Tag: #SEBI

–Report by Prapti Prajeeta

In this case of IFB AGRO INDUSTRIES LIMITED vs SICGIL INDIA LIMITED, the court determined the forum appropriate for adjudication and determination of violations of SAST and SEBI Regulations. In this case, the contention that under Section 59 the National Company Law Tribunal exercises a parallel jurisdiction with the Securities and Exchange Board of India for addressing violations of the Regulations framed under the SEBI Act was rejected.

In this very case, an appeal was filed against the National Company Law Appellate Tribunal for a judgment passed. 

FACTS:-

The Appellant is a company listed and engaged in manufacturing and selling rectified spirits, etc. And respondent No. 1 is a too-listed company engaged in producing the same type of products. Other respondents are the managing director, his wife and some close relatives of the respondents. 

In August 2003, one respondent came up with a proposal for a business between the Appellant and Respondent No. 1. The Appellant rejected the proposal. After this rejection, the Respondents started acquiring shares of the Appellant from the open market to eliminate competition and strengthen its dominant position in the relevant market. 

As of 2004, the Respondents held under 5% of the Appellant’s total paid-up share capital. At the same time, Respondent No. 1 acquired 600 equity shares of the Appellant, and as a result, the respondents aggregate shareholding crossed the paid-up share capital of the Appellant in total by 5%, it triggered the SEBI (SAST) Regulation 7(1)9

Four months later, Respondent No. 1 acquired additional shares of the Appellant; as a result, the total paid-up share capital of the Appellant exceede5% by shareholding. This triggered the SEBI (PIT) Regulations, and Respondent No. 1 failed to disclose within the prescribed time. 

After this, the Appellant filed a petition before the Company Law Board under the 1956 Act for its register rectification by deleting the name of the Respondents as the owner of shares over and above the 5% threshold. 

Upon receiving notice of the petition above, but then Respondent No. 1 sold a few shares of the Appellant and then brought down to 4.91%its shareholding. But the Appellant claims that Respondent No. 1 never reduced its shareholding. Then SEBI was also informed that the individual shareholding of Respondent No. 1 stands below 5%. And as a result, SEBI has not taken any regulatory action.

But then the matter stood transferred to the Tribunal. The tribunal held that it violated the SEBI (PIT) Regulations. Further, the Tribunal also held that there had been SEBI (SAST) Regulations violation as the Respondents did not disclose in the proper format. However, the Tribunal held that the CLB and SEBI exercised powers fall in different and distinct jurisdictional fields. The tribunal thus allowed the company petition.

The Respondents then went to Appellate Tribunal in an appeal where it allowed the appeal and set aside the order of the Tribunal. Being aggrieved by it the plaintiff brought this appeal.

APPELLANT’S CONTENTIONS:-

the Appellant contended that no time intimation was prescribed in format and given by the Respondents when SEBI (SAST) Regulations got triggered; Respondent Nos. 1 – 6 were “connected persons” and were “acting in concert.” He then emphasized that the Respondents had previously admitted to the non-disclosure. Thus the Appellant has the right under Section 111A of the Act to approach the tribunal for rectification of the register. 

DEFENDANT’S CONTENTIONS:-

The Respondents contended that filing a petition under Section 111A is an abuse of process. No violation under the SEBI (SAST) Regulations has occurred as the Respondents did give timely intimation in the prescribed format. The SEBI (PIT) Regulations do not apply to the other Respondent as shareholding never crossed 5% in individual limit. And under section 111A (3), the Tribunal doesn’t have any power to annul the transfer or to direct the buy-back of the shares.

JUDGMENT:-

The court held that the SEBI (SAST) regulation is a comprehensive scheme, the complained transaction should suffer regulator scrutiny and only the regulator has to determine the provisions of the SEBI Act and the Regulations.

Further, the court held that the Appellant is not justified to invoke the CLB jurisdiction under Section 111A for violation of SEBI regulations. And the Tribunal was wrong in allowing and entertaining the company petition filed under Section 111A of the 1956 Act. However, the tribunal did exceed its jurisdiction, so the Appellate Tribunal’s decision in setting aside the judgment was correct. The court then dismissed the appeal with no order as to costs.

Introduction

Foreign Portfolio Investment is holding financial assets in a country other than in the investor’s own country. It is an investment in mutual funds, bonds and securities (stocks, American Depositary Receipts, or Global Depository Receipts) of companies headquartered outside the investor’s nation. The transaction of foreign securities occurs at an organized formal securities exchange or through an over-the-counter market transaction. Foreign portfolio investment is becoming a means of portfolio diversification. The portfolio is a collection of financial assets and investments owned by an individual, a financial institution or an investment firm. Financial assets include valuables ranging from stocks, funds, derivatives property, cash equivalents, bonds, etc. In India SEBI regulates the activities involve in investment. It sets the eligibility criteria, limits the amount that can be invested and categorizes the type of investments. 

