ESG framework boosted in GIFT city | SEBI amends LODR regulations

ESG framework boosted in GIFT city | SEBI amends LODR regulations

SEBI and IFSCA have introduced the following changes:

A. Amendment to SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations): SEBI has notified significant changes to the LODR Regulations, which include following:

Corporate governance norms of Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) to be governed by the norms as specified in the SEBI (Real Estate Investment Trust) Regulations, 2014 and SEBI (Infrastructure Investment Trusts) Regulations, 2014 instead of LODR Regulations with effect from April 1, 2023;
Definition of ‘senior management’ under the LODR Regulations expanded to include functional heads;
Listed entities required to disclose details of material subsidiaries in their annual reports for Annual Reports filed for the financial year 2022-2023 and thereafter.

Changes have been carried out vide the SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2023 (LODR Amendment Regulations).

B. Disclosures by Fund Management Entities (FMEs) for Environmental, Social or Governance (ESG) Schemes: In order to promote consistency, comparability and reliability in disclosures concerning ESG schemes and ensure ESG schemes in IFSC – GIFT City are genuine and true to their name, IFSCA has released a framework requiring ESG schemes to make certain initial and periodic disclosures, significant features of which are as follows:

Initial disclosures in the offer document/placement memorandum such as name of the scheme, investment objective, investment strategy, investment processes, risks and risk management practices, and benchmark;
Periodic disclosures inter alia including compliance with the stated ESG-related investment objectives of the scheme, ESG-related performance, actual proportion of the investable corpus/ assets under management invested as per the stated ESG-related investment objectives, key findings/major observations of internal audits or third-party validation, if any, etc.;
Monitoring and Compliances

The above changes have been analysed in the table below.

A. Amendment to LODR Regulations

Amendment	Particulars of amendment
Governance Norms for REITs and InvITs	The requirement of a ‘high value debt listed entity’ that is a Real Estate Investment Trust (REIT) or an Infrastructure Investment Trust (InvIT) to comply with regulations 15 to 27 of the LODR Regulations relating to corporate governance has been omitted. Instead, the governance norms as specified under the respective SEBI regulations for REITs and InvITs shall be applicable. This shall come into force with effect from April 1, 2023.
Definition of “senior management” expanded	The definition of “senior management” has been expanded: “Senior management” shall mean the officers and personnel of the listed entity who are members of its core management team, excluding the Board of Directors, and shall also comprise all the members of the management one level below the Chief Executive Officer or Managing Director or Whole Time Director or Manager (including Chief Executive Officer and Manager, in case they are not part of the Board of Directors) and shall specifically include the functional heads, by whatever name called and the Company Secretary and the Chief Financial Officer.”
Shareholder approval for appointment of director/ manager for public sector company	A public sector company shall ensure that the approval of the shareholders for appointment or re-appointment of a person on the Board of Directors or as a Manager is taken at the next general meeting of the company.
Disclosure of details of material subsidiaries in the annual report	Listed entities shall be required to additionally disclose details of material subsidiaries of the listed entity including the date and place of incorporation and the name and date of appointment of the statutory auditors of such subsidiaries in the corporate governance section of the annual report of the listed entity. This shall be applicable for annual reports filed for the financial year 2022-23 and thereafter.

In addition to the above, certain other minor changes have also been made in the LODR Regulations as captured hereinbelow:

