New rules for securities payments

Following its board meeting on 7 January, the Securities & Exchange Board of India (SEBI) has announced changes to the rules governing the sale of securities and related-party transactions.

1. From 1 May, purchases of public and rights issues by non-retail investors (non-institutional buyers and qualified institutional buyers) will have to be made by applications supported by blocked amount (ASBA) facilities. Such applications authorize a bank to block in an applicant’s account the money required by them to subscribe to an issue. If an investor applies through ASBA, the application money is debited from their bank account only if their application is selected for allotment.

2. Following the Satyam debacle, SEBI recommended that the Ministry of Corporate Affairs should amend clause 166 of the Companies Bill, 2009, to prevent shareholders from voting on special resolutions on related-party transactions. At present, the Companies Act, 1956, restricts transactions between a company and its directors and certain other entities on the grounds of possible conflicts of interest. Central government approval is required for these transactions. However, the proposed clause 166 only restricts public companies from carrying out such transactions, which require shareholder approval rather than a nod from the central government. Clause 166, would only apply to transactions that are not on an arm’s length basis and would not govern transactions by a company in its ordinary course of business

The legislative and regulatory update is compiled by Nishith Desai Associates, a Mumbai-based law firm. The authors can be contacted at nishith@nishithdesai.com. Readers should not act on the basis of this information without seeking professional legal advice.