SEBI notifies conditions for registered Alternative lnvestment Funds intending to change their category |
On 21st May 2012, SEBI had notified the Alternative Investment Fund (AIF) Regulations thereby bringing all privately pooled investment funds under one roof (except Mutual Funds and Collective Investment Schemes). The said Regulations demarcate AIFs into three categories with all the categories having different investment purposes, type of schemes and benefits.
With respect to these very fresh Regulations, SEBI had recently on 29th July 2013 notified certain operational, prudential and reporting norms with respect to AIFs which answered a lot of questions with respect to the AIF Regulations thus bringing more clarity in regards to a certain aspects. Keeping in line with its efforts to fine tune the AIF Regulations, SEBI has come out with some further clarification vide its circular dated 07th August 2013
As per the SEBI (AIF) Regulations, a fund once registered under one category can change its category subsequent to the registration only with the approval of SEBI. In this context, SEBI has notified a certain criteria and procedure for the registered AIFs intending to change their category they are originally registered under.
Given below is an account of various questions addressed by SEBI in the aforementioned circular:
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1. |
Are all the registered AIFs eligible for a change in category? What is the procedure for obtaining SEBI’s approval for such a change?
Only those AIFs that have not made any investments under the category they were originally registered under shall be eligible to apply for SEBI’s approval for a change in category.
All the eligible AIFs intending to change their category shall make an application to SEBI, which shall include:
- An updated Form A given in the First Schedule of the regulations
- Other updated supporting documents if any
- Rationale for the proposed change
- Application fee of Rs. 1 Lakh
The AIF will not be required to pay the registration fee again. |
2. |
What if the AIF has already raised funds or received commitments from investors?
Such an AIF which has raised funds or received commitments from investors prior to applying for a change in the category, will be required to send letters/ emails to the investors communicating:
- The intention to change the category of AIF
- An option to withdraw the funds poured in by them and doing so at absolutely no charge or penalty
- In case any charge or penalty is charged to an investor for withdrawing its investment, it shall have to be refunded.
- An investor will be allowed to withdraw a partial amount invested in the AIF, provided that the minimum investment amount requirement as per the AIF regulations is complied with.
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How shall the amount received by investors be utilized while the application for change in category is pending?
If the AIF is yet to receive the approval of SEBI for change in category, it shall be allowed to make investments for the time being but only in liquid funds or bank deposits. Once SEBI has approved the change in category, the AIF shall send a revised placement memorandum and other relevant information to all its investors |
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SEBI has brought a vast clarity with respect to a little provision which proved to be of very high importance later i.e. the provision for change in category of AIFs. The regulations allow the AIFs to change their category with SEBI’s approval but the procedure for the same was not given in the regulations. Through this circular, SEBI has not only notified the procedure for a change in category by AIFs but has also by giving option to the Investors to withdraw investment at no charges/ penalty, reaffirmed that the Investor is of prime importance to SEBI. |
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Amendment in SEBI (Buy Back Of Securities) Regulations, 1998 |
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Vide notification dated August 08, 2013, SEBI has made following amendments in SEBI (Buy Back Of Securities) Regulations, 1998:
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i. |
Maximum Offer Size in case of Buy-back from Open Market
There are two popular methods of Buyback i.e. Tender offer and Open Market. The basic difference between the two is that in the tender offer method, all shares are bought back at a fixed price which is generally at a premium to the market price unlike Open Market Method. It is a more equitable way of distributing surplus funds with the companies to its shareholders. Thus, in order to encourage the Tender Offer route, SEBI has put the restriction on the maximum buyback size in case of buyback through open Market Method to upto 14.99% of paid-up capital and free reserves as against the limit of upto 25% prescribed in section 77A (2)(c) of Companies Act, 1956 in case of Buyback through Special Resolution. Meaning thereby, any Company intending to do a buyback of 15% or more will have to necessarily adopt the Tender Offer method.
New inserted Proviso in Regulation 4(1) would read as follows
“Provided that no offer of buy-back for fifteen per cent or more of the paid up capital and free reserves of the company shall be made from the open market.” |
ii. |
Two consecutive buybacks are not allowed
In line with proviso to Section 77A(2)(b) of the Companies Act, 1956 which prescribes that no offer of buy-back shall be made within a period of three hundred and sixty-five days recokned from the date of the preceding offer of buy-back, if any in case of Buyback pursuance to Board Resolution, a similar restriction has also been included in SEBI (Buy Back Of Securities) Regulations, 1998 as well, which shall be applicable irrespective of the fact whether the Buyback is pursuance to Board Resolution or Special Resolution.
New inserted Regulation 4(4) would read as follows
4(4) “A company shall not make any offer of buy-back within a period of one year reckoned from the date of closure of the preceding offer of buy-back, if any”
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iii |
Minimum amount to be utilized in case of Buyback from Open Market
To ensure that companies should not adopt the buyback route to manipulate the market price without having any genuine intention to buy back the shares, it has now been prescribed that atleast 50% of the amount earmarked for buyback shall be utilized for buying-back shares failing which, the amount in the escrow account would be forfeited subject to a maximum of 2.5% of the total amount earmarked. Under the existing Regulations, there is no such provision of minimum amount to be utilized and/ or its forfeiture.
