Ban on entry load effective from August 1st, 2009

Brief History
• Most equity mutual funds charge retail investors an entry load of 2.25% on their investments. This entry load is mandatorily payable irrespective of an investor's mode of entry.
• The total amount collected as load for each scheme, as per SEBI stipulations, has to be maintained in a separate account by AMCs and can be utilised to meet selling and distribution expenses. As per industry practice, the load is normally utilised for paying the agent/ distributor's commission.
• SEBI had earlier decided that there will be no entry load for the schemes, existing or new, of a mutual fund. The upfront commission to distributors should be paid by the investor to the distributor directly. Moreover, the distributors should disclose the commission, trail or otherwise, received by them for different schemes/ mutual funds which they are distributing or advising the investors.
• MF distributors are against this because its gives investors the right to negotiate commissions while buying MF products through them.
• MFs are against this because entry load helped it to meet selling and distribution expenses.

Ban on entry load effective from August 1st, 2009
Now, SEBI vide its Circular SEBI/IMD/CIR No. 4/168230/09 dated June 30, 2009 has given effect to this decision. The major points in this circular are summarized below: -
• There shall be no entry load for all mutual fund schemes.
• The scheme application forms should carry a suitable disclosure to the effect that the upfront commission to distributors will be paid by the investor directly to the distributor, based on his assessment of various factors including the service rendered by the distributor.
• Of the exit load or CDSC charged to the investor, a maximum of 1% of the redemption proceeds should be maintained in a separate account which can be used by the AMC to pay commissions to the distributor and to take care of other marketing and selling expenses. Any balance should be credited to the scheme immediately.
• The distributors should disclose all the commissions (in the form of trail commission or any other mode) payable to them for the different competing schemes of various mutual funds from amongst which the scheme is being recommended to the investor.

All these decisions are applicable to investments in and redemptions from mutual fund schemes from August 1st, 2009. New mutual fund schemes and Systematic Investment Plans (SIP) launched on or after August 1, 2009 will also have to comply with these rules.

A copy of the circular is available here.

SEBI appoints members of the Advisory Committee for the SEBI Investor Protection and Education Fund

Earlier on May 19, 2009, SEBI had notified the SEBI (Investor Protection and Education Fund) Regulations, 2009. It was done with a view to strengthen its activities for investor protection. SEBI stated that the fund will be used for the protection of investors and promotion of investor education and awareness. This includes educational activities, awareness programs, aiding investor associations etc. The sources of the fund include contribution made by the SEBI to the fund, grants and donations given to the fund by the Central Government and such other sources mentioned in regulation 4. 

Under the regulations, SEBI had to constitute a seven-member advisory committee for recommending investor education and protection activities. Today, SEBI has announced the members of the Advisory Committee for the SEBI Investor Protection and Education Fund. Shri R. K. Nair, Executive Director, SEBI, will be the convener of the committee. Other members are Shri S. G. Kale, Shri Sanjay Sehgal, Ms. D. N. Raval, Smt. Mala Banerjee, Shri A. K. Narayan, Shri G. P. Garg and Shri Suresh Menon. 

A copy of the communication from SEBI is available here.
A copy of SEBI (Investor Protection and Education Fund) Regulations, 2009 is available here. 

SEBI allows managers to keep funds of all clients in one account

SEBI on 23rd June, 2009 has issued two important clarifications. They are summarized below: -

Maintenance of Clients’ Funds in a separate Bank Account by Portfolio Managers
SEBI has clarified that portfolio managers may keep the funds of all clients in a separate bank account maintained by the portfolio manager subject to some conditions. These conditions include clear segregation of each client’s fund through proper and clear maintenance of back office records, maintaining an accounting system containing separate client-wise data etc. It is also specified that Portfolio Managers should not use the funds of one client for another client.

A copy of the Circular is available here.

Applicability of SEBI Regulations/ Circulars on Initial and Continuous Disclosures for Convertible and Non-Convertible Debt
Earlier in May 2009, SEBI had introduced a simplified listing agreement for issue of privately placed debt securities and listing of such securities on the exchange. This has created some confusion regarding the applicability of disclosure norms for issue and listing of convertible debt securities.

SEBI has clarified that issue of debt securities that are convertible, either partially or fully or optionally into listed or unlisted equity shall be guided by the disclosure norms applicable to equity or other instruments offered on conversion in terms of the Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000. Issue and listing of non-convertible debt securities, whether issued to the public or privately placed, is to be done in accordance with the provisions of the Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008.

