in the SEBI board meet are critical, the one with the long-term implication will be the decision on SEBI voluntarily excusing itself from the distressed process and giving full leeway to the RBI. That may also be a defining moment for the shape of things to come as far as integrated regulation is concerned!