Sebi Board clears key proposals on MF Lite regulations, New Asset Class at first meeting since Hindenburg allegations

The board of the Capital Market Regulator, Securities and Exchange Board of India (SEBI), met on Monday to make several decisions, including a much-anticipated nod to the proposed Mutual Fund Lite Regulations and a new asset class to fill the gap between mutual funds and portfolio management services (PMS). This development confirmed an earlier exclusive report by Zee Business last week.

Here are some important decisions made by the board at its September 30 meeting:

• Green Light to MF Lite Regulations: Considering the lesser risk inherent in managing passively managed MF schemes, the proposed MF Lite Regulations aim to reduce compliance requirements, foster innovation, encourage competition, and promote ease of entry for mutual funds interested in launching only passive schemes. The regulations are expected to facilitate investment diversification, increase market liquidity, and encourage new players.
• Go-Ahead for New Asset Class Proposal: A minimum investment of Rs 10 lakh has been proposed for this new asset class, which will be riskier than mutual funds and will not be permitted to be advertised as a mutual fund product. However, it will be suitable for higher-risk-taking investors previously engaged in the unregulated sphere. Such investors may now benefit from a well-regulated entity.
• New Rules for Investment Advisors and Research Analysts: The board has approved certain norms for investment advisors and research analysts that will remove the requirement of passing the base certification every three years and relax existing minimum qualification requirements for registration from a postgraduate degree to a graduate degree.
• Faster Rights Issues: SEBI aims to make fundraising easier for companies by cutting down the role of merchant bankers and reducing the entire post-board meeting timeline to around 20 days. This will create a hybrid of rights issues and preferential issues, making rights issues the preferred route for fundraising by companies.
• Changes in ICDR & LODR Rules: A proposed harmonization of ICDR and LODR norms has also been cleared by the market regulator's board. ICDR rules apply to the issuance of capital and disclosure requirements, while LODR norms comprise listing obligations and disclosure requirements. This includes a review of regulations linked to related party transactions, promoter classification, a single filing system for IPOs across stock exchanges, a three-month timeline for filling board vacancies, and strengthened corporate governance-related issues in the ICDR framework.
• Merchant Banking-Related Rules: The board has reviewed certain regulations applicable to merchant bankers that define which activities they can undertake.
• Scope of Connected Persons Expanded: To address the persistent issue of insider trading, the board has approved a proposal to expand the scope of ‘connected persons.’ This change acknowledges that certain individuals not currently covered by the definition of ‘connected persons’ under existing regulations may still have access to unpublished price-sensitive information (UPSI) due to their close relationships with such persons. This proposal was influenced by an insider trading case involving a Delhi-based corporate group.
• Small Matters Related to Non-Compliance to be Brought into Summary Proceedings: The board has approved a proposal to expand summary proceedings for intermediaries regarding certain obvious violations that are either accepted by the intermediary or require minimal documentation or evidence to corroborate the facts.
• Top 500 Companies by Market Cap to Qualify for 'T+0' Settlement System: The board has also cleared a proposal to make the top 500 companies by market value eligible for the 'T+0' settlement system.
• Simplification of Nomination Facility: The board has approved a proposal to simplify the existing nomination facility.

Monday's meeting was significant as it was the first time the regulator's board engaged in discussions since the release of a report by US-based short-seller Hindenburg Research in August, which made serious allegations against the regulator's chairperson, Madhabi Puri Buch. The SEBI chief has repeatedly denied these accusations.

Pressing issues, such as the Hindenburg report and a recent protest by a section of SEBI's employees, were not discussed at the meeting.