A copy of the Circular is available here.

'Anchor Investor’ allowed in public issues, Simplified disclosure norms for rights issues and Removal of the entry load on investors in MF schemes

SEBI vide its press release PR No.192/2009 dated June 18, 2009 has announced the decisions took by SEBI Board on the same day. Major decisions are as follows:-
1. ‘Anchor Investor’ allowed in public issues
An issuer making a public issue of shares through book building may allocate on a discretionary basis up to 30% of the QIB portion of the issue to anchor investors (AIs), who is a QIB. The minimum size of application by AIs would be Rs. 10 crore. There will be a lock-in of 30 days on the shares allotted to these investors from the date of allotment. No person related to the promoter/promoter group/BRLMs can apply as anchor investor. 
2. Simplified disclosure norms for rights issues
Since rights issues are made to existing shareholders, who are in possession of basic information about the company and have been receiving reports regarding major developments in the company on a continuous basis, it has been decided to rationalize disclosures in rights issue offer document by doing away with or modifying existing disclosure requirements. Disclosures that have been done away with include summary of the industry and business of the issuer company, promise vs. performance with respect to earlier/ previous issues, ‘Management discussion and analysis’. The disclosures relating to financial statements, litigations, risk factors, etc. have been simplified. 
3. Removal of entry load for the schemes, existing or new, of a Mutual Fund 
4. Holding period for equity shares which are received on conversion of fully paid compulsorily convertible securities – Explained 
Current guidelines state that a shareholder can make an offer for sale of the equity shares if he has held them for a period of at least one year. Board decided that in case equity shares which are received on conversion of fully paid compulsorily convertible securities, including depository receipts are being offered for sale, the holding period of such convertible securities as well as that of resultant equity shares together would be taken into account for the purpose of eligibility.
5. IPOs of unlisted companies should be listed on stock exchange with nationwide trading terminals
An unlisted company making an IPO should list the securities on at least one stock exchange having nationwide trading terminals. This aims at providing a liquid trading platform to investors in securities of the company.
6. Listed company cannot issue shares with superior voting rights
This is to avoid the possible misuse by the persons in control to the detriment of public shareholders.
7. Other decisions
• Measures to improve transparency in payment of commission to Mutual Fund distributors
• Rationalization of the fees of various intermediaries

A copy of the press release is available here.

SEBI and RBI to introduce Interest Rate Futures in India

Last year on February 28, 2008, SEBI and RBI in a joint meeting had decided to constitute a RBI-SEBI Standing Technical Committee on Exchange-Traded Currency and Interest Rate Derivatives. The Committee submitted its Report on Exchange-Traded Currency Futures on May 29, 2008.Now the RBI-SEBI standing technical committee on exchange interest rate futures has come up with the operational guidelines for the introduction of physically settled interest rate futures contract based on 10-year notional coupon bearing Government of India (GoI) security. Members registered with the Securities and Exchange Board of India (SEBI) for trading in currency/ equity derivatives will be eligible to trade in interest rate derivatives also, subject to meeting the balance sheet networth requirement of Rs 1 crore for a trading member and Rs 10 crore for a clearing member. 

Why Interest Rate Futures?

The report also states that the need for Interest Rate Futures arise from the fact that banks, insurance companies, primary dealers and provident funds bear a major portion of the interest rate risk on account of their exposure to government securities. As such these entities need a credible institutional hedging mechanism. In this context, therefore, it is important that the financial system provides interest rate risk management tools through Exchange-Traded interest rate derivatives.

Benefits: - 

The committee has identified the following as the benefits of Exchange-Traded Interest Rate Derivatives

· Standardization – Through standardization, the Exchanges offer market participants a mechanism for gauging the utility and effectiveness of different positions and strategies.

· Transparency – Transparency, efficiency and accessibility is accentuated through online real time dissemination of prices available for all to see and daily mark-to-market discipline.

· Counter-party Risk – The credit guarantee of the clearing house eliminates counter party risk thereby increasing the capital efficiency of the market participants.

Product design and other details:-

The notional coupon on the underlying 10-year GoI security would be 7 per cent with semi-annual compounding. The size of the interest rate futures contract would be Rs 2 lakh and the maximum maturity of the contract would be 12 months. The contract cycle would consist of four fixed quarterly contracts for the entire year, expiring in March, June, September and December.

A copy of the report is available here.

