Topics Covered in this article
The Securities and Exchange Board of India or SEBI was established on April 12, 1992, by the SEBI Act, 1992. Its head office is located at Bandra Kurla Complex in Mumbai. It regulates the securities or capital market in India. It issues regulations and compliances for listed companies and tracks any malpractices that may be happening in the capital market. Throughout the years, SEBI has issued various compliances and regulations for listed companies to ensure the fair trading in the capital market and to protect the interest of the investors investing in such companies. This article analyses the SEBI rules and provides an overview of the functions and role of SEBI. It also analyses some of these regulations in light of COVID-19.
Functions and Role of SEBI
Chapter IV of the SEBI Act, 1992, lays down the powers and functions given to SEBI. The functions of SEBI are as follows-
- Developmental functions- It has to ensure and promote fair trade practices. It also provides for systemic data for research purposes. It trains the intermediaries like stock brokers to ensure that they do their work efficiently.
- Protective functions- It issues regulations to prevent frauds and unfair trade practices. It also prevents insider trading by issuing rules for the same. It organizes awareness workshops for investors to make sure that they are aware of their rights and duties.
- Regulatory functions- It is empowered under the SEBI Act to issue regulations for listed companies as well as intermediaries in the stock market. It can levy fees or penalties for the non-compliance of its provisions.
SEBI’s primary role is-
- Protection of investors’ interest in a listed company.
- Regulation, development and improvement of the capital market in India.
- To ensure a safe and transparent marketplace for investors.
- To regulate the intermediaries, like the stock brokers and the investment companies.
Important Regulations by SEBI
The most critical regulations under SEBI are-
- The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
- The SEBI (Prohibition of Insider Trading) Regulations, 2015
- The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
- The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018
The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 or the Takeover Code, 2011 is responsible for regulating acquisitions and takeovers of listed companies. It repealed the Takeover Code of 1997 to make the provisions more streamlined with the present corporate culture. Earlier, there was no provision for unlisted companies; however, with the amendment of February 3, 2020, clarity has been brought in this regard in the Companies Act.
Due to the COVID-19 Pandemic, an amendment was introduced on June 16 2020, which is applicable until March 31 2021. According to the amendment, a person who is a promoter of the company can buy additional shares in a target company raising capital by preferentially issuing equity shares, up to 10% without making a public announcement of an open offer. The purpose of introducing this amendment was to easily raise funds for the company during the pandemic.
The purpose of this regulation is to regulate the mergers and acquisition transactions, while also protecting the interests of the shareholders. However, with the recent amendment in 2020, the threshold of the majority squeezing out minority provision has been decreased from 90% to 75%. Thereby, making it easier for majority to squeeze out the minority.
The Takeover Code, 2011 is a very significant regulation in terms of listed companies as, in the recent years, the growth of mergers and acquisitions has been quite substantial. Since upon the completion of any merger of acquisition, the rights of the shareholders are changed, and the control of the company may also change, it becomes crucial to regulate these transactions.
Some of the key provisions of the Takeover Code, 2011 are provided herein-below-
- Regulation 2(e) of the takeover Code defines control as including the right to appoint a majority of directors; to control management; or to take policy decisions including promoter’s veto rights, either directly or indirectly. It can be by virtue of shareholding, management rights, shareholders agreement, voting agreement or any other manner.
- It is mandatory for any person who is buying shares more than 25%, whether individually or with persons in concert, to provide an open offer which is to be announced publically.
- An open offer refers to the exit opportunity given to the public to sell their shareholding in the target company. The acquirers are compulsorily required to make public offer to acquire a minimum 20% of equity capital. Regulations 3, 4, 5, 5A and 6 of the Takeover Code regulates the various kinds of open offers. They are of three types- mandatory offer, voluntary offer and competing offers.
- A trigger point refers to the instances which trigger an open offer to be made to the public. Initial trigger is where an acquirer holds 25% or more of the voting rights is required to make a mandatory offer. A consolidation trigger happens where acquirer holds 25% or more shares or voting rights but less than the maximum possible non-public shareholding limit in a target company, is required to make a mandatory offer, in a single financial year, on gross acquisition of more than 5% of the shares or voting rights. Further, any person, regardless of the extent of voting rights or shares, who acquires direct or indirect control over a target company is required to make a mandatory open tender offer.
The SEBI (Prohibition of Insider Trading) Regulations, 2015
The SEBI (Prohibition of Insider Trading) Regulations, 2015 or the Insider Trading Regulations, 2015 was notified on January 15th, 2015 and came into effect on May 15th, 2015 to prevent the debacle of insider trading. It replaced the SEBI (Prohibition of Insider Trading) Regulations of 1992 to broaden the scope of the legislation. Two of the most recent amendments were the SEBI (Prohibition of Insider Trading) (Amendment) Regulations, 2018 and SEBI (Prohibition of Insider Trading) (Amendment) Regulations, 2019, which came into effect from April 1st, 2019 and January 19, 2019 respectively, to prevent market abuse and promote fair market conduct.
