The board of Sebi in its meeting on March 15 is likely to approve a proposal to relax timelines for disclosure of material changes by FPIs.
The board may also discuss another proposal to allow alternative investment funds (AIFs) to pledge their shares in infrastructure sector investee companies in a bid to allow these investment vehicles to engage in leverage. The nine-member board may also discuss giving flexibility to AIFs, venture capital funds (VCFs) and their investors in dealing with unliquidated investments of schemes beyond the expiry of tenure.
In a discussion paper, while proposing exemption in case of companies without any identified promoter and low FPI holding, Sebi said the entire shareholding is classified as ‘public’ and there is no risk of violating minimum public holding norms.
To that extent, there is room for relaxing the additional disclosure requirements for FPIs holding concentrated positions in such companies. However, concerns regarding the circumvention of the takeover code would remain, Sebi said.
Takeover rules currently require an investor along with persons acting in concert (PAC), acquiring more than 5% shares or voting rights in a listed company to make disclosures.Sebi has proposed to keep the threshold at 3% for holdings by identifying FPIs in such companies.”It seems the exemption has a narrow application. It might apply only if the FPI has an investment in the holding company of a non-promoter group and after disregarding such investment, if the 50% threshold is not breached by such FPI, then the exemption from granular reporting would trigger,” said Rajesh H Gandhi, Partner at Deloitte.
“The added complication is that this carve-out is available only if the holding of all such FPIs is below 3% of the capital of the holding company. So, in other words, the 3% limit applies qua all FPIs investing in the holding company,” Gandhi said.
On relaxing timelines for disclosures by FPIs, the regulator has proposed to categorise material changes into two groups.
Type I includes changes that would require FPIs to seek fresh registration, or which affect any privileges or exemptions available to such foreign investors while Type II includes all other material changes.
FPIs should report Type I changes within seven working days and provide supporting documents within 30 days while Type II changes require notification and supporting documents within 30 days, Sebi has proposed.
The new proposal follows the market regulator receiving feedback from market participants on the challenges it faced in meeting timelines prescribed for disclosures, regarding changes in beneficial owners.
AIFs’ Pledge
The regulator said in the recent past it had received representations from industry associations and certain funds to allow the pledging of equity investments by AIFs to secure borrowing by investee companies to protect the value of the AIFs’ investments, particularly for the purpose of facilitating infrastructure financing. Industry bodies told the regulator that allowing AIFs to create encumbrance on their equity investments in infrastructure sector companies for the purpose of project finance is essential for infrastructure development.
Debt funding of infrastructure projects is done through project finance. In such cases, the protection provided to the lenders is the pledge of equity held in the infrastructure special purpose vehicle (SPV) holding the project.
Currently, this pledge is crucial for lenders as it gives them the right to step into the project in case the SPV defaults on its payment obligation. In the absence of such equity pledges, project finance is severely hampered.
Banks have told Sebi that they cannot lend to AIF but can provide finance to investee companies in which the AIF has invested. The credit facilities are granted against cash flows from the project. The pledge of equity is for the purpose of collateral and to secure the loan.