SEBI mulls allowing FPIs to invest in unlisted NCDs

New Delhi: With an aim to deepen capital markets, regulator SEBI is mulling relaxing its norms to permit FPIs to invest in unlisted non-convertible debentures and securitised 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 in the board meeting of Securities and Exchange Board of India (SEBI) later this week, sources said.

The regulator plans to allow Foreign Portfolio Investors (FPIs) to invest in unlisted non-convertible debentures and securities debt instruments, they added. 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 that include sovereign wealth funds and central banks as well as Category-II FPIs, which include 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, sources 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 source 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.