Corporate Law Developments in India - Q4 2023

Ankush GoyalPartner

Rohan KohliSenior Associate

Natansh JainAssociate

Key Developments

• SEBI Alternative Investment Funds Regulations amended to enhance transparency and protect investor interest

  On 25 April 2024, the Securities and Exchange Board of India amended its Alternative Investment Funds Regulations, 2012 (AIF Regulations) to enhance transparency and protect investor interest. These amendments place enhanced due diligence obligations on Alternative Investment Funds (AIF) and permit Category I and Category II AIFs to create encumbrances on infrastructure sector companies.

  Key amendments are discussed in detail below.

  • Enhanced due diligence on investors and investments: AIFs, their managers, and key management personnel (KMP) are now required to conduct specific due diligence on their investors and investments to prevent AIFs from circumventing financial sector regulations.

    SEBI had earlier clarified in its board meeting that the due diligence requirements must be precise and not open to interpretation. Accordingly, the Standards Forum for AIFs (SFA) will develop the specific implementation standards for verifiable due diligence on investors and investments of AIFs, in consultation with SEBI.

    The exact nature of the compliance burden for AIFs, their managers, and KMPs will become clear once the SFA standards are notified.

  • Creation of encumbrances: Category I and Category II AIFs can now create encumbrances on the equity of investee companies engaged in the development, operation, or management of infrastructure projects listed in the Harmonised Master List of infrastructure sub-sectors issued by the central government (infrastructure sector companies). These encumbrances are permissible only for borrowing by such investee companies and are subject to conditions specified by SEBI in its circular dated 26 April 2024.¹

    For encumbrances not disclosed in the Private Placement Memorandum, only the encumbrances created on the equity shares held by an AIF in its investee company in the infrastructure sector (to facilitate borrowing by such company)² will be allowed to continue. Even in such cases, consent of all investors in the AIF scheme must be taken by 24 October 2024. If such consent is not obtained, the encumbrances must be removed by 24 January 2025. All other undisclosed encumbrances must be removed by 24 October 2024.

    The restriction on AIFs to create encumbrances on securities of investee companies engaged only in a select sector is likely to impact several existing deal structures in the market, as well as future financing structures which involve AIFs.

• Overseas investment framework revised to remove restrictions and liberalise norms

  The Reserve Bank of India (RBI) issued a circular on 7 June 2024, amending the Foreign Exchange Management (Overseas Investment) Directions, 2022 (OI Directions).

  Previously, overseas portfolio investment (OPI) into an overseas fund was allowed only in limited situations. These included investments (including sponsor contributions) in units of an overseas investment fund where the fund was required to be regulated by the financial regulator in the host jurisdiction. Unlisted entities could only invest in units of an investment fund or vehicle in an International Financial Services Centre (IFSC). This restricted investment opportunities in jurisdictions where the fund manager, rather than the fund itself, was regulated.

  The amendment has removed these restrictions to significantly liberalise investment norms as under.

  • Investments can now be made in units or any other instruments issued by an overseas investment fund, where either the fund itself or the fund manager is regulated by the financial sector regulator in the host jurisdiction.
  • Listed Indian companies, as well as resident individuals, can invest in jurisdictions outside of IFSCs.
  • In IFSCs, unlisted Indian entities may now also make OPI in units or any other instrument (by whatever name called) issued by an investment fund or vehicle, subject to other conditions and limits set out under the OI Directions.

  This regulatory change provides investors with the flexibility to establish funds in various forms, including limited partnerships, and limited liability companies, and more significantly, broadens the scope for Indian participation in international investments. The amendment also allows investors to tap opportunities for investments in overseas funds which are regulated through their fund managers, opening up favourable jurisdictions like Singapore and Delaware where such structures are commonly used.

• Listing regulations amended to improve market integrity and investor confidence

  SEBI has introduced significant amendments to the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations) on 17 May 2024. These amendments are slated to come into effect in a staggered manner, with most amendments having already been enforced from 17 May 2024, and others to come into effect from 31 December 2024. These amendments collectively aim to enhance the accuracy of market data, ensure timely and transparent communication, and provide entities with more flexibility and time for compliance and strategic planning.

  The key amendments are:

  • New market cap formula: A new methodology for calculating market capitalisation has been introduced, effective 31 December 2024. Instead of relying on the market cap as of 31 March or fiscal year-end, the new calculation will be based on a six-month average from 1 July to 31 December. This aims to provide a more stable and accurate representation of a company’s market cap.
  • Rumour verification linked to material price movements: Companies must verify and respond to market rumours within 24 hours if there is a material price movement. This aims to ensure timely and accurate information dissemination. (To read our detailed update on the new market rumour verification framework, click here.)
  • Prompt responses from key executives on market rumours: A new regulation mandates that key executives, including promoters, directors, and senior management, must promptly respond to queries related to rumour verification.
  • Extended timeline for filling key executive vacancies: In case regulatory approval is required for key executive appointments, companies now have up to six months (in comparison to the earlier three-month period) to fill vacancies for CEO, CFO, MD, etc.
  • Uniform two-day notice for stock exchange intimations: Companies must now provide a uniform two-working-day notice for all specified events requiring intimation to stock exchanges, ensuring more consistent communication.

