Legal Frameworks and Compliance Requirements for Pre-Issuance Verification call in India

22nd November 2023

As we delve into the intricate fabric of India's financial landscape, it's paramount to recognize the pivotal role that legal frameworks play in the securities issuance process.

These frameworks are not merely regulatory hoops to jump through; they are the bulwarks against fraud, manipulation, and insider trading—guardians of market integrity​​.

Within this realm, the Securities and Exchange Board of India (SEBI) Act of 1992 stands tall, empowering SEBI with broad oversight and punitive powers to ensure all market intermediaries adhere to the highest standards​​.

Juxtaposed to this is the historic Companies Act of 1956, focusing on the internal machinations of companies, including financial aspects such as the use of premiums and dividends​​.

The Securities Contracts (Regulation) Act of 1956 and the Depositories Act of 1996 complement these by overseeing trading activities and ensuring the free transferability of securities, thus providing a robust legal infrastructure for market operations​​​​.

The need for pre-issuance verification in this evolving market cannot be overstated. It's a prophylactic measure, ensuring that each security issued withstands the scrutiny of legal and financial due diligence—securing investor confidence and fostering a transparent, efficient market system​​.

As we proceed, we'll traverse the nuances of compliance requirements, the digitalization of verification processes, and real-world anecdotes—drawing a comprehensive map of India's pre-issuance verification terrain.

Understanding Pre-Issuance Verification

Pre-issuance verification in India's financial markets serves as the keystone in the arch of trust between insurers and policyholders. Think of it as the meticulous double-check before the final draft of an agreement is sealed. It's comparable to the last once-over a parachutist might give their gear—a vital step to prevent mishaps mid-flight​​.

This process, akin to a quality assurance call after an online purchase, is not just about verification; it's about creating a seamless tapestry of trust and transparency. In the insurance sector, it's a conversation that aligns the insurer's offering with the customer's expectations and needs, facilitated by regulations from authorities like the IRDAI (Insurance Regulatory and Development Authority of India)​​.

Moreover, in the grand bazaar of financial instruments, where each stall offers a myriad of dazzling options, pre-issuance verification acts as the discerning customer's best friend—ensuring that what's promised is precisely what's provided​​.

Entities involved in the process typically include the issuing company, regulatory bodies like SEBI and IRDAI, and intermediaries such as brokers and underwriters, all playing their distinct roles in this intricate dance of due diligence​​​​.

Hence, this verification is not a mere bureaucratic checkbox but a proactive risk management stride, a dialogue that fortifies the foundations of financial promises and fortifies the ramparts against future disputes​​.

Legal Framework Governing Pre-Issuance Verification

The legal framework that governs pre-issuance verification in India's securities market is a complex tapestry, with the Securities and Exchange Board of India (SEBI) as its weaver. The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, known as ICDR Regulations, lay the groundwork for companies aspiring to issue securities, ensuring that a specific portion of the issue size is earmarked for defined corporate purposes​​.

Recent amendments to these regulations, effective from January 14, 2022, aim to tighten the reins on how the proceeds from Initial Public Offerings (IPOs) are utilized, particularly regarding inorganic growth and general corporate purposes. SEBI's vigilance is evident in its requirement for companies to appoint SEBI-registered credit rating agencies to monitor and report on the utilization of issue proceeds, with quarterly audit committee reviews now mandated​​.

The Companies Act of 2013 also plays a crucial role, with Section 23 outlining the process of public issue as a means of raising funds by issuing shares to the public through a prospectus. This act lays the foundation for companies to enter the public market and get listed on recognized stock exchanges in India​​.

SEBI, acting in consultation with the central government, navigates matters related to the prospectus and financial reporting under the regulations established by the SEBI Act of 1992. The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, also provide a framework for public issues, ensuring companies comply with the listing agreement post-IPO and adhere to regulations for foreign/NRI equity participation​​.

In this legal maze, SEBI's rules are not isolated; they intersect with other regulatory bodies like the Reserve Bank of India (RBI), especially when foreign investment is involved. This multifaceted legal structure ensures that pre-issuance verification in India is not just a formality but a robust, thorough process that upholds the integrity of the financial market and protects investor interests

Compliance Requirements for Issuers

To comply with the legal requirements for issuing securities in India, companies must navigate through a series of meticulous steps, ensuring all t's are crossed and i's dotted. Here’s a conversational walk-through of what that journey typically involves:

Step-by-Step Guide on Compliance for Issuing Securities:

Step-by-Step Guide on Compliance for Issuing Securities

Documentation and Due Diligence Requirements:

● Detailed business plan including use of proceeds from the issue.

