Bankers To The Rescue? SEBI Issues Master Circular For Bankers To An Issue

Posted On - 15 June, 2024 • By - King Stubb & Kasiva

Introduction

The SEBI has released a Master Circular consolidating all directives for Bankers to an Issue (BTI) under the SEBI (Bankers to an Issue) Regulations, 1994. This comprehensive document replaces previous circulars, ensuring stakeholders can access all relevant guidelines in one place. The Master Circular streamlines the registration, transfer, and operational procedures for BTIs, enhancing regulatory compliance and investor protection.

This chapter of the Master Circular covers various registration-related procedures and requirements.

Online Registration Mechanism

BTIs can register and submit applications online through the SEBI Intermediary Portal.
The portal handles registration, processing, change requests, and report submissions.
Physical copies of declarations/undertakings are still required for record purposes.

Transfer of Business

The transferee (receiving entity) must obtain fresh SEBI registration if not already registered in the same capacity as the transferor (outgoing entity).
A new registration number will be issued in these scenarios:
- Transfer through regulatory processes (merger, amalgamation, etc.)
- Transfer through non-regulatory processes (private agreements)
Exceptions:
- If control remains unchanged after the transfer, the transferor can keep its existing registration number.
- Partial transfer allows the transferor to retain its registration.

Prior Approval for Change in Control[1]

BTIs seeking a change in control must get prior approval from SEBI.
The application process involves:
- Submitting an online application through the SEBI Intermediary Portal.
- Providing detailed information about the BTI, acquirer(s), and their directors/partners. This includes:
  - Current and proposed shareholding pattern.
  - Any past SEBI registration applications or regulatory actions.
  - Pending investor complaints and how they will be resolved.
  - Litigation details (if any).
  - Confirmation of SEBI fee payments.
  - Declaration from BTI and acquirer(s) on maintaining the Board of Directors and informing existing clients before the change.
  - Additional documents for registered stockbrokers, clearing members, or depository participants (approval/NOC from relevant exchanges/depositories).
SEBI’s approval is valid for six months, within which the BTI must apply for fresh registration under the new control.
Special considerations for change in control involving NCLT schemes of arrangement:
- The application to SEBI must be filed before approaching NCLT.
- SEBI will grant an in-principle approval upon meeting requirements – valid for 3 months to file with NCLT
- Upon NCLT’s order, the BTI needs to submit a final application with specific documents to SEBI for final approval.

Transfer of Shares and Change in Control

Transfers/transmissions of shares among immediate relatives (as defined by SEBI regulations) in an unlisted BTI will not be considered a change in control.[2]
Incoming entities acquiring controlling interest through such transfers/transmissions still need to meet the “fit and proper person” criteria set by SEBI.

Non-Scheduled Payments Banks as BTIs

Non-scheduled payments banks with RBI approval can act as BTIs if they meet BTI regulation conditions.[3]
Payments bank BTIs can also act as Self-Certified Syndicate Banks subject to SEBI criteria.
Fund movement from investors to issuers must be done through the investor’s savings account held with the payments bank.

Designated Email IDs

BTIs must designate separate email IDs for investor complaint registration and redressal and regulatory communication with SEBI.[4]
These IDs must be informed to SEBI in a specific format (Annexure 2).
The designated IDs should be used exclusively for the mentioned purposes and not be person-specific and must be displayed on websites.

General Obligations

This chapter outlines the general obligations, responsibilities, and reporting requirements for BTIs.

Reporting[5]

Half-Yearly Reports: BTIs must submit electronic half-yearly reports to SEBI within three months of the half-year ending.
- The report format is specified in Annexure 3.The Board of Directors must review the reports and record observations on deficiencies and corrective measures.The BTI’s compliance officer must submit the report in Excel format to bti@sebi.gov.in.
- Specific email titling and file naming conventions are required.
Reporting Changes: BTIs must report specific changes in the half-yearly reports:
Mergers, demergers, consolidations, or other corporate restructurings. Changes in directors, including managing/whole-time directors.
- Changes in shareholding (not resulting in a control change).

Guidelines and Standards[6]

BTIs must strictly comply with the guidelines in Annexure 4 as relevant to their operations.
These guidelines cover areas such as dividend/interest/redemption payments and transfer/transmission of shares.
Records and documents mentioned in Annexure 4 must be maintained for at least eight years after relevant transactions.
BTIs can implement stricter internal controls if desired.

Software as a Service (SaaS) Advisory

The Ministry of Electronics & Information Technology (MoE&IT) advises financial institutions using SaaS solutions for Governance, Risk & Compliance (GRC) to be mindful of data security risks.[7]
BTIs are encouraged to refer to the advisory issued by the Indian Computer Emergency Response Team (CERT-In) in Annexure 5.
BTIs should ensure complete protection and control over critical systems while keeping data within India’s legal boundaries.
Compliance with the SaaS advisory must be reported in the half-yearly report with a confirmation statement.

Other Guidelines

This chapter covers various regulatory requirements and best practices for BTIs.

Investor Complaints and SEBI redressal

BTIs must comply with SCORES[8], the SEBI centralized complaint redressal system.[9]
They should display information as specified in Annexure 6 to inform investors about complaint redressal mechanisms.

Permanent Account Number (PAN) Requirement[10]

BTIs must:
- Implement systems to link client databases and transactions with PAN details for analysis.
- Build infrastructure to enable PAN-based data retrieval for comprehensive client and transaction information.
- Collect and maintain verified copies of client PAN cards issued by the Income Tax Department.
- Cross-check PAN details with the Income Tax Department website.
Exceptions exist for government entities and court-appointed officials, but BTIs must verify their claims with sufficient documentary evidence.