• Capital issuance regulations amended in response to evolving market requirements

  The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations) were amended on 18 May 2024 to streamline and harmonise regulatory provisions, making it easier to do business.

  The key amendments are:

  • Scope of minimum promoter contribution broadened: Members of the promoter group and non-individual shareholders holding at least 5% of post-issue capital are now allowed to contribute towards minimum promoter contribution (MPC) in case of a shortfall. This flexibility benefits companies with a dispersed promoter shareholding.

    Moreover, compulsorily convertible securities (CCS) held for over a year before filing the draft red herring prospectus (DRHP) are now eligible for MPC, provided they are fully disclosed and converted into equity shares before filing the red herring prospectus. This amendment aligns the eligibility of CCS with that of shares for an offer for sale (OFS).

  • New thresholds for refiling draft red herring prospectus: The amendment clarifies that changes in fresh issue size will be tested in rupee value. An increase or decrease within 20% for fresh issues and within 50% for OFS will not require refiling of the DRHP, providing greater flexibility for issuers.
  • Price determination for preferential allotment and qualified institutional placement: The new framework allows listed companies to exclude price variations due to market rumours when determining the floor price for private placements if the market rumours are confirmed within 24 hours. This change makes private placements more viable by preventing steep hikes in the floor price caused by outlier events.
  • Flexibility in extending bid/offer closing date: The minimum extension period for bidding due to force majeure events has been reduced from three working days to one. This change prevents unnecessary delays and allows for quicker initial public offering processes.

  These amendments demonstrate SEBI's business-friendly approach and responsiveness to market needs. By broadening MPC eligibility and including CCS towards the MPC calculation, and providing greater flexibility and clarity in regulations, SEBI aims to support modern businesses that rely on continuous funding requirements.

• SEBI’s complaint redressal system revamped for increased efficiency

  SEBI has enhanced its complaint redressal mechanism by launching the updated SCORES 2.0 (SEBI Complaint Redressal System) portal on 1 April 2024.

  The key features of the new system include the following.

  • Uniform and reduced timeline of 21 days for the resolution of investor complaints across the securities market.
  • Auto-routing of complaints to the relevant regulated entity to minimise delays.
  • Two-level review system for complaint resolutions - initially by the designated body (as specified in SEBI circular dated 20 September 2023) and subsequently by SEBI if the investor remains dissatisfied.
  • Auto-escalation of complaints in cases of non-compliance with the prescribed timelines by the regulated entity or the designated body.
  • Integration with the Know Your Customer Registration Agency database to facilitate easy registration of investors on SCORES 2.0.

  The overall design and scheme of SCORES 2.0 is geared to minimise delays, streamline processes, enhance transparency, and improve the overall investor experience in the securities market.

• Reforms to the corporate insolvency resolution process proposed to increase effectiveness and reduce gaps

  The Insolvency and Bankruptcy Board of India (IBBI) recently released a discussion paper proposing several reforms to the Insolvency and Bankruptcy Board of India (Insolvency Resolution for Corporate Persons) Regulations, 2016 (CIRP Regulations). These reforms aim to address existing gaps in the corporate insolvency resolution process (CIRP) and enhance the viability and effectiveness of the Insolvency and Bankruptcy Code, 2016 (Code).

  The suggested reforms include:

  • Valuation of the corporate debtor: The current valuation process involves two valuers estimating the asset-wise values of the corporate debtor, and potentially a third valuer, if there is a significant discrepancy in the valuation of the first two valuers. The suggested reform aims to align this process with valuation rules under the Companies Act, 2013, which requires registered valuers to submit a valuation report for the corporate debtor as a whole (i.e., after obtaining inputs on its valuation report or getting a separate valuation conducted for any class of assets from any other registered valuer, if required). This alignment will streamline compliance procedures.

  • Single valuation estimate for certain companies: Under the existing valuation process, two valuers are required to be appointed within 47 days from the CIRP commencement date, and a third can be appointed if needed. The proposed reform provides that only one registered valuer be required for micro, small and medium enterprises (MSME) or companies with assets up to INR 1,000 crore. The Committee of Creditors (CoC) can, however, decide to appoint two valuers if required.

    This reform is expected to expedite CIRPs and reduce costs, contributing to value maximisation for financial creditors.

  • Appointment of authorised representative: The appointment of authorised representative (AR) currently requires confirmation by the adjudicating authority before the first CoC meeting can take place. This requirement can delay the representation of creditors' interests. The proposed reform seeks to permit the AR to attend CoC meetings and perform its duties from the date of submission of the appointment application until its confirmation.
  • Release of guarantees: The reform suggests that the resolution plan must explicitly state that its approval does not prevent creditors from enforcing rights against guarantors of the corporate debtor. The proposed reform seeks to provide clarity with respect to continuity of the relevant guarantee post approval of the resolution plan.

^[1] https://www.sebi.gov.in/legal/circulars/apr-2024/framework-for-category-i-and-ii-alternative-investment-funds-aifs-to-create-encumbrance-on-their-holding-of-equity-of-investee-companies_83067.html
^[2] That is, created as per the provisos to Regulation 16(1)(c) and 17(c) of the AIF Regulations

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