New Inserted Regulation 14(3) would read as follows
14(3)”The company shall ensure that atleast fifty per cent of the amount earmarked for buy-back, as specified in resolutions referred to in regulation 5 or regulation 5A, is utilized for buying-back shares or other specified securities.”
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Amendments in case of Buyback from Open Market through Stock Exchange |
iv |
Timing of Public Announcement
Under the extant Regulations, the Public Announcement is required to be made within 2 working days of the date of the resolution authorizing the Buyback and atleast 7 days before the commencement of buyback.
Now the timing of making public announcement has been revised and it is required to be published within 7 working days from the date of passing the resolution authorizing the Buyback. Further, the timing of submission of public announcement has been reduced and it is required to be file with SEBI simultaneously with the publication.
Regulations 15(d) and 15(e) after amendment would read as follows:
15(d) “The public announcement shall be made within seven working days from the date of passing the resolution referred to in regulation 5 or regulation 5A, and shall contain disclosures as specified in Schedule II, Part B”;
15(e)”Simultaneously with the issue of such public announcement, the company shall file a copy of the public announcement with the Board along with the fees specified in Schedule IV;” |
v |
Rationalization of ongoing disclosure requirements
It was being felt that the current requirement of publishing the disclosures in the news papers on fortnightly basis and every time an additional 5% of maximum shares on offer were bought back only adds to the cost of buyback program. Therefore, now the disclosure requirements have been rationalized requiring disclosure of the shares bought back on the website of the company and the stock exchange, only on a daily basis instead of the current requirement of disclosure on daily and fortnightly basis.
Regulation 15(i) after amendment and new inserted 15(ia) would read as follows:
15(i) “the company shall submit the information regarding the shares or other specified securities bought-back, to the stock exchange on a daily basis in such form as may be specified by the Board and the stock exchange shall upload the same on its official website immediately;â€
15(ia) “The company shall upload the information regarding the shares or other specified securities bought-back on its website on a daily basis;”
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vi |
Maximum period to complete the Buy-Back reduced to 6 months from 12 months
From the data pertaining to buy backs for FY 2009-10 and 2010-11, it was observed by SEBI that the companies on an average have bought back around 62% of the proposed buyback size, out of which around 49% have been bought back in the first 3 months itself. Therefore was deliberated that the companies may not need such a long period to complete the buyback offer although Companies Act, 1956 provides for 12 months. Thus Maximum buy-back period has been reduced to 6 months from 12 months.
New Inserted Regulation 15(k) would read as follows:
15(k)”The buy-back offer shall open not later than seven working days from the date of public announcement and shall close within six months from the date of opening of the offer.”
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vii. |
Ease in the procedure for selling the shares for the holders of physical shares
In open market purchase method of buy-back, there were many barriers for the holderss of physical shares to participate in buy-back program. Therefore in order to mitigate the problems faced by such physical shareholders, SEBI has amended the Procedure for buy-back of physical shares and provision has been made for opening the separate window and for determination of the price of the buyback and a new Regulation 15(A) has been inserted.
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Newly Inserted Regulation 15(A) would read as follows-;
Buy-back of physical shares or other specified securities
A company shall buy-back its shares or other specified securities in physical form through open market method as provided hereunder: |
- A separate window shall be created by the stock exchange, which shall remain open during the buy back period, for buyback of shares or other specified securities in physical form.
- The company shall buy-back shares or other specified securities from eligible shareholders holding physical shares through the separate window specified in clause (a), only after verification of the identity proof and address proof by the broker.
- The price at which the shares or other specified securities are bought back shall be the volume weighted average price of the shares or other specified securities bought-back, other than in the physical form, during the calendar week in which such shares or other specified securities were received by the broker:
Provided that the price of shares or other specified securities tendered during the first calendar week of the buy-back shall be the volume weighted average market price of the shares or other specified securities of the company during the preceding calendar week. Explanation: In case no shares or other specified securities were bought back in the normal market during calendar week, the preceding week when the company has last bought back the shares or other specified securities may be considered.
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viii. |
Mandatory Creation of Escrow Account
To ensure that only serious companies launch the buyback program, it has been made mandatory to create an escrow account towards security for performance with an amount equivalent to at least 25% of the amount earmarked for buy-back.
- The escrow account can be in the form of cash deposit or bank guarantee with scheduled commercial bank subject to a deposit of cash of atleast 2.5% of the amount earmarked for buyback as and by way of security.
- In case of escrow account in the form bank guarantee, the same shall be in favour of Merchant Banker and shall be valid for a period of 30 days after the closure of the offer or till the completion of obligation under the regulation.
- A minimum of 2.5% of the amount earmarked for buyback shall be maintained in escrow account at all the time.
Newly inserted Regulation 15(B) would read as follows-
“Escrow Account” |
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- The Company shall, before opening of the offer, create an escrow account towards security for performance of its obligations under these regulations, and deposit in escrow account 25 per cent of the amount earmarked for the buy-back as specified in the resolutions referred to in regulation 5 or regulation 5A.