SEBI eases listing norms for potential issuers from IOSCO countries

SEBI vide its Circular SEBI/CFD/DIL/IDR/1/2009/16/06 dated June 16, 2009 has simplified the listing agreement for Indian Depository Receipts (IDRs) for potential issues from countries, which are part of the International Organization of Securities Commission (IOSCO). Accordingly, SEBI has drafted a model listing agreement for IDR issuers having its registered office situated in a country, the securities market regulator of which is a signatory to MMOU of IOSCO. With respect to most of the provisions especially Corporate Governance requirements and disclosure of periodical results, the issuer is allowed to follow the home country requirements provided equitable treatment is given to the IDR holders vis-à-vis holders of equity shares. For the issuing companies from other jurisdictions, the existing model listing agreement for IDRs shall continue to apply till further advice in this regard. This is part of the market regulator’s attempts to reduce additional regulatory requirements and lower costs.  

A copy of the Circular is available here.

SEBI changes debt fund valuation norms for Mutual Funds

SEBI vide its SEBI / IMD / CIR No. 2/166256/ 2009 dated June 12, 2009 has changed the norms for valuation of debt securities held by mutual funds. Now the fund houses would be needed to value their funds nearer to market levels. SEBI has now shifted back to its valuation norms practiced till October last year, when it had allowed the fund houses to use a wider margin in valuing their debt securities. With this change in the permissible mark-up and mark-down levels -- the margins allowed above and below the exact market value -- the fund houses would be allowed lesser margin levels. As per the new norms, Mutual Funds would be allowed a mark-up (the upward permissible margin) of 100 basis points and a mark- down of 50 basis points (the downward margin) for rated debt securities with maturity duration of up to two years. Earlier in October 2008, SEBI had raised the mark-up and mark-down for such securities to 500 basis points and 150 basis points, respectively.

A copy of the circular is available here.

SEBI issues Delisting Regulations, 2009

SEBI on 10th June, 2009 has notified the SEBI (Delisting of Equity Shares) Regulations, 2009. 

What is delisting of securities?

Delisting of securities means permanent removal of securities of a listed company from a stock exchange. As a consequence of delisting, the securities of that company would no longer be traded at that stock exchange.

History of delisting regulations in India

Every company that issues shares to the public is required to have its shares listed on a recognised stock exchange. Initially The Controller of Capital Issues (CCI) fixed the price of shares issued by any company. In 1992 the CCI guidelines were abolished and SEBI was constituted. SEBI opened up the market to the Issuers and regulated the issue process by providing for full safeguards and transparency through disclosure of all relevant information by the issuers so that the investor can make an informed decision.  Companies issuing shares became free to fix the premium provided adequate disclosure is made in the offer documents. This resulted in many IPOs and a huge number of companies got listed on stock exchanges. Later it became necessary for many companies to delist their shares due to reasons like hitting the delisting limits. This resulted in the appointment of a Committee by SEBI and finally the SEBI (Delisting of Securities) Guidelines, 2003. SEBI (Delisting of Securities) Guidelines, 2003 provided an exit mechanism, whereby the exit price for voluntary delisting of securities is determined by the promoter of the concerned company which desires to get delisted, in accordance to book building process. SEBI on 10th June, 2009 has notified the SEBI (Delisting of Equity Shares) Regulations, 2009.

SEBI (Delisting of Equity Shares) Regulations, 2009

Kinds of delisting 

 (1) Voluntary delisting means delisting of equity shares of a company voluntarily on application of the company under Chapter III of these regulations. 
(2) Compulsory delisting means the delisting of equity shares of a company by a recognised stock exchange under Chapter V of these regulations. It states that a recognised stock exchange may, by order, delist any equity shares of a company on any ground prescribed in the rules made under section 21A of the Securities Contracts (Regulation) Act, 1956. This is a penalizing measure at the behest of the stock exchange for not making submissions/complies with various requirements set out in the Listing agreement within the time frames prescribed.

Voluntary Delisting 

Delisting of securities is not permitted in certain circumstances which are explained in Regulation 4. It states that a company cannot delist pursuant to a buy back of equity shares by the company; pursuant to a preferential allotment etc. It is also clarified that a company cannot delist its convertible securities.

