Sebi approves gold and social stock exchange, changes to superior voting rights and delisting norms



The Securities and Exchange Board of India on Tuesday announced a slew of reform measures to deepen the securities markets, introduce new investment avenues for investors, eased norms for issuance of superior voting rights to allow founders of venture capital backed companies to retain better control over their companies and ease merger and acquisitions in listed companies.

However, the board did not announce any move to allow private equity funds to acquire control of mutual fund managers, which the markets were anticipating.

The board approved the framework for Gold Exchange and SEBI (Vault Managers) Regulations and approved amendment to SEBI (Mutual Funds) Regulations to enable introduction of Silver Exchange Traded Funds in line with the existing regulatory mechanism for Gold ETFs.

 “The instrument representing gold will be called ‘Electronic Gold Receipt’ (EGR) and it will be notified as “securities” under Securities Contracts (Regulation) Act, 1956. EGRs will have the trading, clearing and settlement features akin to any other “securities”. Any recognized stock exchange, existing as well as new, can launch trading in EGRs in a separate segment,” the board said.

Sebi also approved the creation of the Social Stock Exchange (SSE), under the regulatory ambit of SEBI, for fund raising by social enterprises.

 “Social Enterprises eligible to participate in SSE, shall be entities (NonProfit Organization – NPO and For-Profit Social Enterprise) having social intent and impact as their primary goals. Social Enterprises will have to engage in a social activity out of the list of 15 broad eligible social activities approved by the Board. Eligible NPOs may raise funds through equity, Zero Coupon Zero Principal bonds, Mutual Funds, Social Impact Funds, and Development

Impact Bonds,” the board said.

The regulator also eased norms for superior voting rights, which were envisaged to help founders of venture capital backed companies retain control over their companies. Given that such high growth companies usually raise a lot of capital to push exponential growth, founders tend to get diluted significantly, raising questions over their ability to retain control of the company. The plan to amend these norms comes as many Indian technology startups, backed by venture capital, are gearing up to go public, and many more are expected to follow suit. Among the companies that are planning to go public are Paytm, PolicyBazaar, PharmEasy and many others.

 “As per the existing provisions, an SR (superior voting rights) shareholder should not be part of a promoter group having net worth more than Rs500 crore. This has been changed to require that the SR shareholder, as an individual, should not have net-worth of more than 1000 crore. The minimum gap between issuance of SR shares and filing of Red Herring Prospectus is reduced to 3 months from the existing requirement of 6 months,” the board said.

Sebi also approved changes to delisting regulations to make it possible for acquirers to go for a simultaneous delisting when acquiring control of a listed company, wherein an open offer is triggered.

 “If the acquirer is desirous of delisting the target company, the acquirer must propose a higher price for delisting with suitable premium over open offer price. If the response to the open offer leads to the delisting threshold of 90% being met, all shareholders who tender their shares shall be paid the same delisting price and if the response to the offer leads to the delisting threshold of 90% not being met, all shareholders who tender their shares shall be paid the same takeover price,” the board said.

This move will likely increase M&A in publicly listed companies, said experts.

 “The current requirement of first being required to sell down to 75% and then attempt a delisting process as per the reverse book building process has been done away with. First time acquirer’s can now attempt a delisting by offering what they believe is a commercially reasonable price without having to worry about an exorbitant price thrown up by the reverse book building method. With increasing shareholder activism and sound guidance provided to minority shareholders on the reasonableness of the price offered, this should be an attractive proposition for public M&A,” said Vikram Raghani, Partner at law firm J Sagar & Associates.

Raghani added that reforms announced by the regulator on related party transactions will also help improve corporate governance standards.

 “…the scope of the regulatory framework has been extended to transactions with shareholders holding 10% or more in the company (20% for now which will eventually be transitioned to 10%). From a governance standpoint, this only makes the rules tighter which should work well for all stakeholders involved,” he said.

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