● Audited financial statements for the last five years.

● Legal due diligence reports.

● Compliance with corporate governance norms as per the listing agreement​​.

Engagement Process with SEBI and Other Regulatory Bodies:

Pre-Issue: Liaise with SEBI during the draft offer document stage.

Post-Issue: Appoint a SEBI-registered monitoring agency to oversee the use of issue proceeds.

Regular Filings: Submit quarterly and annual reports, shareholding patterns, and any material changes in the company’s business or management to the stock exchange​​.

The Role of Intermediaries in Compliance

In the complex ballet of securities issuance in India, intermediaries play pivotal roles, each contributing their unique expertise to the grand performance. Let’s unwrap who these intermediaries are and their responsibilities:

Who Qualifies as an Intermediary in the Pre-Issuance Process?

Merchant Bankers: These are the maestros, ensuring the offer document's accuracy and compliance with SEBI rules. They submit a due diligence certificate to SEBI to validate the disclosures made​​.

Underwriters: Often, these are SEBI-registered merchant bankers, stockbrokers, or mutual funds, who underwrite the securities issue​​.

Bankers to an Issue: Scheduled banks that meet SEBI’s eligibility criteria play this role, managing the funds raised from the issue​​.

Portfolio Managers: Registered with SEBI, they manage investment portfolios, including those related to the securities issue​​.

Debenture Trustees: They ensure that the issuer adheres to the norms of the debenture trust deed, particularly regarding security creation and interest payments​​.

Registrars to an Issue and Share Transfer Agents: They manage the registry of securities and assist in their transfer​​.

Stock Brokers and Sub-Brokers: These players facilitate the trading of securities on the stock exchange​​​​.

Legal Obligations of Intermediaries

Intermediaries are governed by SEBI’s regulations, which cover their registration, responsibilities, and adherence to corporate governance practices. They must comply with stringent rules, including submitting detailed information for registration and maintaining a compliance officer to ensure adherence to SEBI guidelines​​.

Consequences of Non-Compliance for Intermediaries

Non-compliance can result in severe repercussions, including:

● Rejection of their registration application by SEBI for providing incomplete or false information.

● Revocation or suspension of their license.

● Penalties and legal action for failing to resolve investor complaints within the stipulated 45 days​​.

Each intermediary, like a cog in a well-oiled machine, must function flawlessly, adhering strictly to the regulatory framework laid out by SEBI. Their role is not just a mere facilitation but a crucial part of ensuring the integrity and smooth functioning of India's securities market.

How Technology is Shaping the Pre-Issuance Verification Process?

In the context of pre-issuance verification compliance in India, technology plays a pivotal role, with the introduction of innovative solutions and the integration of advanced technologies

PIVC 2.0 by Perfios

Perfios has introduced Pre-Issuance Verification PIVC 2.0, a solution designed to enhance policy verification and agreement processes. Key features include speech-to-text verification, real-time consent, global language support, location and IP fraud checks, minimal bandwidth requirements, uncompromising security, and accurate verification. This tool represents a significant advancement in insurer-customer agreements, making these processes more transparent, efficient, and dispute-free​​.

PIVC 2.0 by Perfios

The Future of PIVC

The insurance sector is undergoing digital transformation, with the Pre Insurance Verification Call (PIVC) process expected to evolve significantly. The integration of AI and machine learning will likely streamline verification processes, automate many aspects, reduce human error, and ensure more accurate results. This evolution is a global trend, with the international insurance market also adopting real-time verification methods utilizing advanced technologies​​.

Future Trends in Compliance Verification

Regulatory AI and Machine Learning: AI and machine learning are increasingly used in regulatory technology to manage and interpret large volumes of regulatory information. These technologies help in translating regulatory knowledge into actionable information, thereby increasing the efficiency of creating and maintaining digital compliance knowledge​​.

Taxonomies and Knowledge Graphs: These are important tools in compliance automation. They classify information, reduce complexity, and organize it into actionable data, thus enhancing the capabilities of machine learning in regulatory compliance​​.