Two types of voluntary delisting

Delisting where no exit opportunity is required. These are cases where even after the delisting from any one or more recognised stock exchanges, the equity shares would remain listed on any recognised stock exchange which has nationwide trading terminals. In this scenario exit opportunity should not be given to all the public shareholders with Chapter IV. Procedure to be followed is mentioned in regulation 7. 
Delisting where exit opportunity is required. This can happen in two cases, Firstly in cases where the company delists its equity shares from all recognised stock exchanges and secondly in cases after the proposed delisting, the equity shares would not remain listed on any recognised stock exchange having nation wide trading terminals. In these scenarios exit opportunity should be given to all the public shareholders with Chapter IV. . Procedure to be followed is mentioned in regulation 8. 

The procedure for providing exit opportunity is detailed in Chapter IV of the Regulations. It includes public announcement, opening of an escrow account, dispatching letter of offer, price determination through book building process etc. There is also a prescribed minimum number of equity shares to be acquired while providing this exit opportunity.  

Compulsory Delisting

This is a penalizing measure at the behest of a recognised stock exchange for not making submissions/complies with various requirements set out in the Listing agreement within the time frames prescribed. Procedure for the same is detailed in Chapter V of the Regulations. This is different from voluntary delisting in many ways. For example, the stock exchange should appoint an independent valuer or valuers for determining the fair value of the delisted equity shares. Then the promoter of the company should acquire delisted equity shares from the public shareholders by paying them the value determined by the valuer, subject to their option of retaining their shares.

Special provisions for small companies and delisting by operation of Law

Company having paid up capital up to one crore rupees and its equity shares were not traded in any recognised stock exchange in the one year immediately preceding the date of decision, such equity shares may be delisted from all the recognised stock exchanges where they are listed, without following the procedure in Chapter IV. Provisions are also provided for delisting in case of winding up, derecognition of companies.

Copy of the Regulations is available here.

Shri C B Bhave elected as the Chairman of the Asia- Pacific Regional Committee of IOSCO

SEBI vide its press release (PR No.184/2009) dated June 9, 2009 has announced the election of Shri C B Bhave, Chairman, SEBI as the Chairman of the Asia- Pacific Regional Committee of the International Organisation of Securities Commissions (IOSCO), at the 34th Annual Conference of IOSCO. IOSCO is recognized as the international standard setter for securities markets. The Organization's wide membership regulates more than 90% of the world's securities markets and IOSCO is the world's most important international cooperative forum for securities regulatory agencies. IOSCO members regulate more than one hundred jurisdictions.

Press release is available here.

www.iosco.org

Copies of gazette notifications of SEBI (Mutual Funds) (Amendment) Regulations 2009

SEBI vide its circular SEBI / IMD / CIR No. 1/ 165935 / 2009 dated June 9, 2009 has issued copies of gazette notifications of SEBI (Mutual Funds) (Amendment) Regulations 2009 and SEBI (Mutual Funds) (Second Amendment) Regulations 2009. The key changes brought about by these amendments are as follows: - 

SEBI (Mutual Funds) (Second Amendment) Regulations 2009

· Mutual fund scheme cannot invest more than thirty percent of its net assets in money market instruments of an issuer. The limits do not cover government bonds, treasury bills and collateralized borrowing and lending obligation. (Notified on June 5, 2009 and is effective from that date).

 
SEBI (Mutual Funds) (Amendment) Regulations 2009

· Notified on April 8, 2009 and is effective from that date. 
· The AMC should obtain, wherever required under the regulations, prior in-principle approval from the recognised stock exchange(s) where units are proposed to be listed.
· Every close ended scheme, other than an equity linked savings scheme, should be listed on a recognised stock exchange within such time period and subject to such conditions as specified by the Board. But close ended scheme launched prior to the commencement of these amendment regulations need not be compulsorily listed if it qualifies certain conditions mentioned in the regulations.
· Units of a close ended scheme, other than those of an equity linked savings scheme, launched on or after the commencement of the Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations, 2009 should not be repurchased before the end of maturity period of such scheme.
· AMC should issue to the applicant whose application has been accepted, a statement of accounts specifying the number of units allotted to the applicant as soon as possible but not later than thirty days from the date of closure of the initial subscription list and/or from the date of receipt of the request from the unit holders in any open ended scheme.

SEBI clarifies that Mutual Funds can invest in Indian Depository Receipts

SEBI vide its circular SEBI / IMD / CIR No. 1/ 165935 / 2009 dated June 9, 2009 has clarified that mutual funds can invest in Indian Depository Receipts. 

Copy of the Circular is available here.