SEBI’s Landmark Reforms: A New Era for India’s Capital Markets
On September 13, 2023, the Securities and Exchange Board of India (SEBI) unveiled a series of transformative reforms aimed at enhancing the landscape of public offerings, foreign investor access, and compliance norms in India’s capital markets. These changes are designed to ease the regulatory burden on issuers while broadening market participation, ultimately fostering a more inclusive financial ecosystem.
Staggered Compliance for Large Issuers
One of the most significant changes pertains to very large issuers, specifically those with a market capitalization exceeding ₹1 lakh crore. SEBI has proposed amendments to the Securities Contracts (Regulation) Rules, 1957, allowing these companies to stagger their compliance with minimum public shareholding (MPS) requirements.
Under the new guidelines, companies can now list with a lower public float. If their public shareholding at the time of listing is below 15%, they are required to increase it to 15% within five years and to 25% within ten years. Conversely, if the public shareholding is already at or above 15%, the 25% threshold must be achieved within five years. This flexibility is also extended to issuers with a market capitalization above ₹5 lakh crore, ensuring that large companies can navigate the listing process more smoothly.
Revised Anchor Investor Norms
In a bid to attract more institutional investment, SEBI has revised the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, particularly concerning anchor investors. Life insurance companies and pension funds will now be included in the reserved anchor investor portion, alongside mutual funds.
The overall anchor reservation has been increased from one-third to 40%, with one-third specifically allocated for mutual funds and the remaining portion for insurers and pension funds. Additionally, the cap on the number of anchor allottees has been relaxed, providing greater flexibility for large Foreign Portfolio Investors (FPIs) managing multiple funds.
Simplifying Related Party Transactions
SEBI’s reforms also extend to related party transactions (RPTs), where the board approved amendments to ease compliance under the Listing Obligations and Disclosure Requirements (LODR). The new rules introduce scale-based thresholds and simplify disclosure norms, making it easier for companies to navigate these often-complex regulations.
Enhanced Access for Foreign Investors
To further bolster foreign investment, SEBI has allowed retail schemes in International Financial Services Centres (IFSCs) with Indian sponsors to register as FPIs. Additionally, the newly approved SWAGAT-FI framework aims to streamline access for trusted foreign investors, including sovereign wealth funds and pension funds. This move comes at a crucial time, as recent months have seen increased international outflows driven by high U.S. tariffs and elevated valuations.
Changes in Mutual Fund Regulations
In a significant shift, SEBI has reduced the maximum exit load in mutual funds from 5% to 3%. This change is expected to make mutual funds more attractive to investors. Furthermore, new distributor incentives have been introduced to encourage onboarding women investors and those from B-30 cities, promoting financial inclusion.
Reclassification of REITs and Investment Thresholds
SEBI has reclassified Real Estate Investment Trusts (REITs) as equity instruments for mutual fund investments, paving the way for higher participation and potential index inclusion. Additionally, the minimum investment threshold for Large Value Funds (LVFs) under Alternative Investment Funds (AIFs) has been lowered from ₹70 crore to ₹25 crore. A new category of AI-only funds has also been created, offering regulatory flexibilities to attract more investments.
Strengthening Investor Outreach
To enhance investor engagement, SEBI has proposed establishing local offices in key state capitals such as Jaipur, Lucknow, Hyderabad, and Bengaluru. This initiative aims to strengthen outreach and provide better support to investors across the country.
Governance Enhancements for Market Infrastructure Institutions
Finally, the new decisions have tightened governance norms for market infrastructure institutions (MIIs). The regulations now mandate that MIIs have two executive directors responsible for oversight on compliance and risk management, ensuring a more robust governance framework.
Conclusion
SEBI’s recent reforms represent a significant step forward in making India’s capital markets more accessible and efficient. By easing compliance burdens, enhancing foreign investor access, and promoting financial inclusion, these changes are poised to invigorate the market landscape, fostering a more dynamic and inclusive financial ecosystem. As these reforms take effect, they are expected to attract a broader range of participants, ultimately contributing to the growth and stability of India’s economy.