Categories for Foreign Portfolio Investors (FPI)

The Foreign Portfolio Investors in India are divided into Three Categories:

Category I foreign portfolio investor:  Government and investors related to Government which includes central banks, Governmental agencies, wealth funds and international or multilateral organizations or agencies.

Category II:  In this category FPI like appropriately regulated Mutual Funds, Investment trusts, insurance/reinsurance companies, banks, asset management companies, investment managers/ advisors, portfolio managers, university funds and pension funds etc.

Category III: All those investors that do not fall under Category I and II foreign portfolios investors such as endowments, charitable societies, charitable trusts, foundations, corporate bodies, trusts, individuals and family offices.

Every Foreign Portfolio Investor is required to obtain Registration for FPI with Designated Depository Participant (DDP) on Behalf of SEBI.

SEBI (Foreign Portfolio Investors) Regulations 2014 (“2014 Regulations”) have provided certain exemptions from registration to foreign institutional investors and qualified foreign investors. 2019 Regulations have scrapped some of these exemptions and it has made a mandate that every person dealing in securities as FPI to mandatorily acquire a registration certificate from the Designated Depository Participant. Further, existing offshore funds set up by Indian mutual funds existing offshore have to register themselves as FPIs by March 22, 2020. In 2014 Regulations eligibility for FIP license was only given to those central banks which are members of the Bank of International Settlement. Whereas through the 2019 regulations, SEBI in order to attract more investors recognized non-BIS registered central banks as eligible for FPI license. Under the FPI 2014 Regulations, a fund should not be registered as an FPI if it fails to qualify the broad-based criteria. A fund qualified as a broad-based fund if it had at least 20 investors with no investor holding more than 49% shares of the fund. 2019 Regulations have scrapped away with this requirement. 

The 2019 Regulations provide that FPIs set up in the International Financial Services Centre (“IFSC”) are required to satisfy the jurisdiction criteria under Regulation 4 for registering as an FPI. An entity set up in an IFSC is qualified to be registered as an FPI even though that entity would be a domestic entity.

Investment limit: The FPI regulations regulate and provide for a threshold on the total investment incurred by each company by the FPI including its investor group. The FPI Regulation of 2014 had set the investment threshold of 10 per cent of the issued capital of the company. Under the 2019 Regulations, the threshold has now been changed to 10 per cent of the ‘fully diluted paid-up equity capital of a company. 

Classification of Category I

Under the 2014 FPI Regulations, FPIs were divided into 3 categories under which easier compliance norms for Category-I FPIs were given and the strictest for Category-III FPIs. Under the new framework of 2019 Regulations, SEBI decided to reduce the total number of categories and to re-categorize into two categories, Category I and Category II FPIs. 

FPI Registration

Companies that issue shares and securities would be registered under the stock exchange. An Indian company that wishes to register its securities on the stock exchange would have to abide by the rules established by the Securities Exchange Board of India (SEBI). An investor who wants to indulge themselves with Foreign Portfolio Investment has to make an application and obtain a certificate of registration from the respective board. The offshore fund which falls under the purview of an Asset Management Company is required to make an application under Foreign Portfolio Investor Registration. The offshore fund is required to secure such registration within a period of 180 days.

Under the SEBI (FPI) regulations, 2019 any applicant would have to liaise with the Designated Depository Participant (DDP) for making such an application for foreign portfolio investor registration. A DDP can be defined as a person or an institution who has been approved by the board under Chapter III of the 2019 regulations. In order to take different forms into consideration for registering under FPI, the DDP would act as a negotiator between the applicant and the board.

Procedure to get registration

1. Appoint a legal representative: 

 Legal representatives are required in India to fill out the forms and do the paperwork as required by the regulatory authorities. The role of a legal representative can be performed by any financial institution regulated by the Reserve Bank of India. It is important to choose DDP to get registered as FPI. 

2. Appoint a Tax adviser: 

A tax advisor will help the investor to comply with all Tax obligations that will arise from your activities in India. It is very much required for the investor to know about the tax obligations on him for the smooth running of functions. The tax adviser advises whether the tax involved is reasonable or not.

 3. Appoint a Domestic Custodian:

Appointing a domestic custodian before making any investments in India is a very important step. A domestic Custodian can be any entity registered according to the norms set by SEBI to carry on the activity of providing custodial services in respect of securities.

