The Securities and Exchange Board of India (SEBI) in its board meeting held on September 30, 2024, considered and approved several measures concerning the primary and secondary markets which was concluded without any concrete decision on the much-anticipated revised framework governing Futures and Options. Key amendments announced by SEBI relating to the introduction of a ‘new asset class’ as a distinct investment product being offered by asset management companies (AMCs) and those related to the framework governing Alternative Investment Funds (AIFs) and Foreign Portfolio Investors (FPIs) have been discussed below.
(a) Introduction of a new asset class for investors with a high-risk appetite
- SEBI announced a new investment product which will be offered by AMCs in accordance with the extant regulatory framework governing mutual funds. AMCs can offer high-risk investment strategies such as long-short equity funds and exchange traded funds (ETFs) under the new asset class at a minimum investment amount of INR 10 lakhs per investor. Safeguards approved under the New Asset Class include restriction on engaging in leverage, restrictions on investment in unlisted and unrated securities similar to those applicable to mutual funds and limit of 25% of assets under management of investment strategy on derivatives exposure. These measures seek to strike a balance between enabling higher risk taking for investors while having in place commensurate risk mitigation strategies.
- SEBI’s approval follows up on recommendations on introduction of a new asset class contained in SEBI’s consultation paper dated July 16, 2024.
- This move is expected to curtail the development of largely unregulated and unauthorized investment products which exploit investors by offering irrationally high returns posing potential financial risk.
- SEBI has also approved introducing lighter touch regulations to govern passively managed mutual fund schemes reducing entry barriers for participants such as those relating to net worth, track record, and profitability of mutual funds.
(b) Investors of AIFs to have pro-rata and pari-passu rights
- Amendments to SEBI (Alternative Investment Funds) Regulations, 2012 clarifying that rights of investors with respect to distribution of returns from a scheme of an AIF will be pro-rata to contributions made by such investors in the scheme, have been approved by SEBI. It has also been clarified that rights of investors in all other respects subject to certain exemptions shall be pari-passu.
- Existing AIF schemes that have accorded priority in distribution to certain classes of investors over others while continuing with existing investments will now be barred from soliciting any new investment commitments or investing (directly or indirectly) in any investee company.
- Certain AIFs will be permitted to grant differential rights to certain investors without a detrimental effect on rights of other investors based on terms and conditions formulated by standards setting forum for AIFs in consultation with SEBI and as may be specified. Additionally, Large Value Funds (LVFs) for accredited investors will be exempt from providing pari-passu rights to their investors subject to obtaining a waiver to that effect from every investor
(c) Overseas derivative instruments and segregated portfolios of FPIs to provide additional disclosures
- FPIs issuing Overseas Derivative Instruments (ODIs), formerly known as P-notes and those having segregated portfolios will now be required to provide detailed disclosures such as ODI subscriber information and information related to segregated portfolios to depositories / designated depository participants / custodians.
- SEBI has approved a proposal to prohibit FPIs issuing ODIs from: (I) issuing ODIs with derivatives as reference / underlying; and (II) hedging their ODIs with derivative positions on stock exchanges. As a result, ODIs, throughout their life-cycle shall have cash equity / debt securities / other non-derivative permissible investment by FPI as underlying and shall be fully hedged with the same securities on a one-to-one basis.
- Existing ODIs hedged with derivatives shall be redeemed or hedged with cash positions on a one-to-one basis within one year of guidelines being issued in that regard.
- SEBI has mandated issuance of ODIs (other than those with government securities as underlying) by FPIs through a distinct registration without any proprietary investments under such registration.
Conclusion
SEBI is likely to notify the amendment regulations and / or circulars in respect of these decisions in the coming days.