SEBI proposes 4 key revamps to strengthen corporate governance in securities market

Capital markets regulator SEBI (Securities and Exchange Board of India) on May 18 released four consultation papers seeking comments from stakeholders for more transparency and corporate governance.

Framework for registration of Foreign Venture Capital Investors

In the consultation paper, SEBI has proposed streamlining the regulatory framework for the registration of Foreign Venture Capital Investors (FVCIs) in order to ensure adequate due diligence to regulate the money.

"Considering that FVCIs are one of the routes through which foreign investment is enabled in India and that FVCIs have been provided certain benefits to encourage investments in sunrise sectors and start-ups in India, reviewing the eligibility criteria for FVCIs and rationalizing the process of granting registration is necessary to ensure that there is adequate due-diligence and safeguard to regulate the money coming in through this route in India, similar to that prescribed for other routes of foreign investment. Considering the same, it is desirable to align the regulatory framework for registration of FVCIs with that of FPI," SEBI said.

As of March 31, 2023, a total of 269 FVCIs are registered with SEBI. As per the investment data reported by FVCIs as on March 31, 2023, the cumulative investments made by FVCIs directly in investee companies stand at ₹48,286 crore.

Framework regarding fees and expenses charged by AMCs

SEBI has proposed changes regarding fees and expenses charged by asset management companies (AMCs) to unitholders of mutual fund schemes. At present, a slab-based TER (total expense ratio) is applicable for various categories of schemes viz, equity schemes, debt schemes, hybrid schemes and solution-oriented schemes. Further, additional expenses such as brokerage and transaction costs, incentives for B30 investments etc. over and above the TER limits, are also permitted to be charged to unitholders.

According to SEBI, the TER should, in the interest of transparency, be inclusive of the total expenses charged to investors at any point in time. However, at present, certain additional expenses are permitted to be charged over and above the TER thus leading to a lack of transparency in the manner in which unitholders are charged by different mutual funds.

"Keeping the said principle in view, proposals have been made in succeeding paras with respect to the four additional expenses presently permitted over and above TER," SEBI said.

Framework to strengthen governance of AIFs

The SEBI has also proposed amendments with the objective of strengthening the governance mechanisms of AIFs (alternative investment funds). According to the consultation paper, the proposal has been sought so that Category I and Category II AIFs should not borrow directly or indirectly or “or engage in any leverage except for meeting temporary funding requirements for not more than thirty days, on not more than four occasions in a year and not more than 10% of the investable funds.” SEBI noted that the regulatory intent behind permitting borrowing for Category I and II AIFs is that the funds borrowed shall be utilized for meeting the operational requirements of the AIF.

Apart from this, the capital markets regulator has also proposed the requirement of mandatory appointment of a custodian for the safekeeping of securities for AIFs with a corpus of more than ₹500 crore, which may be extended to AIFs with a corpus less than ₹500 crore as well. According to SEBI, existing AIFs with a corpus less than ₹500 crore shall be given a time period of 6 months to appoint a custodian.

"Manager of the AIF shall ensure that the custodian appointed by AIF is not an associate of the manager/sponsor/trustee of the AIF. Existing AIFs who have appointed custodians that are associates of their manager/sponsor/trustee shall be given a time period of 6 months to comply with the aforesaid requirement," SEBI said.

"Custodians shall also be responsible for monitoring investments of AIFs with regard to investment conditions and other related requirements under AIF Regulations," it added.

Framework for unexplained suspicious trading activity

The capital markets regulator has proposed the prohibition of unexplained suspicious trading activities in the securities market. The consultation paper said that a new regulatory framework is required to be conceptualized wherein a person or group of connected persons exhibiting an unexplained suspicious trading pattern i.e. repetitive abnormal gainful dealings in a security or a set of securities, around the presence of material non-public information, would be deemed to be violating the securities laws unless they are able to effectively rebut the said presumption.