The market regulator approved a number of measures on Wednesday to protect investors and make doing business easier, including stricter regulations for listing small and medium-sized businesses (SMEs), stricter checks on insider transactions, stricter standards for merchant bankers, and simpler regulations for investment trusts.
The most significant initiatives are related to SMEs, where new regulations are intended to protect investors who are at risk while also making sure that the businesses are financially stable. According to the Securities and Exchange Board of India (Sebi), investors wishing to purchase shares in SMEs through initial public offerings (IPOs) must contribute a minimum of ₹2-4 lakh. By doing this, the regulator seeks to restrict SME IPOs to knowledgeable investors who can take on greater risk. For SME IPOs, the minimum application fee is now ₹1 lakh. When submitting its draft IPO documents, the SME must have shown an operating profit of at least ₹1 crore in two of the previous three fiscal years.
An additional significant modification concerns the offer for sale (OFS) made by shareholders. Only 20% of the shares held by SME promoters may be sold collectively during an IPO, and no shareholder may sell more than 50% of their shares. Phased lock-in periods will apply to promoters’ holdings that exceed the minimum promoter contribution (MPC). After a year, half of the excess promoter holding will be unlocked, and the remaining half after two years. These steps are intended to guarantee that promoters maintain sizeable stakes in their businesses following the initial public offering.
The allocation process for non-institutional investors will now follow the same pattern as mainboard IPOs, guaranteeing consistency in how these investors are handled.
SEBI set a ceiling on the amount that could be raised for general corporate purposes (GCP) to restrict the possible end-use of IPO profits. The GCP amount shall be limited to ₹10 crore or 15% of the total amount raised, whichever is less. Additionally, the regulator forbade SME initial public offerings (IPOs) to use the money raised to pay back loans from promoters, promoter groups, or connected parties.
SEBI required that the draft red herring prospectus (DRHP) for SME IPOs be available for public review for 21 days, during which time the public could offer feedback, to increase transparency. As long as they follow the listing guidelines for mainboard businesses, SMEs will also be permitted to stay listed without moving to the mainboard.
Insider trading rules
SEBI suggested broadening the definition of unpublished price-sensitive information (UPSI) under the Prohibition of Insider Trading (PIT) Regulations in an effort to strengthen insider trading laws. This follows a Sebi analysis that revealed businesses frequently neglect to designate specific company advancements as UPSI. The Sebi board gave its approval to add 17 more UPSI products.
Along with flexibility in trading window closure requirements, Sebi also gave companies the option to postpone the designation of events as UPSI, providing a two-day window for revisions.
Merchant banking norms
A thorough revision of merchant banking rules, including more stringent net worth criteria and increased certification requirements, was also authorized by Sebi. Only authorized activities will be permitted for merchant bankers (MBs), except banks, state financial institutions, and their subsidiaries, under the new regulations. Within two years, any operations that are not permitted must be divided into a distinct legal body. These organizations may share resources with the parent MB at arm’s length, but they will function under a separate brand identity.
Depending on their activities and net worth, MBs will be divided into two groups: Category 1 MBs, who have a net worth of at least ₹50 crore, can engage in any activity that is allowed, and Category 2 MBs, who have a net worth of at least ₹10 crore, can do anything that is allowed, except managing equity issues on the main board.
A liquid net worth of at least 25% of the minimum net worth criterion must be maintained by both categories. Additionally, during the previous three fiscal years, MBs must have generated a minimum cumulative revenue from approved operations of ₹25 crore for Category 1 and ₹5 crore for Category 2. Its registration may be cancelled if revenue requirements are not met.
Additionally, the underwriting limit for MBs has been raised to 20 times their liquid net worth, giving these institutions greater freedom to assume underwriting responsibilities.
REITs and InvITs
Additionally, Sebi established policies to make it easier for Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trusts (REITs) to conduct business. One important concept makes the process more flexible by allowing the inter-se transfer of locked-in units within the sponsor group. In order to make it clearer what exactly qualifies as shared assets, the REIT Regulations will now include a definition of “common infrastructure.”
Subject to certain restrictions, REITs and InvITs will also be permitted to purchase unlisted equity interests of businesses that manage the trust’s assets through housekeeping, maintenance, project management, and other activities. By standardizing disclosures in plan offer documents and making it simpler to conduct public unit offers, the Sebi board also simplified regulations for Small and Medium REITs (SM REITs).
PaRRVA
A Past Risk and Return Verification Agency (PaRRVA) was approved by the regulator to allow individuals or their agents who are subject to Sebi regulation to advertise their services to investors using risk-return measures. The risk-return metrics linked to the services provided by these individuals or their representatives will be checked by the agency. A reputable stock market will serve as the PaRRVA Data Center (PDC), and a Credit Rating Agency (CRA) will act as PaRRVA.
For Investment Advisors (IAs), Research Analysts (RAs), Algorithmic Traders, and other organizations approved by Sebi to provide these services, PaRRVA will be in charge of confirming the risk-return measures. For the first two months, PaRRVA will function as a trial program.
