On June 27, 2019, the Securities and Exchange Board of India (“SEBI”) issued a press release pursuant to its board meeting of the same date.

 In the said board meeting, inter alia, the following decisions were taken:

1. Framework for Issuance of Differential Voting Rights Shares

The board approved a framework, as detailed in the press release, for issuance of differential voting rights shares along with amendments to the relevant SEBI regulations to give effect to the framework.

2. Amendments to SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 – payment relating to royalty and brand usage

The said regulations provide that payments made to related parties towards brand usage or royalty may be considered material if the transaction(s) exceed 2% (two percent) of the annual consolidated turnover of the listed entity during a financial year and would require approval of the shareholders, with no related party having a vote to approve such resolutions. Such threshold of 2% (two percent) was decided to be increased to 5% (five percent).

3. Disclosure of Encumbrances 

(a) The term ‘encumbrance’ as defined in the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 shall include:

      i. any restriction on free and marketable title to shares; 

      ii. pledge, lien, negative lien, non-disposal undertaking; and

      iii. any covenant, transaction, condition or arrangement in the nature of encumbrance. 

(b) Detailed disclosure by promoters of reasons for encumbrance is required to be made if the combined encumbrance by promoters and persons acting in concert (“PACs”) crosses 20% (twenty percent) of the total share capital in the company or 50% (fifty percent) of their shareholding in the company. 

(c) Declaration by promoters to the audit committee and to the stock exchanges on a yearly basis must be made to the effect that they, along with PACs, have not made any encumbrance directly or indirectly, other than already disclosed, during the financial year. 

4. Review of Risk Management Framework of Liquid Funds, Investment Norms and Valuation of Money Market and Debt Securities by Mutual Fund

 In light of certain credit events in the fixed income market that led to increase in liquidity risk of Mutual Funds (“MFs”), a need was felt to review the regulatory framework and take necessary steps to safeguard the interest of investors and maintain the orderliness and robustness of MFs. The SEBI had accordingly constituted working groups to look into this aspect and the analysis and recommendations of such working groups were placed before the Mutual Fund Advisory Committee which made certain recommendations. The board, upon deliberation, inter alia, approved the following:

(a) Risk Management Framework of Liquid Funds and prudential norms governing investments in debt and money market instruments

1. Liquid schemes shall be mandated to hold at least 20% (twenty percent) in liquid assets. 
2. The cap on sectoral limit of 25% (twenty five percent) shall be reduced to 20% (twenty percent). The additional exposure of 15% (fifteen percent) to housing finance companies shall be restructured to 10% (ten percent) in housing finance companies and 5% (five percent) exposure in securitized debt based on retail housing loan and affordable housing loan portfolios. 
3. The valuation of debt and money market instruments based on amortization shall be dispensed with completely and shall be based on mark to market. 
4. Liquid and overnight schemes shall not be permitted to invest in short term deposits, debt and money market instruments having structured obligations or credit enhancements. 
5. A graded exit load shall be levied on investors of liquid schemes who exit the scheme up to a period of 7 (seven) days. 
6. MF schemes shall be mandated to invest only in listed non-convertible debentures and the same would be implemented in a phased manner. All fresh investments in commercial papers shall be made only in listed commercial papers pursuant to issuance of guidelines by SEBI in this regard. 
7. All fresh investments in equity shares by MF schemes shall only be made in listed or to be listed equity shares. 
8. Prudential limits on total investment by a MF scheme in debt and money market instruments having credit enhancements and on investment by MF scheme in such debt securities of a particular group, as percentage of debt portfolio of the respective scheme have been prescribed at 10% (ten percent) and 5% (five percent) respectively. 
9. There should be adequate security cover of at least 4 (four) times for investment by MF schemes in debt securities having credit enhancements backed by equities directly or indirectly. 

 (b) Valuation of money market and debt securities by MFs 

1. In order to make existing provisions on valuation of money market and debt securities more reflective of best practices, various proposals for amending the extant provisions were approved by the board. 
2. In order to bring uniformity and consistency in valuation, various proposals on the waterfall approach for valuation of non-traded money market and debt securities by MFs were approved, along with acknowledging that valuation agencies may need a certain degree of flexibility in order to ensure fair pricing of securities. 
3. In order to increase the robustness of valuation and address possible misuse, various proposals related to valuation of Inter-scheme Transfers, disallowing the use of own trades for valuation etc., were approved. 

5. Amendments to SEBI (Prohibition of Insider Trading) Regulations, 2015 

(a) The board approved amendments clarifying that trading window closure for listed companies shall be applicable from end of every quarter till 48 (forty eight) hours after declaration of financial results. The amendments would clarify that such closure shall not be applicable in respect of transactions such as off-market inter-se transfer between insiders, transaction through block deal window mechanism between insiders, transaction due to statutory or regulatory obligations, exercising of stock options, pledging of shares for bona fide transaction such as raising of funds and transactions for acquiring shares under further public issue, right issue and preferential issue, exercising conversion of warrants/ debentures, tendering shares under buy-back, open offer and delisting etc. under respective regulations, subject to conditions specified. 

(b) The board also approved amendments clarifying material financial relationships.