The Securities and Exchange Board of India (SEBI) on Wednesday eased rules for investors looking to acquire stressed assets from banks, as it unveiled a series of measures to help lenders deal with rising bad debt, deepen capital markets and boost investor sentiment.
The capital markets regulator also exempted private equity firms from the one-year lock-in period in initial public offerings and allowed hedge funds and PIPE funds, or funds that make private investments in public equities, to invest in commodity derivatives.
Investors buying distressed assets from banks will no longer have to make an open offer to shareholders, the regulator said in a statement after its second board meeting under new chairman Ajay Tyagi.
“However, such relaxations shall be subject to certain conditions like approval by the shareholders of the companies by special resolution and lock-in of their shareholding for a minimum period of three years,” it said.
The move is in line with the efforts of the government and the Reserve Bank of India (RBI) to tackle banks’ stressed assets that the finance ministry’s economic survey for 2016-17 estimated could have touched $191 billion by September 2016, or about 16.6% of gross advances.
The move could also help invigorate the joint ventures that several global alternative investment firms have formed with Indian companies to acquire stressed assets.
Canadian investment firms Canada Pension Plan Investment Board, Brookfield Asset Management and CDPQ as well as American PE fund Bain Capital Credit have tied up with Indian companies Kotak Mahindra Bank, State Bank of India, Edelweiss and Piramal Enterprises Ltd to buy stressed assets. But most have yet to strike a deal.
Separately, while allowing hedge funds and PIPE funds in commodity derivatives, SEBI said the commodity derivatives markets in India lack the desired liquidity and depth for efficient price discovery and price risk management. “Participation by institutional investors would be conducive for the overall development of the commodity derivatives market,” the regulator said.
SEBI said that the decision to exempt investors from making open offers for distressed listed companies is aimed at facilitating turnaround of these companies, which will benefit their shareholders and lenders.
Currently, only banks are allowed relaxation from preferential issue requirements and from open offer obligations for restructuring of distressed listed companies under the RBI's Strategic Debt Restructuring (SDR) scheme.
The SEBI move came after some lenders, who had acquired shares of distressed companies and proposed to divest them, informed the regulator that new investors faced difficulties in making an open offer. Also, such offers reduce the funds available for investment in the company concerned, SEBI said.
The SEBI board also cleared a proposal to provide exemption from open offer obligations for acquisitions as per resolution plans approved by the National Company Law Tribunal under the Insolvency and Bankruptcy Code, 2016.
The regulator also allowed category-II alternative investment funds (AIFs), comprising private equity firms and real estate funds, from the one-year lock-in period in IPOs.
Currently, PE firms cannot sell the shares they acquire in a company before an IPO for one year after listing. They will now be allowed to sell shares in a company anytime after it gets listed on exchanges.
The move will remove the differential treatment for PE investors compared with category-I AIFs, such as venture capital funds, as well as other secondary market participants.
“This would bring about uniformity, ease of doing business and expand the investor base available for capital raising,” SEBI said.
Lalit Kumar, partner at law firm J. Sagar Associates, said PE investors the decision will give flexibility to PE firms to exit any time after the listing of shares. "It will give them an option to exit as part of the IPO through an offer for sale at the determined IPO price and also any time after listing of securities if they remain invested after listing,” he said.
The move comes at a time when IPO market activity has been the best in six years. Primary market activity in India picked up pace after four years of slow activity till mid-2014 when the BJP-led government took over. In 2015, 21 companies had raised about Rs 14,000 crore, as per stock-exchange data.
Eleven companies have raised nearly Rs 12,500 crore so far this calendar year, extending the good run for IPOs after a blockbuster 2016 when fundraising by companies via initial share sales jumped to a six-year high of Rs 26,500 crore, data from the SEBI.
SEBI also allowed category-III AIFs, comprising hedge funds, to invest in the commodity derivative markets, after proposing the norms roughly two months ago.
The capital markets regulator had floated a consultation paper on 28 April proposing the involvement of category-III AIFs in all commodity derivatives products traded on commodity derivatives exchanges.
The decision to allow these AIFs in the commodity derivatives market was based on the recommendations of the Commodity Derivatives Advisory Committee and feedback from various stakeholders, SEBI had said earlier.
SEBI said that hedge funds, PIPE funds and other category III alternative investment funds can invest no more than 10% of the investable funds in one underlying commodity. Also, these funds can borrow money to invest in commodity derivatives but will have to take approval from their investors.
The regulator said that these AIFs may trade as ‘clients’ and will be subject to rules, regulations and instructions that are applicable to clients under SEBI rules, including position limits and timely disclosures.
AIFs will also be required to comply with SEBI and the RBI's guidelines pertaining to the corpus received from non-resident Indians, the capital regulator said.