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Sebi chairman Ajay Tyagi.
Sebi chairman Ajay Tyagi.

Sebi limits trading in security receipts to qualified buyers

Sebi's move aimed at allowing only informed investors to trade in the securities

Mumbai: A private placement, rather than a public issue, is the markets regulator’s favoured route to start trading in securities receipts issued by asset reconstruction companies (ARCs).

Only certain “qualified buyers" will be permitted to trade in them, and the minimum lot size will be Rs10 lakh. The intention is to allow only informed investors to trade in these securities.

A committee set up by the Securities and Exchange Board of India (Sebi) has made these recommendations, and the regulator’s board meeting on 28 December approved them, minutes of the meeting published on the Sebi website on Monday showed.

“The offer of Security Receipts (SRs), which are proposed to be listed, may be allowed only to Qualified Buyers through private placement," the minutes read.

Initially, security receipts—issued by ARCs to banks in exchange for some of their bad loans—will be sold to qualified buyers such as financial institutions, banks and alternative investment funds (AIFs) through a process of private placement. Later, high -net-worth individuals (HNIs) and portfolio managers will be allowed to trade in them.

Mint had first reported allowing these investors into the market for securities receipts on 13 July.

Listing of securities receipts was initially proposed in the Union budget to improve liquidity in the securitization industry and help speed up the resolution of the stressed assets in the banking system. Sebi then formed a committee with representatives from the central bank, stock exchanges, credit rating agencies and ARCs to study the matter.

The Reserve Bank of India has defined “qualified buyer" as financial institutions, banks, insurance companies, mutual funds, or any category of non-institutional investors it specifies.

“Sebi’s move to restrict these assets to savvy and more informed investors is right as these assets carry certain amount of risk with them. However, the regulator can consider expanding the subscriber class after we get a real sense of the efficacy of the Insolvency and Bankruptcy Code (IBC) in resolving the stressed or non-performing assets in the system," said Sai Venkateshwaran, partner and head, accounting advisory services, KPMG India.

Existing holders of security receipts have also been allowed to sell them in an offer for sale (OFS). The net asset value of these receipts may be disclosed quarterly. Existing RBI guidelines require such disclosures twice a year.

Considering that the securities receipts will be listed, the regulator has approved norms which subject them to higher standards of disclosures. These will include “more loan-level and pool-level information about the underlying loans", the minutes read.

Listing of these receipts would happen through the Electronic Book Mechanism, which is currently applicable for listing of debt securities. To begin with, Sebi has kept the listing of securities receipts optional.

“However, if the holder(s) of existing SRs wants to undertake an offer for sale, then such SRs shall be mandatorily listed by the issuers," the minutes read.

While the committee suggested that AIFs be allowed to subscribe to the listed SRs, existing Sebi norms limits qualified buyers only to those AIFs which are body corporates. “The existing SEBI notification is limited to AIFs which are bodies corporate, whereas the reality is that most of the AIFs are currently functioning as trusts," the committee noted in the board minutes.

“At the second stage, after seeing the level of interest and the operation of the market, the RBI may consider expanding the definition by including HNIs, portfolio managers having an investible fund base of Rs10 crore or above and family trusts, with net worth of Rs500 crore," the committee added.

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