	Previous Regulation	Revised Regulation
Regulation 17(1C)	The listed entity shall ensure that approval of shareholders for appointment of a person on the Board of Directors or as a manager is taken at the next general meeting or within a time period of three months from the date of appointment, whichever is earlier; …	The listed entity shall ensure that approval of shareholders for appointment *or re-appointment* of a person on the Board of Directors or as a manager is taken at the next general meeting or within a time period of three months from the date of appointment, whichever is earlier; …
Proviso to Regulation 17(1C)	… Provided that the appointment or a re-appointment of a person, including as a managing director or a whole-time director or a manager, who was earlier rejected by the shareholders at a general meeting, shall be done only with the prior approval of the shareholders: …	… Provided that a public sector company shall ensure that the approval of the shareholders for appointment or re-appointment of a person on the Board of Directors or as a Manager is taken at the next general meeting: Provided further that the appointment or a re-appointment of a person, including as a managing director or a whole-time director or a manager, who was earlier rejected by the shareholders at a general meeting, shall be done only with the prior approval of the shareholders: …
Heading of Regulation 26	*Obligations with respect to employees including senior management, key managerial persons, directors and promoters*	*Obligations with respect to employees including senior management, key managerial persons* *key managerial personnel, directors and promoters.***
Regulation 31A	(3) Reclassification of status of a promoter to public shall be permitted by the stock exchanges only upon satisfaction of the following conditions: … (b) .. (v) act as a key managerial person in the listed entity ..	(3) Reclassification of status of a promoter to public shall be permitted by the stock exchanges only upon satisfaction of the following conditions: … (b) .. (v) act as a key managerial person *key managerial personnel* in the listed entity ..
Schedule III, Part A, Para A	(16) The following events in relation to the corporate insolvency resolution process (CIRP) of a listed corporate debtor under the Insolvency Code: … (l)… (ix) Names of the new promoters, key managerial persons(s), if any and their past experience in the business or employment. In case where promoters are companies, history of such company and names of natural persons in control;…	(16) The following events in relation to the corporate insolvency resolution process (CIRP) of a listed corporate debtor under the Insolvency Code: … (l)… (ix) Names of the new promoters, key managerial person *key managerial personnel*, if any and their past experience in the business or employment. In case where promoters are companies, history of such company and names of natural persons in control;…

The above amendments have been made to the LODR Regulations vide the LODR Amendment Regulations dated January 17, 2023 (available here).

B. Disclosures by FMEs for ESG Schemes

With the objective of establishing the GIFT City as a hub for sustainable finance related activities, the International Financial Services Centre Authority (IFSCA) had previously issued regulatory frameworks for including listing of green bonds and social bonds, sustainability reporting by listed entities, sustainability related discourse by FMEs, etc. To further align the disclosures concerning ESG schemes and ensure that ESG schemes in the IFSC are bona fide, IFSCA as issued a framework for disclosures by FMEs that intend to launch ESG schemes.

