The capital markets watchdog said any acquisition following resolution plans approved by the National Company Law Tribunal under the Insolvency and Bankruptcy Code, 2016, would be exempt from an open offer. (Reuters)

In a move that should facilitate the resolution of stressed assets, the Securities and Exchange Board of India (Sebi) on Wednesday exempted new investors in stressed firms as also in some instances banks from making the mandatory open offer to minority shareholders under the Sebi (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. The capital markets watchdog said any acquisition following resolution plans approved by the National Company Law Tribunal under the Insolvency and Bankruptcy Code, 2016, would be exempt from an open offer.

Following a board meeting, the regulator also banned the issue of offshore derivative instruments against derivatives except on those used for hedging. Moreover, every subscriber to an ODI issued by a foreign portfolio investor (FPI) will be charged a “regulatory fee” of $1,000 once in three years. The move is seen to be one that discourages the issue of participatory notes by foreign investors.

Sebi chairman Ajay Tyagi also said the National Stock Exchange (NSE) and 14 key personnel had been issued a show-cause notice in the co-location case in which some brokers were allegedly given preferential treatment and speedier access to the exchange’s data feed. Tyagi said the regulator was looking into the possible connivance between NSE employees and brokers and unfair gains made by brokers. “We are also engaging forensic auditors to help the investigation team,” he said.

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The regulator said buyers acquiring stakes from banks via the strategic debt restructuring (SDR) scheme would also be exempted from making the mandatory open offer provided they retain the shares for a period of three years. Tyagi said in an interaction with reporters that unless new investors were given some relief, it was hard to see sales of distressed assets taking off. To be sure, banks have had limited success with SDR schemes so far and the new measure should help.

The capital market regulator’s amended rules come amid a renewed push by the government and the Reserve Bank of India to tackle bad loans head on. Indian banks are saddled with an estimated Rs10 lakh crore of stressed loans, or 13% of loans outstanding. Sebi also decided on Wednesday to exempt banks from making an open offer to minority shareholders if they acquired shares in a distressed company via any other mechanism other than the SDR.

Banks have in the past acquired shares in financially fragile and over-leveraged firms by converting a portion of their loans into equity. However, the total stake has never crossed 26% and, consequently, the purchase never triggered the open offer. An open offer is mandatory under the Sebi (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. In other measures approved by the Sebi board on Wednesday, Category II alternate investment funds (AIFs) will now be eligible for relaxed rules relating to lock-in provisions much like Category I AIFs. The regulator feels the change would impart uniformity, make it easier to do business and expand the investor base available for capital raising.

Currently, in an initial public offering, the entire pre-issue capital held by persons other than the promoters is to be locked in for one year except those allotted to employees under the employee stock option scheme, equity shares held by a venture capital fund or Category I AIF or a foreign venture capital investors.

Moreover, the capital market watchdog also proposed norms that would ease the entry of FPIs into the Indian market. Sebi said it plans to amend the Sebi (Foreign Portfolio Investors) Regulations, 2014, to further ease access to Indian market for FPIs. Among the changes being considered are the expansion of eligible jurisdictions for grant of FPI registration to Category I FPIs by including countries having diplomatic tie-ups with India, simplifying broad-based requirements, rationalising fit and proper criteria, permitting FPIs to operate under the multiple investment managers structure and holding FVCI registration to appoint multiple custodians.