Mint Explainer: Sebi’s new regulations and expanded definitions

Mint takes a close look at Sebi’s decisions and their implications for investors.

Faster rights issue with flexibility of allotment to specific investors

Sebi has drastically cut the timeline for rights issues to 23 working days from the date of approval by an issuer from the current average of 317 days. This change gives existing shareholders of a company an opportunity to participate in its potential future growth. Additionally, companies no longer are required to submit their draft letter of offer to Sebi for review, and can instead file directly with the stock exchanges.

Sandeep Parekh, partner at Finsec Law Advisors, said this decision could “shave off 90% of the time required for a rights issue”. However, he said it was unusual that promoters are now allowed to renounce their rights entitlements, and issuers can allot the under-subscribed portion of a rights issue to any specific investor, provided appropriate disclosures are made. “This may be an antithesis to the right of entitlement and goes against the jurisprudence for shareholder rights,” he said.

Pro-rata and pari-passu rights of AIF investors

Sebi clarified that investors in alternative investment funds will have rights and returns proportional to their investments (pro-rata), and in most cases, their rights will be equal (pari-passu).

Ketan Mukhija, senior partner at Burgeon Law, said pro-rata and pari-passu rights could ensure fair treatment for AIF investors, but increase administrative efforts for AIFs.

Sebi’s emphasis on pro-rata and pari-passu rights followed its assessment of side-letter agreements—ancillary documents to a contract—from AIFs through an industry association, said Vivaik Sharma, partner at Cyril Amarchand Mangaldas. “For investors to feel confident in domestic fund structures, it is crucial to maintain consistency in regulatory policies,” he said.

To provide operational flexibility to AIFs and their managers, Sebi has allowed these funds to offer specified differential rights to certain investors, without affecting the rights of others. The terms for such differential rights will be formulated by a standard-setting forum for AIFs in consultation with Sebi, based on certain principles specified by the regulator.

Large-value funds, however, may retain the flexibility to offer differential rights via side-letters, but will be required to secure explicit waivers from investors, Sharma added.

Sebi has also permitted entities such as government-owned or development institutions to subscribe to units of AIFs with fewer rights. It further clarified that existing AIF schemes with prioritised distributions for certain investors cannot raise new commitments or invest in new companies.

Sharma suggested that foreign investors and qualified institutional cuyers (QIBs) could also be permitted to take junior tranche exposures in AIFs.

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Rationalising the scope of ‘connected person’ and ‘immediate relative’

Not all individuals who have or are likely to have access to unpublished price-sensitive information related to stocks are covered under the definitions of ‘connected person’ and ‘immediate relative’. To address this, Sebi’s board has broadened the definitions to include the entire firm where a ‘connected person’ trading in stocks is employed, as well as individuals sharing a household or residence with the ‘connected person’.

Additionally, it has expanded the term ‘relative’ to include the spouse and their parents, siblings and their spouses, and children and their spouses.

Shoubhik Dasgupta, partner at Pioneer Legal, explained that Sebi introduced this provision it found it difficult to prove that acquaintances not classified as ‘connected persons’ were in possession of unpublished price-sensitive information. Sebi’s decision now shifts the burden of proof to the accused to show that acquaintances or relatives were not in possession of price-sensitive information.

Parekh of Finsec criticised the expanded definitions. “This provision would detect only 100% false positives, and 100% false negatives. It will only catch innocent people. Once you create a ‘deeming’ provision, it is difficult to disprove,” he said.

Dasgupta cautioned that individuals with access to price-sensitive information must now exercise a greater degree of diligence through checks and balances to ensure that people in their households, firms, and relatives refrain from trading in certain stocks—a potentially challenging task.

Mutual Fund Lite for passive schemes

To uniformly apply the regulatory framework of active mutual fund schemes to passive schemes such as exchange traded funds (ETFs) and index funds, Sebi has introduced a relaxed framework called ‘MF Lite’. This framework includes eased eligibility criteria for sponsors, covering aspects such as net worth, track record, and profitability, along with simplified trustee responsibilities, streamlined approval processes, and reduced disclosure requirements.

Siddharath Arora, director and head of products and research at Equirus Wealth, said the reduced barriers will attract new participants to the mutual fund industry, especially small players who may have found the earlier regulations too demanding.

“We expect the schemes under this framework to offer a reduced total expense ratio, providing retail investors with more affordable passive investment options and access to low-cost funds that track both equity and debt markets,” Arora said.

Aligning disclosure requirements for ODIs and segregated portfolios of FPIs

Sebi has aligned the disclosure requirements for offshore derivative instruments (ODIs) and segregated portfolios of foreign portfolio investors (FPIs) with those for FPIs. Failure to comply with these disclosure requirements will result in the redemption of ODIs or liquidation of the segregated portfolio within 180 days. Defaulting ODI subscribers will be barred from subscribing to ODIs from any ODI-issuing FPI.

Sebi’s board also banned ODI-issuing FPIs from issuing ODIs that reference derivatives as well as from hedging ODIs with derivatives on stock exchanges. Existing ODIs currently hedged with derivatives must either be redeemed or converted to cash positions on a one-to-one basis within one year from the issuance of these guidelines.

Additionally, Sebi has mandated that ODIs (except those linked to government securities) be issued by FPIs through a separate, dedicated FPI registration that does not allow proprietary investments.

This reflects Sebi’s efforts to increase transparency and ensure robust regulatory oversight, said Sangeeta Jhunjhunwala, partner at Khaitan Legal Associates.

“These disclosures may prevent any misuse of these instruments for unregulated financial activities. While there are additional compliance steps, the transparency sought by the regulator is in line with global best practices,” she said.

Mukhija added that stricter disclosure norms for ODIs may deter their usage due to complex compliance requirements, pushing some investors toward more transparent alternatives.