SEBI December 18 Board Meeting: Tighter regulations for SME IPOs, wider scope of UPSI, performance validation agency, other proposals for board test

Market regulator Securities and Exchange Board of India (SEBI) is meeting on December 18 to discuss and finalise various policy proposals. As per the statute, the SEBI board is required to meet every quarter. The last board meeting took place on September 30 and the next is scheduled on December 18. The regulator's board has a slew of items on the agenda for the upcoming meeting. Important proposals are likely to be discussed at the meeting, concerning aspects such as SME IPO regulations, merchant banker regulations, performance validation agency framework, public interest director regulations, and custodian regulations.

Major overhaul of SME IPO rules

According to sources, the board is likely to discuss and approve new regulations related to how small and medium-sized companies tap the capital market. SEBI has proposed a wide range of tweaks in SME IPO regulations including an increase in application size from existing Rs 1 lakh to Rs 2-4 lakh. While one proposal is to double the amount to Rs 2 lakh, another suggests an increase to Rs 4 lakh per application in view of around 4.5 times growth in Nifty and Sensex in the past 14 years. The board is also likely to consider setting up a monitoring agency to track the usage of issue proceeds, limiting the size of an offer for sale (OFS) for promoters to 20 per cent of the issue size. Currently, there is no such restriction on OFS. The condition of Rs 3 crore operating profit in two out of three years and track record is also proposed as a condition for IPO. SEBI is of the view that the allocation of SME IPOs can be aligned with that of mainboard offers. The minimum issue size is proposed to be a minimum of Rs 10 crore and the promoter lock-in increased to five years from the current three years. Quarterly disclosures of financial results restricting fundraising for loan repayment to related parties, opening DRHP for 21 days for public comments, and expenses such as merchant banking fees and the dues of staff PF and ESIC may also be required.

Tightening the scope of insider trading 

SEBI intends to widen the scope of the meaning of unpublished price sensitive information (UPSI) to now include activities like fundraising, corporate insolvency and loan restructuring, management and control agreements, regulatory and legal actions licenses, and guarantees.  Also, events such as mergers, acquisitions, delisting, major business expansions, awards or terminations of significant contracts outside the ordinary course of business will also qualify as price-sensitive information. A recent study conducted by SEBI revealed that many listed entities are narrowly interpreting the term UPSI. Companies often limited their classification of UPSI to the explicit examples listed in the SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations), ignoring the broader intent of the regulation. This limited interpretation led to non-compliance with the law in spirit and raised concerns about inconsistent disclosures and misuse of sensitive information. 

Review of merchant banker regulations

The SEBI board is also likely to discuss and approve merchant banking regulations, according to the sources. The board is likely to discuss and consider the review of net worth requirements for merchant bankers. Currently, merchant bankers require a minimum net worth of Rs 5 crore, which has not been revised since 1995. SEBI is proposing two categories for merchant bankers: Category 1 and Category 2. Category 1 will have a net worth of not less than Rs 50 crore and will be permitted to deal with all kinds of activities. Category 2 will be required to maintain a minimum of Rs 10 crore net worth and permitted to undertake all kinds of activities except mainboard issues. Existing merchant bankers will be given two years to fulfill the revised net worth criteria.  Minimum liquid net worth, aligning the net worth with the Companies Act is also under review. The board will also review the multiple registration licenses within the same group. SEBI believes such licenses are prone to misuse, if one is canceled the activities may shift to another. Although banks and public finance groups will be allowed to have more than one others will be restricted to one only, and those having more than one will be given a one-year time frame to surrender. A review of minimum and maximum underwriting obligations is also on the cards, according to the sources. Merchant bankers won’t be allowed to underwrite more than seven times of net worth and 20 times of liquid net worth, as against the current 20 times net worth. SEBI is of the view that 20 times is too high and needs to be aligned with the market risk.

Framework for performance validation agency

The long pending proposal of the performance validation agency may go to the board again for consideration. SEBI had floated a consultation paper on the same. An entity under NSE will be the first such agency. SEBI may initially allow it for investment advisors, research analysts, and algo makers. This will be voluntary for the market participants in order to get their claims authenticated. The proposal was put up in the September board meeting but it was decided that it would be taken up later due to some concerns were raised. The proposal may again be placed before the board with some tweaks.

Review of public interest director appointments 

SEBI board may also consider a proposal to review the public interest directors-related regulations. Public interest directors (PIDs) are like independent directors in market infrastructure institutions (MIIs) like exchanges, clearing corporations and depositories. The proposal seeks to incentivise PIDs by offering a fixed remuneration of a maximum of Rs 30 lakh per annum in addition to sitting fees and expenses related to attending meetings. Due to a shortage of quality PIDs, the cooling period may also be relaxed. However, this may apply only to cases where a PID is joining a rival MII or MII associate. MIIs had said to SEBI that there are skilled and well-trained PIDs available that cannot be utilised because of this blanket restriction of one one-year cooling off period. Existing rules say that PIDs after completion of their two terms in one MII and seeking appointment as PID into another MII have to wait one year before such appointment. Additionally, they cannot join the subsidiary of the existing MII before a cooling-off period of three years.

Review of custodian regulations

The SEBI board is also likely to approve the net worth requirements for custodians from Rs 50 crore to Rs 100 crore. Other regulatory changes may include a mandatory business continuity plan (BCP) or disaster recovery system (DRS) like qualified institutional brokers (QSBs); prescribed code of conduct to include a requirement that they don't indulge in any unfair competition practices, mandating an orderly framework for winding down operations if needed, and allowing non-segregation of allied activities that are regulated by other entities. Custodians are prone to fraud and operational risks and such risks can result in financial losses which may lead to erosion of the net worth of the custodian. Higher net worth will provide a cushion against potential fraud losses and operational risks. Custodians with higher net worth may be better equipped to absorb losses, maintain operational stability, and enhance the trust of their clients and stakeholders in the ecosystem.

Proposals related to mutual funds, MSM REITs and InvITs, and AIFs may also be taken up by the board.

Queries emailed sent to SEBI seeking a response remained unanswered at the time of publishing this report.