Provision	Explanation
Applicability	Framework shall apply to FMEs that intend to launch and manage ESG scheme(s). “*ESG Schemes” would include such retail schemes, Exchange Traded Funds (ETFs*), restricted schemes and venture capital schemes, which: have terms, such as ‘Environment’, ‘Social’, ‘ESG’, ‘Green’, ‘Sustainability’ or any combination thereof or similar terms, incorporated in their names, or represent or market themselves as ESG focused schemes.
Initial Disclosures for ESG Schemes in Offer Document / Placement Memorandum including name of the scheme, investment objectives, investment strategy, benchmarks, etc.	*Name of the Scheme: The name of an ESG scheme should be reflective of its ESG focus and consistent with its ESG-related investment objectives and investment strategy. Investment Objectives: FME should transparently disclose the nature and extent of the scheme’s ESG-related investment objectives, including details of the primary components of sustainability addressed by the scheme. The FME should provide a clear declaration / statement of the ESG-related investment objectives, in addition to other objectives, if any, that the scheme intends to achieve through its investments. Investment Strategy: The disclosures for investment strategy should consist of a detailed explanation of the type of investment strategy that the FME intends to pursue with a view to achieve the stated investment objectives of the ESG scheme. Following are some indicative examples of ESG-related investment strategies: – Integration: Explicit consideration of ESG related parameters alongside with conventional financial parameters; – Best-in-class and Positive Screening: Investing in companies that perform better than their peers on one or more ESG-related parameters, which would be governed by a standard policy; – Impact Investing: FME seeks to generate a positive and measurable environmental / social impact, where investment would be undertaken in a consistent manner and based on a standard policy; – Engagement: FME invests in such companies where it can effectively engage for improvement in their ESG score / profile and, if the engagement does not result in improvement of ESG score / profile, takes certain pre-identified measures; – Transition: FME seeks to invest in hard-to-abate and other emission-intensive sectors, to upgrade their technology, processes and infrastructure, with the objective of achieving substantial reductions in greenhouse gas emissions. ESG Investment related Processes: FME shall disclose the methodology for processes deemed relevant for ESG investments and include a description of the same in the offer document / placement memorandum of the ESG scheme, as may be applicable. These processes inter alia* may include: – Regarding investment decisions which should involve consideration of ESG scores/ ratings/ criteria/ profiles/ index. – Regarding FME’s engagement in investee companies which should include exercise of voting rights in accordance with the ESG related investment objectives of the scheme. – Regarding periodic review of the investments which should include assessment of their performance against the stated ESG related investment objectives of the scheme – Regarding exiting the investments which should involve consideration of ESG scores/ ratings/ criteria/ profiles/ index The strategy and methodology description may further be supplemented by disclosure of various tools deployed for investment decisions like investment universe, details of external service providers for the ESG scores, key performance indicators for the measurement of ESG related performance of the scheme, minimum percentage of investable corpus / assets under management. *Disclosure of Risks and Risk Management Practices: With the objective to achieve high levels of transparency, the FME managing an ESG scheme should disclose all the specific risks that arise on account of the scheme’s pursuit of ESG related investment objectives in addition to all the other material risks faced by the scheme. Further, wherever feasible, the risk management practices should also be disclosed by the FME. Illustrations of some risks that typically arise from a scheme’s ESG focus include risk of concentration in certain types of investments, risk of reliance on third party providers for ESG scores / ratings / criteria / profiles, limitations of the methodologies and data used. Benchmark*: FME may designate a reference benchmark for the ESG scheme to measure the attainment of its ESG focus and or financial performance vis-a-vis the benchmark. Where such a benchmark is designated, the FME should provide explanation as to how it is relevant to the scheme and also provide a link to the benchmark methodology in the offer document or placement memorandum of the scheme.
Periodic Disclosures for ESG Schemes on a half yearly/ annual basis	Following disclosures should be made to IFSCA and the investors on a half yearly basis for a retail scheme and on an annual basis for other types of schemes: Compliance with the stated ESG-related investment objectives of the scheme (FME may use qualitative information and quantitative metrics, where available); ESG-related performance (FME may disclose the same in terms of the pre-determined KPIs, expected outcomes and other relevant factors); Actual proportion of the investable corpus / assets under management invested as per the stated ESG-related investment objectives (FME shall disclose the exact proportion of such investments); If an ESG scheme relies on engagement with investee companies as a significant means to implement its investment objectives/strategy, it shall disclose the efforts, including voting activities, undertaken in engagement with investee companies; Where a benchmark is designated for the scheme, comparison of scheme’s performance vis-à-vis the reference benchmark; Changes, if any, carried out in the methodologies or processes which are deemed relevant for achieving ESG-related objectives; Changes, if any, in the external ESG scores/ ratings/ criteria/ profiles/ index provider deemed relevant by the FME; and Key findings/major observations of Internal audits or third-party validation, if undertaken with respect to the scheme’s portfolio or its ESG-related investment objectives. FMEs managing ESG schemes which are in the nature of retail schemes or ETFs shall publicly disclose the above at a suitable place on their website or by other appropriate means.
Passive ETFs or Schemes	ETFs or Schemes tracking an ESG index shall comply with the requirements under this framework to the extent applicable and provide complete details of the chosen index, including its methodology and composition, along with the rationale for choosing the index.
Monitoring and Performance Evaluation	The FME should undertake the following, on a half-yearly basis for a retail scheme and on annual basis for other types of schemes: Assessment of their compliance with the stated ESG-related investment objectives of the schemes. Measurement of the ESG-related performance of the scheme by evaluating any pre-determined KPIs, expected outcomes and other relevant factors. The marketing materials and advertisements are consistent with the disclosures made in terms of this circular. Declaration to the fiduciaries by an authorized person of the FME certifying that the ESG scheme is pursuing the stated ESG-related investment objectives and adhering to its disclosed ESG-related investment strategy while adhering to the ESG-related investment methodologies. Where available, this may be backed by third-party validation / certification. In case of any material deviations or adverse observations, the fiduciaries shall bring the same to the notice of IFSCA.

Detailed requirements of the framework as issued by IFSCA have been provided in circular dated January 18, 2023 (available here).

We trust you will find this an interesting read. For any queries or comments on this update, please feel free to contact us at insights@elp-in.com or write to our authors:

Manendra Singh, Associate Partner –ManendraSingh@elp-in.com ;
Tanvi Goyal, Principal Associate –TanviGoyal@elp-in.com;
Aditi Ladha, Associate- AditiLadhai@elp-in.com

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein

ESG framework boosted in GIFT city | SEBI amends LODR regulations

Jan 23, 2023