Independent Director Norms Amended by SEBI

A Brief Overview

Presently, those involved in independent directorial roles are required to make an investment amounting to one percent of what the amount raised via a New Fund Offer (or NFO) would be, or invest an amount of INR 50 Lakhs. The independent director is required to pay whichever of the two amounts falls lower than the other.

Amended Norms and New Frameworks

Yesterday, as per a meeting organized by the Securities and Exchange Board of India (or SEBI) approved a whole retinue of measures which held under their belt an array of norms and amendments pertaining to independent directors. Additionally, it also brought forth a framework expected to be followed by accredited investors.

As per SEBI’s stipulations, accredited investors here refer to partnership firms, sole proprietorships, trusts, HUFs, individuals, family trusts, and body corporates keeping in mind the financial parameters that have been outlined.

Fund Managers Beware

In addition to these updates, the Securities and Exchange Board of India has chosen to permit resident Indian fund managers to hold constituent positions for foreign portfolio investors / Additionally, they are now required to amend mutual fund rules such that a minimum investment amount is added to the schemes laid forth by asset management companies (or AMCs) such that investors at least have a certain minimum stake at play in their investments. This is of course understood to be in line with the risks understood to exist with such schemes.

Insider Trading Informants

The Securities and Exchange Board of India has also increased the maximum reward informants are awarded for bringing to their attention information pertaining to insider trading. This reward now amounts to INR 10 crore which is in stark contrast to the currently prevailing reward that amounts to INR 1 Crore. SEBI has however made it clear via a release that the informant responsible will receive up to INR 1 crore following the final order. The remainder of the reward will only be provided following a receipt of the monetary sanctions which should amount to at least two times the balance of the amount to be rewarded to the informant.

Why are these Amendments Being Made?

While at face value each of these amendments and norms might appear to be stringent, these regulatory changes have been introduced and aim to be implemented such that greater transparency and structure prevail. Moreover, the corporate governance standard is set to improve with these new regulations in place.

Indian fund managers will now be responsible for ensuring that the money put forward by retail investors is allocated with a greater amount of prudence and care.

Amendments pertaining to Indian fund managers have been made such that they act with more caution when they launch mutual fund schemes. Additionally, they are aimed at reducing if not mitigating entirely, mis-selling such that public money is handled more judiciously and losses are mitigated.

In the past three years, several retail mutual fund investors have suffered major losses pertaining to their net asset values (or NAVs) owing to having invested in high-risk instruments or by virtue of being exposed to investments being nestled in a single sector.

Other Pertinent Information

In addition to the aforementioned regulations, the Securities and Exchange Board of India has incorporated the following changes.

It has shrunk the investment ticket size required under real estate investment trusts (or REITs). This is owed to their surge in popularity over the last two years.

It has been less stringent in its approach to investment norms pertaining to alternative investment funds (or AIFs)

Directorship norms pertaining to listed companies have however become stricter such that corporate governance standards be better upheld.

Concluding Thoughts

Each of the regulations and norms imposed by the Securities and Exchange Board of India are aimed at making corporate governance standards far superior. Investors should as always invest their funds with caution and understand where their money would be invested if directed towards fund management.