Preventing Unverified News Circulation

To prevent market disruption from rumors[11], BTIs must:

Implement a proper internal code of conduct and controls.
Prohibit employees from spreading rumors or unverified information obtained from clients, industry sources, or other channels.
Restrict or monitor employee access to blogs, chat forums, messenger sites, etc.
Maintain logs of any such platform usage and treat them as records subject to relevant BTI regulations.
Direct employees to forward market-related news received through any channel only after approval by the BTI’s Compliance Officer. Failure to do so may result in disciplinary action against the employee and the Compliance Officer.

Outsourcing Activities[12]

SEBI regulations require BTIs to maintain high service standards and exercise due diligence in their operations.
BTIs may outsource activities to reduce costs or for strategic reasons, but with proper risk management.
Outsourcing principles (refer to Annexure 7, not provided) address operational, reputational, legal, and other risks associated with outsourcing.
Core business activities and compliance functions (including KYC) must not be outsourced.
BTIs remain responsible for reporting suspicious transactions to the Financial Intelligence Unit (FIU) or other competent authorities, even for outsourced activities.

Conflict of Interest

BTIs and their associates must avoid conflicts of interest and comply with the following guidelines[13]:

Establish policies and procedures to identify, avoid, manage, or disclose conflicts.
Maintain high standards of integrity and treat clients fairly.
Ensure personal interests do not conflict with client duties; client interests should always be prioritized.
Make appropriate disclosures to clients about potential conflicts.
Implement measures to reduce conflict opportunities, such as information barriers between departments.
Place restrictions on securities transactions to avoid conflict while handling client mandates.
Abstain from dealing in securities while possessing material non-public information.
Avoid sharing material non-public information while dealing in securities on behalf of others.
Refrain from manipulating securities demand/supply or influencing prices.
Avoid incentive structures that encourage unsuitable product sales to clients.
Protect the confidentiality of client information.
BTI boards must implement systems for conflict identification, mitigation, and periodic review.

Foreign Account Tax Compliance Act (FATCA) Reporting[14], Anti-Money Laundering and Combating Financing of Terrorism

BTIs are required to report tax information on U.S. account holders/taxpayers to the Indian government, which will then forward it to the U.S. Internal Revenue Service (IRS).[15]
They should refer to the SEBI Master Circular for AML/CFT obligations under the Prevention of Money Laundering Act, 2002.[16]

Conclusion and The Way Forward

The SEBI Master Circular consolidates BTI regulations, simplifying compliance and improving investor protection. While online registration and reporting streamline processes, focus areas remain: ensuring a ‘fit and proper’ profile for BTIs undergoing control changes, robust data security practices, and adherence to KYC/AML/CFT norms. BTIs must navigate potential conflicts of interest and prevent rumor-spreading to maintain market integrity. Effective implementation and ongoing review are crucial for the success of this framework.

[1] https://www.sebi.gov.in/web/?file=https://www.sebi.gov.in/sebi_data/attachdocs/aug-2023/1691668695506.pdf#page=1&zoom=page-width,-15,842.

[2] https://www.sebi.gov.in/web/?file=/sebi_data/attachdocs/mar-2021/1616685668546.pdf#page=1&zoom=page-width,-16,792.

[3] https://www.sebi.gov.in/web/?file=/sebi_data/attachdocs/aug-2021/1627990238920.pdf#page=1&zoom=page-width,-16,842.

[4] https://www.sebi.gov.in/legal/circulars/jan-2007/exclusive-e-mail-id-for-redressel-of-investor-complaints_9431.html; https://www.sebi.gov.in/legal/circulars/jul-2008/designated-e-mail-id-for-regulatory-communication-with-sebi_6950.html.

[5] https://www.sebi.gov.in/web/?file=/sebi_data/attachdocs/1333011226685.pdf#page=1&zoom=page-width,-16,792.

[6] https://www.sebi.gov.in/web/?file=/sebi_data/attachdocs/apr-2018/1524228878012.pdf#page=1&zoom=page-width,-16,792.

[7] https://www.sebi.gov.in/web/?file=/sebi_data/attachdocs/nov-2020/1604487640622.pdf#page=1&zoom=page-width,-16,792.

[8] https://www.sebi.gov.in/web/?file=/sebi_data/attachdocs/1409220877600.pdf#page=1&zoom=page-width,-16,792.

[9] https://www.sebi.gov.in/web/?file=https://www.sebi.gov.in/sebi_data/attachdocs/sep-2023/1695456916964.pdf#page=1&zoom=page-width,-15,842.

[10] https://www.sebi.gov.in/legal/circulars/apr-2007/permanent-account-number-pan-to-be-the-sole-identification-number-for-all-transactions-in-the-securities-market_9445.html; https://www.sebi.gov.in/legal/circulars/jun-2008/mandatory-requirement-of-permanent-account-number-pan_6942.html.

[11] https://www.sebi.gov.in/web/?file=/sebi_data/attachdocs/1301040094242.pdf#page=1&zoom=page-width,-16,792; https://www.sebi.gov.in/web/?file=/sebi_data/attachdocs/1301040026718.pdf#page=1&zoom=page-width,-16,792.

[12] https://www.sebi.gov.in/web/?file=/sebi_data/attachdocs/1323947579579.pdf#page=1&zoom=page-width,-16,792.