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Key Regulatory Changes by SEBI
Context:
The Securities and Exchange Board of India (SEBI) has introduced several key regulatory changes, including a new mutual fund scheme for passive funds, enhanced investor rights in alternative investment funds (AIFs), and expanded definitions related to insider trading.
Faster Rights Issue and Allotment Flexibility:
- SEBI has drastically reduced the timeline for rights issues from an average of 317 days to just 23 working days after approval.
- This gives existing shareholders a quicker opportunity to invest in a company’s future growth.
- Companies also no longer need to submit a draft letter of offer to SEBI, and can directly file with stock exchanges.
Pro-Rata and Pari-Passu Rights for AIF Investors:
- AIF investors will now have rights and returns proportional to their investments (pro-rata), with most investors enjoying equal rights (pari-passu).
- SEBI has also allowed AIFs to offer differential rights to certain investors without impacting others, subject to standardised terms.
- Large funds may retain flexibility through side letters, provided they secure explicit waivers from investors.
Expanded Definitions for Insider Trading:
- SEBI has expanded insider trading regulations to include the entire firm where a ‘connected person’ is employed, as well as individuals residing with them.
- The term ‘relative’ now covers spouses and their parents, siblings and their spouses, as well as children and their spouses.
Insider trading refers to the buying or selling of a company’s securities by individuals who possess material, nonpublic information about that company. This practice can lead to unfair advantages in the financial markets and is subject to strict regulations.
‘MF Lite’ Framework for Passive Funds:
- SEBI’s ‘MF Lite’ framework simplifies eligibility criteria for sponsors of passive mutual funds, including aspects like net worth and profitability, along with streamlined trustee responsibilities and reduced disclosure requirements.
Disclosure Requirements for ODIs and FPIs:
- SEBI has aligned the disclosure requirements for offshore derivative instruments (ODIs) and segregated portfolios of foreign portfolio investors (FPIs) with those for FPIs.
- Non-compliance will result in the redemption of ODIs or liquidation of segregated portfolios within 180 days, with defaulting ODI subscribers being barred from future participation.
The New Asset Class:
- Currently, investment products range from mutual funds with a minimum investment of ₹500, to portfolio management services (PMS) requiring a minimum of ₹50 lakh, and alternative investment funds with a threshold of ₹1 crore.
- SEBI’s new asset class is designed to bridge the gap between mutual funds and PMS, offering investors more flexibility in portfolio construction.
Benefits of the New Investment Product:
- This new product aims to provide investors with a professionally managed, well-regulated option that offers greater flexibility and the ability to take on higher risks for larger ticket sizes.
- It also ensures that proper safeguards and risk mitigation measures are in place to protect investors. Key safeguards include:
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- Prohibition on leverage.
- No investments in unlisted or unrated instruments beyond those allowed for mutual funds.
- Derivatives exposure capped at 25% of assets under management (AUM), except for hedging and rebalancing purposes.
- Minimum Investment Requirement: SEBI has set a minimum investment limit of ₹10 lakh per investor for this new asset class, across all investment strategies offered by a specific asset management company (AMC).
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