Insider trading refers trading of shares in a company based on the disclosure of price sensitive information by persons who are part of or close to the management of the company. It is in reference to listed companies whose shares are publically traded on stock exchanges.
The following are some of the important provisions of the Insider Trading Regulations, 2015-
- The regulations are only applicable on listed companies and not on unlisted public or private companies.
- Regulation 2(e)(5) defines insider as any person connected with the company and having information to unpublished price sensitive information.
- Unpublished price sensitive information, as given under Regulation 2(ha) is that information, which hasn’t been published to the public, and if published, would lead to a material change in the stock prices of the company.
- A connected person, under Regulation 2(c), states that a person who is the director or deemed director; or an officer or an employee of the company; or holds a relationship which is professional in nature with the company; such position may be temporary or permanent; and also includes a person who may have such access to unpublished price sensitive information pertaining to the company.
- Trading plans have been introduced according to which the traders can trade in a company. The trading plan has to be approved by a compliance officer and also disclosed publically after which the traders can execute the plan.
- It also provides clear guidelines as to which kinds of communications may be termed as entailing an open offer, in cases of mergers and acquisitions; and which will be termed as insider trading.
- The penalty imposed under Regulation 15G of the Insider Trading Regulations, 2015, cannot exceed 25 Crores or three times the amount of profit made as a result of insider trading, whichever is higher.
The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
The regulations governing listed companies are Securities Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 or Listing Regulations, 2015 and certain provisions of the Companies Act, 2013. It is necessary for a company to comply with the aforementioned requirements for maintaining its status as a listed company and ensuring that no legal liabilities are attracted. The primary objective of these regulations is to ensure a proper corporate governance mechanism and transparency in the company. Since the capital invested in listed companies comes directly from the public, it becomes important to protect the interest of the investors.
The Listing Regulations, 2015 provide for a ‘Uniform Listing Agreement’ to act as the format for the mandatory agreement between the company and the stock exchange. There are two kinds of disclosure requirements under Regulation 30 of the Listing Regulation, 2015-
- Events to be disclosed mandatorily- These kinds of disclosures are mandatory in nature. It does not matter whether they pass the materiality test or not, a company is bound to disclose such events. Some of these events are-
- Outcomes of board meetings;
- Change of directors or Key Managerial Personnel;
- Mergers and acquisitions;
- Agreements which deviate from the ordinary course of business;
- Corporate debt restructuring, etc.
- Events to be disclosed on applying the materiality test- Some events are only to be disclosed depending on whether the meet the criteria of the materiality test. As per the materiality test, the criteria for material disclosures provides that any event which is not disclosed would lead to-
- Alteration of information available to public;
- A substantial reaction from the market if disclosed later on; and
- If the board of directors considers such event to be material in nature.
It is mandatory for companies to form a policy for determining materiality as per the Listing Regulations, 2015.
The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018
The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 or the ICDR Regulations, 2018 came into effect on November 10, 2018, and resultantly, rescinded and repealed the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009. There have been several amendments in the regulations, with the most recent one being on September 28, 2020. During the COVID-19 pandemic, several relaxations were also introduced vide circular dated April 21, 2020, in case of rights issue.
This regulation provides for rules pertaining to the disclosure requirements and the matters related to issuing of capital in case of listed companies. The primary purpose of this legislation is to make the securities’ trading process smoother and more beneficial to the investors as well as the listed companies. The main objective of introducing the new regulations was to simplify the language along with the structure to improve the readability of the rules. It would further help in streamlining the interpretation process and also provide a more comprehensive view of the legislation by combining more information at a single place. It has also aimed at bringing the provisions on the rights issue and disclosures closer to the global practice.
A brief overview of the changes introduced by the ICDR Regulations, 2018 has been provided herein below-
- The listed company is now only required to provide restated consolidated financial statements of the past three years as opposed to both restated consolidated and standalone financial report for the past five years.
- The listed company has to provide disclosure of the audited standalone financial statements of all its material subsidiaries on its website.
- It has amended some definitions, such as employees and advertisements and also inserted new definitions, like associate, group-company, issuer, fugitive economic offender, etc.
- The provisions pertaining to Institutional Placement Programs have been deleted from the ICDR Regulations, 2018.
- The references of the Companies Act, 2013 have been given instead of the 1956 Act.
- A new term called ‘selling shareholder’ has been introduced.
- Changes in qualified institution placements have been introduced by including provisions for an offer for sale.
- The provisions of Initial Public Offers have been separated from Further Public Offers.
SEBI plays the most significant role in the regulation of the securities market to protect the interest of the investors. Along with the issuance of various regulations, circulars and notifications, it also monitors suspicious activities and has the power to take action against the same. However, its lack of enforcement over unlisted companies which allows various private corporations who are indulging in malpractices to run without any proper supervision. Another shortcoming of the SEBI’s regulations is the lack of a Code governing the listed companies, which creates confusion and makes the interpretation of such regulations difficult. There is a need to form a combined code for the Regulations of the SEBI to provide the compliances in a clear, concise and crisp manner that can be easily understood.