Sebi mulls allowing FPIs to invest in unlisted NCDs

Sebi also plans to tighten corporate governance rules on profit sharing deals between promoters and private equity funds to help protect minority shareholders


Sebi plans to add a provision to the listing agreement that will require disclosures and prior approval of shareholders about profit sharing deals.  Photo: Abhijit Bhatlekar/Mint
Sebi plans to add a provision to the listing agreement that will require disclosures and prior approval of shareholders about profit sharing deals. Photo: Abhijit Bhatlekar/Mint

New Delhi: With an aim to deepen the capital markets, regulator Securities and Exchange Board of India (Sebi) is considering the relaxation of its norms to permit foreign portfolio investors (FPIs) to invest in unlisted non-convertible debentures(NCDs) and securitized debt instruments.

In a slew of proposed reform measures, the regulator also plans to tighten corporate governance rules on profit sharing agreements between promoters and private equity funds as part of its efforts to safeguard minority shareholders in markets. These proposals are likely to be discussed at Sebi’s board meeting later this week, people familiar with the matter said.

The regulator plans to allow FPIs to invest in unlisted non-convertible debentures and securities debt instruments, they added. The Reserve Bank of India (RBI) has also recently relaxed its rules for allowing such investments by FPIs. The move comes after Sebi’s board, in September, allowed well-regulated FPIs to directly trade in corporate bonds, without going through any broker or other intermediary. The revised norms are applicable for Category-I FPIs, which includes sovereign wealth funds and central banks as well as Category-II FPIs, which includes mutual funds and banks. However, hedge funds, individuals and other high-risk foreign investors will not get this facility. Prior to that, FPIs could trade in Indian markets only through brokers who are registered with the stock exchanges as their members. The move is aimed at boosting foreign inflows in Indian capital markets. It would also deepen and widen the corporate bond market.

Sebi is planning to make it mandatory for promoters and top executives of companies entering into special profit sharing deals with private equity funds to obtain prior approval from the company’s board and shareholders, people with knowledge of the matter said. The regulator plans to add a provision to the listing agreement that will require disclosures and prior approval of shareholders. In case of existing profit sharing agreements, such agreements would need to be informed to the stock exchanges for public dissemination.

“No employee, including key managerial personnel, director or promoter of a listed entity, shall enter into any agreement for himself or on behalf of any other person, with any shareholder or any other third party with regard to compensation or profit sharing agreement unless prior approval has been obtained from the board as well as public shareholders,” a person familiar with the matter said.

Earlier, Sebi had said that instances of private equity funds entering into compensation agreements with promoters, directors and key managerial personnel of listed investee companies, based on performance of such companies have recently come to light. However, when such reward agreements are executed without prior approval of shareholders, it could potentially lead to unfair practices, it had added.

READ MORE