- The escrow account referred to in sub-regulation (1) may be in the form of,—
- cash deposited with any scheduled commercial bank; or
- bank guarantee issued in favour of the merchant banker by any scheduled commercial bank.
- For such part of the escrow account as is in the form of a cash deposit with a scheduled commercial bank, the company shall while opening the account, empower the merchant banker to instruct the bank to make payment of the amounts lying to the credit of the escrow account, to meet the obligations arising out of the buy-back.
- For such part of the escrow account as is in the form of a bank guarantee:
- The same shall be in favour of the merchant banker and shall be kept valid for a period of thirty days after the closure of the offer or till the completion of all obligations under these regulations, whichever is later.
- The same shall not be returned by the merchant banker till completion of all obligations under the regulations.
- Where part of the escrow account is in the form of a bank guarantee, the company shall deposit with a scheduled commercial bank, in cash, a sum of at least 2.5 per cent of the total amount earmarked for buy-back as specified in the resolutions referred to in regulation 5 or regulation 5A. as and by way of security for fulfillment of the obligations under the regulations by the company.
- The escrow amount may be released for making payment to the shareholders subject to atleast 2.5% of the amount earmarked for buy-back as specified in the resolutions referred to in regulation 5 or regulation 5A remaining in the escrow account at all points of time.
- On fulfilling the obligation specified at sub regulation (3) of Regulation 14, the amount and the guarantee remaining in the escrow account, if any, shall be released to the company.
- In the event of non-compliance with sub-regulation (3) of regulation 14, except in cases where, –
- Volume weighted average market price (VWAMP) of the shares or other specified securities of the company during the buy-back period was higher than the buy-back price as certified by the Merchant banker based on the inputs provided by the Stock Exchanges.
- Inadequate sell orders despite the buy orders placed by the company as certified by the Merchant banker based on the inputs provided by the Stock Exchanges.
- Such circumstances which were beyond the control of the company and in the opinion of the Board merit consideration, the Board may direct the merchant banker to forfeit the escrow account, subject to a maximum of 2.5 per cent of the amount earmarked for buy-back as specified in the resolutions referred to in regulations 5 or 5A.
- In the event of forfeiture for non-fulfillment of obligations specified in sub-regulation (8), the amount forfeited shall be deposited in the Investor Protection and Education Fund of Securities and Exchange Board of India.”
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ix |
Extinguishment of share certificate
All the share certificates bought back during the month should be extinguished and destroyed within fifteen days of the succeeding month subject to the extinguishment of all security certificate within seven days of the completion of the offer.
Regulation 16(1) after amendment and new inserted 16(3) would read as follows: |
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16(1)”Subject to the provisions of sub-regulation (2) and sub-regulation (3), the provisions of regulation 12 pertaining to extinguishment of certificates shall be applicable mutatis mutandis”
“(3) The company shall extinguish and physically destroy the security certificates so bought back during the month in the presence of a Merchant Banker and the Statutory Auditor, on or before the fifteenth day of the succeeding month:
Provided that the company shall ensure that all the securities bought-back are extinguished within seven days of the last date of completion of buyback.”
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General Obligation |
x. |
Prohibition from dealing in shares or other specified securities
Prior to the amendment Regulation 19(1)(e) prohibited the promoters or the persons from dealing in the shares or other specified securities of the Company in the Stock Exchange during the period the buyback offer is open. Through this amendment, the scope of Regulation 19(1)(e) has been widened and now the promoters are not only prohibited from dealing in the stock exchange but in fact even from off market as well including by way of inter se transfer and that too from the date of passing of resolution authorizing buyback.
Regulations 19(1)(e) after amendment would read as follows:
19(1)(e)”the promoter or the person shall not deal in the shares or other specified securities of the company in the stock exchange or off-market, including inter-se transfer of shares among the promoters during the period from the date of passing the resolution under regulation 5 or regulation 5A till the closing of the offer.”
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xi. |
Restriction on further issue of capital
A new sub regulation restricting the companies from raising the further capital for a period of 1 year from the closure of buyback offer is inserted as against the period of 6 months mention in 77A(8) of the Companies Act, 1956.
Newly inserted Regulation 19(1)(f) would read as follows-
“(f) the company shall not raise further capital for a period of one year from the closure of buy-back offer, except in discharge of its subsisting obligations.” |
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Our view:
Through this amendment, the Regulations have been made more beneficial for the shareholders more so, for the physical shareholders by providing a separate window and easing the process of tendering the shares in the buyback offer. Further, the requirement of escrow account in case of buyback from open market through stock exchange mechanism and forfeiture of amount lying in the escrow account in case of failure to utilize the minimum amount as prescribed in the regulations would again be in the interest of the shareholders as this will prompt only genuine companies to come for buybacks. However, on the other hand, this provision seems to be a bit discouraging as well for the companies planning to go for buyback through open market route on account of apprehension of forfeiture of escrow account as well as blocking of money. |