Embedded Compliance: This approach integrates regulatory technology with business processes, helping companies reduce compliance risk and operational costs. It represents a shift from traditional compliance frameworks towards digital-centric models​​.

Cross-Border Compliance: Compliance automation is becoming crucial for financial institutions serving global clients. The digitization of complex and dynamic rules is essential to manage the regulatory complexities of different jurisdictions​​.

Compliance Automation for Meeting Preparation: This trend focuses on using digital tools to handle regulatory issues in client meetings, making the process more efficient and client-focused​​.

Common Challenges Faced by Issuers and Intermediaries in Meeting Compliance Requirements

Lack of Expertise and Awareness: Medium and large enterprises in India often struggle with the complex web of compliance requirements, which includes adhering to numerous acts, licenses, registrations, and filings. A significant number of companies (about 91%) lack detailed information about the acts and compliances applicable to their business and are unaware of the consequences of non-compliance​​.

Insufficient Resources: Many companies do not have dedicated resources for compliance management. Often, large companies may have only a small team, sometimes as few as two or three people, to handle these responsibilities. This lack of resources leads to inefficiencies and productivity issues in both legal and compliance aspects​​.

Management Unawareness: Over 81% of key management personnel, including directors and board members, have limited understanding of compliance requirements. This lack of knowledge at the management level leads to inadequate guidance and prioritization of compliance issues​​.

Limited Access to Legal Updates: The dynamic nature of India's compliance and regulatory ecosystem means laws change frequently, requiring timely updates in business processes. Most companies struggle to keep track of these changes manually, especially with limited personnel​​.

Possible Solutions and Strategies to Overcome These Challenges

Adoption of Regulatory Technology (RegTech): Financial institutions are increasingly turning to RegTech to manage the complex regulatory environment. RegTech solutions, available as SaaS and via open APIs, help in reducing compliance costs and improving efficiency. These technologies are particularly effective in adapting to new and complex regulations​​​​.

Digitization and Automation of Compliance Processes: Implementing technology-driven platforms for end-to-end governance and regulatory compliance can significantly enhance efficiency. Automated systems aid in data collection and report generation, meeting various regulatory requirements more effectively​​.

Engagement and Collaboration with Regulators and Institutions: Developing shared testing facilities and using machine learning to manage regulatory impact can expedite solution development and reduce costs and risks. This approach enables financial institutions to rapidly scale solutions in partnership with others​​.

Utilizing Main Technologies Supporting RegTech: Leveraging technologies like AI, machine learning, and blockchain can enhance compliance management, simplify data management, provide real-time reporting, and assist in decision-making processes​​​​​​​​.

Regulation Reframing and New Governance Implementation: Adapting to new regulatory frameworks and implementing risk management strategies can be facilitated through RegTech innovations. These include solutions for KYC, real-time AML screening, and AI/ML-based fraud prevention​​​​.

RegTech as a Service (RaaS) and Partnerships with RegTech Providers: This approach encourages financial institutions to adopt RegTech for efficiency and regulatory compliance. It includes various partnership models for shared benefits and leveraging advanced technologies​​​​​​.

Summing Up

Pre-issuance verification in India's financial market is more than a regulatory formality; it's a cornerstone for maintaining market integrity and investor confidence. By rigorously vetting the financial and operational health of companies before they issue securities, this process ensures transparency and reliability in the information presented to potential investors.

Issuers and intermediaries must stay informed about the latest regulations from bodies like SEBI to ensure adherence and demonstrate commitment to ethical practices. Adapting to technological advancements in verification processes can further enhance efficiency and compliance.

In summary, diligent pre-issuance verification and compliance are essential for the health and trustworthiness of India's financial markets, benefiting all market participants and reinforcing India's position in the global financial sector.

About Perfios:

Perfios Software Solutions is India’s largest SaaS-based B2B fintech software company enabling 900+ FIs to take informed decisions in real-time. Headquartered in Bangalore, India, Perfios specializes in real-time credit decisioning, analytics, onboarding automation, due diligence, monitoring, litigation automation, and more.

Perfios’ core data platform has been built to aggregate and analyze both structured and unstructured data and provide vertical solutions combining both consented and public data for the BFSI space catering to their stringent Scale Performance, Security, and other SLA requirements.

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