The securities market regulator on Wednesday introduced new rules that would make it easier for debt-laden listed companies looking to sell themselves to new promoters.

After its board meeting here, Ajay Tyagi, Chairman, Securities and Exchange Board of India, announced that new buyers of such companies will be exempt from mandatory open offer and preferential share issue requirements.

This also goes a long way in both the government’s and the Reserve Bank of India’s fight to deal with banks’ bad loan problem.

Currently, when lenders to a stressed business take controlling interest in the listed company through the Strategic Debt Restructuring scheme, they are exempt from making a mandatory open offer to the company’s public shareholders and are exempt from issuing preferential shares.

However, when these lenders try to sell these assets to a new investor, the latter is obliged to make the mandatory open offer and preferential share issue under SEBI’s existing takeover codes. But banks have been finding it difficult to sell these distressed businesses since the new investor would not want to use up capital to buy out existing shareholders.

Wednesday’s announcements exempt the new investor too from the takeover code’s requirements, allowing them to use the capital to turn the business around.

However, these relaxations are subject to approval by shareholders by special resolution. Also, the new investor’s shareholding is compulsorily locked in for three years, to reassure minority shareholders that the new investor is in for the long haul.

SEBI’s board also approved the proposal to provide exemption from open offer obligations, under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, for acquisitions under resolution plans approved by the National Company Law Tribunal under the Insolvency and Bankruptcy Code, 2016.

Offshore derivatives norms

The meeting also approved a slew of relaxations for foreign portfolio investors keen to invest in the Indian market while also tightening the regulation for the issue of offshore derivative instruments (like participatory notes) to foreign investors. Effective April 1, 2017, each ODI-holder will have to pay a regulatory fee of $1,000 for every three-year period.

Also, SEBI has prohibited ODIs being issued against derivatives except for genuine hedging requirements. This is part of a continual plan to discourage investment through the ODI route, where it is difficult to trace the ultimate beneficiary, making the route susceptible to tax evasion and money laundering by Indian and NRI investors, and instead encourage foreign investors into India by registering as FPIs.

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