4. Appoint a designated Bank:

After the registration is done under an FPI it is important to appoint a Designated Bank.  The Designated Bank has a duty to open and maintain a foreign currency account and/or a Non-Resident Special Rupee Account. Designated Bank means any bank in India which has been given permission by the Reserve Bank of India to act as a banker to FPIs.

5. Appoint a trading member: 

A Trading member has the duty to execute trades for the FPI. An FPI can have multiple TM’s.

6. Appoint a clearing member: 

The clearing member does the confirmation of trades. Clearing through a single clearing member. 

7. Appointment of a Compliance Officer

Every FPI is required to appoint a compliance officer who shall be responsible for looking after the compliance of the Act, rules and regulations, notifications, guidelines, instructions etc. issued by the Board or the Central Government.

Impact of Foreign Portfolio Investment

Globalization has turned the world into a small village. The integration of economies of the world has led to the free flow of ideas, resources, people, and funds. Speaking of funds there is an enormous need for foreign investment in developing countries like India. India lacks funds, it has low infrastructural facilities and a huge population, keeping in mind these factors Foreign Portfolio Investment is a boon to the Indian Economy. It provides the investors with required profits, a huge market, labour at a cheap cost and so on. The capital account of India’s Balance of Payment consists of both FDI and FPI. FPI is one of the major sources of foreign capital in India. India requires this foreign capital for its growth and development. An inflow of foreign capital helps in removing a deficit in the balance of payment. Foreign investment has the ability to meet the gap in management, entrepreneurship, technology and skill. The developing countries need these resources that are transferred to the local country through various training programmes. Further, foreign companies bring with them advanced technological knowledge about production processes while transferring modern machinery equipment to the capital-poor developing countries.

Conclusion

Integration of the economies of the world has started a new era of setting and broadening business in different countries through Foreign Direct Investment and Foreign Portfolio Investment. These investments have acted as a boon for the development of those countries where investment is made. To regulate such activities of investment laws are required to safeguard the rights of target countries. FPI Regulation of 2019 has widened the scope of investment and also eliminated certain limits on investors that earlier prevailed. For a developing country like India, foreign capital is a much-needed thing to develop its economy. India is making efforts to keep its economy open to the world yet protected from completely vanquishing its true nature.   

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References

1. www.sebi.gov.in › legal › regulations SEBI | Securities and Exchange Board of India (Foreign fastlegal.in › academy › securities-law Foreign Portfolio Investor (FPI) Registration In India

This article is written by Rishita Vekta, B.A.LLB(H) 2nd Year, from Lloyd Law College, Greater Noida U.P.

A whole-time member of SEBI, G Mahalingam held the business enterprise prone to pay an economic penalty of Rs 5 crore inside a duration of forty-five days and refund the funding control and advisory costs gathered with recognition to the six debt schemes inspected at the side of easy hobby on the charge of 12 percentage consistent with annum inside a duration of 21 days from the date of this order.

The business enterprise shall additionally be prohibited from launching any new debt scheme for 2 years. Franklin Templeton Trustee Services Pvt. Ltd had determined to land up the subsequent schemes of Franklin Templeton Mutual Funds according to the provisions of Regulation 39(2)(a) of SEBI (Mutual Funds) Regulations, 1996:

• Franklin India Ultra Short Fund/Ultra Short Bond Fund;
• Franklin India Low Duration Fund;
• Franklin India Short Term Income Fund/Plan.

SEBI had located severe lapses within side the manner Franklin Templeton India Mutual Fund controlled the six debt budget that it wound up all at once in April 2020. Upon attention of the Forensic Audit/Inspection Report, SEBI issued a show-cause beneath Neath the provisions of Sections 11(1), 11(4), 11(4A) and 11B of the SEBI Act, containing the subsequent allegations:

• The business enterprise walking debt schemes inspected similar to Credit Risk Fund scheme and in a comparable manner, regardless of the funding goals of those schemes, being different. The debt schemes inspected had been projected as duration–primarily based schemes, in place of Credit Risk Fund schemes.
• Not disclosed its method of investing in excessive yield securities with credit score rating
• Incorrectly calculated Macaulay duration, taking hobby charge to reset dates as deemed adulthood date, even though there has been no specific go out to each the parties-Issuer and Investor, at the hobby charge reset date
• Entered into phrases of funding, which had been ambiguous and without identical rights to each the Issuer and the Investor.
• Incorrect disclosures of the month-to-month portfolio of securities.
• Invested in illiquid securities without right due diligence.

It has informed the refund of funding to go back fund control costs well worth Rs 451.63 crore to the buyers of the six debt budget. Plus, it has additionally levied a 12 percentage hobby rate in this amount, which sums up the full disgorged rate to Rs 512.50 crore.

-Report by Manaswa Sharma