Securities market regulator SEBI in a board meeting on Tuesday decided to tighten corporate share buyback norms and increase disclosure norms for preferential issues, and came up with guidelines for angel funds as part of forming alternative investment fund regulations.
It also approved the recommendations of the KM Chandrasekhar-chaired Committee on Rationalisation of Investment Routes and Monitoring of Foreign Portfolio Investments, which submitted its report on June 12. The report suggested formation of a new category to club foreign portfolio investors and risk-based KYC norms (click here for details).
SEBI did not mention a timeline for implementation of the new decisions.
News norms would make share buybacks a serious exercise for companies, as against being a share price propping activity.
SEBI increased the mandatory minimum buyback limit from 25 per cent to 50 per cent of the amount earmarked for the buyback. If a firm fails to meet this requirement, the amount in the escrow account would be forfeited subject to a maximum of 2.5 per cent of the total amount earmarked.
It said companies shall create escrow accounts towards security for performance with an amount equivalent to at least a quarter of the amount earmarked for the buyback.
Moreover, it reduced the maximum buyback period to six months from 12 months.
SEBI said a company shall not raise further capital for a year from the closure of the buyback except in discharge of subsisting obligations as against the existing six months; it shall not make another buyback offer within a year from the date of closure of the preceding offer.
The market regulator said companies can buy back 15 per cent or more of capital (paid-up capital and free reserves) only by way of tender offers. It modified the procedure for buyback of physical shares (odd-lot) with the creation of a separate window in the trading system, requirement of PAN/Aadhaar for verification, etc.
SEBI decided that the promoters of the company shall not execute any transaction, either on-market or off-market, during the buyback period.
In another move, it rationalised norms requiring disclosure of the shares bought back on a cumulative basis on the Website of the company and the stock exchange; now the disclosure needs to be made only on a daily basis instead of the current requirement of disclosure on daily, fortnightly and monthly basis.
The market regulator said preferential issue shall be subscribed only through the allottee’s own bank account and the issuing company shall disclose the ultimate beneficial owner of allotted shares.
Currently, firms disclose the name of an intermediary entity which picks the shares but many a time skips giving detailed disclosure of the actual investor. While this strengthens disclosure norms, it might prove to be tricky for PE firms on the applicability of this requirement.
SEBI said that the shares allotted in the preferential issue shall not be transferred till trading approval is granted for such shares by the stock exchanges. Further, the lock-in period shall commence on the date of such trading approval.
Startups and angel funds
The market regulator noted that lack of exit opportunities for the existing investors and restricted access to new investors is one of the problems faced by startups and SMEs. To provide liquidity for angel investors, VC firms and others, it approved the proposal to amend regulations to permit listing of startups and SMEs in institutional trading platform (ITP) without having to make an IPO.
It said such firms shall be accessible for investment to the ‘informed investors’ only and marked the minimum amount for trading or investment on the ITP at Rs 10 lakh. These companies shall also be exempted from the requirement to offer up to 25 per cent of their stake to public through an offer document in order to get listed. This would allow such firms to list without an IPO and do away with the expenses associated with it.
However, it added that such companies will be able to only make private placements and not public issues.
Standardised norms of entry for companies, eligibility criteria, continuous disclosure requirements, simplified exit rules and corporate governance norms will be prescribed separately, SEBI said.
The market regulator also came up with guidelines for angel funds and angel pools, bringing them under the ambit of alternative investment funds (AIF) regulations. Given the smaller size of such funds compared with other VC firms, it termed them as separate from VC firms but put such early stage investment funds under category I of AIF regulations.
SEBI said individual angel investors shall be required to have early stage investment experience/experience as serial entrepreneurs/be senior management professionals with 10 years of experience. They shall also be required to have net tangible assets of at least Rs 2 crore ($330,000) while the corporate angel investors shall be required to have Rs 10 crore net worth or be a registered AIF/VCF.
For angel funds, the regulator prescribed a minimum corpus of at least Rs 10 crore (against Rs 20 crore for other AIFs) and minimum investment by an investor into that fund to be Rs 25 lakh (may be accepted over a maximum period of three years) against Rs 1 crore for other AIFs. It added that the continuing interest by sponsor/manager in the Angel Fund shall be not less than 2.5 per cent of the total corpus or Rs 50 lakh, whichever is lesser.
SEBI also put separate riders for angel investments: they shall invest in firms incorporated in India and are not more than three years old; have a turnover not exceeding Rs 25 crore ($4.2 million); are unlisted, not promoted, sponsored or related to an industrial group whose turnover is in excess of Rs 300 crore and have no family connection with the investors proposing to invest in the company. Further, investment in an investee company by an angel fund shall be not less than Rs 50 lakh and not more than Rs 5 crore and shall be required to be held for a period of at least three years.
(Edited by Joby Puthuparampil Johnson)