In a significant development, the Securities Exchange Board of India (“SEBI”) recently has undertaken transformative measures. These reforms span across various sectors, including providing support to Not-for-Profit Organizations (“NPOs”) on the Social Stock Exchange, ushering in a new era for Small & Medium Real Estate Investment Trusts (“SM REITs”), and implementing investor-focused reforms for Alternative Investment Funds (“AIFs”). We provide some key highlights and implications of these regulatory changes.
Empowering NPOs on the Social Stock Exchange (“SSE”)
SEBI has taken a proactive stance to boost fundraising for NPOs on the SSE by reducing the minimum issue size for Zero Coupon Zero Principal Instruments (“ZCZP”). Basically, ZCZP functions as a distinctive link connecting social enterprises or charitable organizations with potential donors. Unlike conventional bonds or equities, these instruments do not generate interest or repay the principal amount at maturity. Instead, they function as outright donations. The move, lowering the threshold from INR 1 Crore to INR 50 lakhs, is aimed at fostering increased participation from NPOs. Simultaneously, the minimum application size for ZCZP public issuance has been substantially reduced from INR 2 lakh to INR 10,000, encouraging broader involvement, especially from retail investors.
Additionally, the change in nomenclature from "Social Auditor" to "Social Impact Assessor" aims to convey a positive approach towards the social sector. The introduction of the "Social Impact Assessor" role signifies a strategic move to reinforce the focus on the impact of NPO activities.
Moreover, SEBI's endorsement of a regulatory framework for Index Providers marks a pivotal step towards enhancing transparency and accountability in financial benchmarks. This framework aims to establish a structured registration process for Index Providers licensing 'Significant Indices.' Aligned with IOSCO Principles for Financial Benchmarks, these regulations exclusively target 'Significant Indices', contributing to the overall governance and administration of financial benchmarks in the securities market.
Regulatory Framework for SM REITs
SEBI's approval of amendments to the REIT Regulations introduces a regulatory framework tailored for SM REITs. Departing from the previous requirement of a INR 500 crore minimum asset value for existing REITs, SM REITs now face a more manageable threshold of at least INR 50 crore. This significant reduction in the minimum asset value aims to support smaller players in the real estate sector.
Furthermore, SM REITs gain the flexibility to establish separate schemes for real estate asset ownership through special purpose vehicles, with detailed provisions outlining the structure, transition of existing structures, and the responsibilities of the investment manager.
Investor-Focused Reforms for AIFs
SEBI's focus on AIFs includes crucial reforms designed to simplify compliance and strengthen investor safeguards. To enhance compliance simplicity and fortify investor safeguards, SEBI mandates that any new investment by an AIF post-September 2024 must be held in dematerialized form. While existing investments are exempted, exceptions are granted in cases where the investee company is legally obligated to facilitate dematerialization or when the AIF, independently or with other SEBI registered entities, exercises control over the investee company.
The mandate for the appointment of a custodian, initially applicable to Category III AIFs and Category I and II AIFs with a corpus exceeding INR 500 Crore, is now extended to all AIFs. AIFs have the flexibility to appoint a custodian associated with the manager or sponsor, subject to conditions similar to those outlined in SEBI (Mutual Funds) Regulations, 1996. Acknowledging the average cost of compliance for schemes under this mandate, SEBI emphasizes the importance of protecting investor interests.
Our Take
SEBI's regulatory reforms, spanning NPOs, REITs, and AIFs, underscore a proactive approach to adapt to evolving market dynamics. These measures collectively aim to foster inclusivity, transparency, and investor protection. The reduced thresholds for NPOs and SM REITs, coupled with stringent investor-focused reforms for AIFs, paint a picture of a regulatory landscape geared towards sustainable growth and investor confidence. As India's financial markets evolve, SEBI's role in implementing progressive reforms becomes increasingly pivotal.
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