In light of the recent developments relating to the COVID-19 pandemic (and its ongoing consequent impact on the Indian and global economy), the Securities and Exchange Board of India (“SEBI”), had recently, vide its two circulars, each dated April 21, 2020 (“April Circulars”), granted (a) temporary relaxations from compliance with certain provisions of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018, as amended (“SEBI ICDR Regulations”), and (b) one-time relaxation with respect to validity of SEBI observations, in respect of rights issues, with an intent to improve fund raising access to listed corporate entities as well as revive investor confidence in the securities market. With the aforesaid intention in mind, SEBI has issued another circular dated May 6, 2020 (Circular No. SEBI/HO/CFD/CIR/CFD/DIL/67/2020) (“Circular”), for granting relaxation relation to (a) certain procedural matters in relation to rights issues, and (b) authentication of offer documents and inspection of documents electronically for all capital markets issues.
The Circular shall be applicable for all rights issues (including fast track rights issues) opening before July 31, 2020, and for all offer documents filed until July 31, 2020.
Key aspects of the Circular
A. Relaxation in respect of rights issues
i. Availability of letter of offer and other issue materials
Regulation 77(2) of the SEBI ICDR Regulations prescribes that the abridged letter of offer (along with application form), can be despatched either through registered post, speed post, courier service or by electronic transmission to all existing shareholders of the issuer company, prior to the opening of the issue.
However, keeping in mind the various practical challenges that may arise in the COVID-19 era, particularly in relation to engaging courier or postal services, SEBI has now specifically clarified that failure to dispatch the aforesaid offering material through registered post or speed post or courier services, due to prevailing COVID-19 related conditions, will not be treated as non-compliance, for rights issues opening up to July 31, 2020. To supplement the aforesaid relaxation, the following additional steps are required to be undertaken:
- issuers are required to publish the letter of offer, abridged letter of offer and application forms on its website as well as on the websites of the lead manager(s) to the issue, registrar to the issue and stock exchanges; and
- issuers as well as the lead manager(s) to the issue are required to undertake adequate steps to reach out to the shareholders through other means, including through SMS, ordinary post, audio-visual advertisements on television, as well as digital advertisements.
These measures help issuers negate the difficulties they may face in respect of physical distribution of offering material. The availability of offering material on the internet would ensure that potential investors get access to the same through virtual means. Having said that, digital modes of communication may not be preferred by a select set of investors, who are either not accustomed to such platforms, or may face challenges in receiving uninterrupted internet network connectivity.
Thus, the aforesaid clarification showcases SEBI’s positive intent towards making the Indian capital markets regime a technologically driven and an environment friendly one, and we may hope for increased usage of electronic transmission systems for dispatch of the aforesaid offering materials, not only during the next couple of months, but also in the coming years in the post COVID-19 era.
Further, in light of the Circular and other representations received re provision of clarification on mode of issue of notice (referred to in Sections 62(1)(a)(i) of the Companies Act, 2013 (“Companies Act”) for rights issues by listed companies, in view of difficulties faced by such companies in sending notices through postal/courier services on account of the threat posed by the COVID-19 situation, the Ministry of Corporate Affairs, Government of India, issued a clarificatory circular dated May 11, 2020 (General Circular No. 21/2020) (the “MCA Circular”). The MCA Circular clarified that the inability to dispatch the notice (referred to hereinabove) by listed companies (which comply with the Circular) to their shareholders through registered post, speed post or courier would not be viewed as a violation of Section 62(2) of the Companies Act. The MCA Circular shall be applicable in case of rights issues opening up to July 31, 2020.
ii. Issue-related advertisements
Prior to the opening of the rights issue, the issuer is required to publish advertisement(s) in certain specific newspapers (“Statutory Newspapers”), containing the disclosures mandated under Regulation 84(1) of the SEBI ICDR Regulations (“Statutory Advertisement(s)”). However, given the difficulties in publishing physical advertisements (i.e. in newspapers, hoardings, banners, etc.) and the potential inefficacies with respect to their outreach in the COVID-19 era, SEBI has provided a few additional mechanisms for publication of Statutory Advertisements and other issue-related advertisements:
(a) issuers have the flexibility to publish the Statutory Advertisement confirming dispatch of abridged letter of offer and application form in newspapers other than the Statutory Newspapers;
(b) all such advertisements must also be made available on the websites of the issuer, lead manager(s) to the issue, registrar to the issue, and the stock exchanges; and
(c) issuers are also required to make use of advertisements through other electronic media such as television channels, radio and the internet for disseminating information relating to the application process. Further, for the first time, SEBI has permitted such advertisements to be made in the form of crawlers or tickers as well.
The Circular also requires issuers to disclose additional details in Statutory Advertisement(s), specifically in relation to the application process for shareholders who have not been served notice via electronic modes.
iii. Application by physical shareholders
In 2008, SEBI, while acknowledging the market practice of trading of rights entitlements in physical form, envisaged the establishment of a uniform and exchange driven mode of trading of rights entitlements, and released a paper for receiving public comments on the proposed electronic rights issue process and e-trading of rights entitlements. While the proposal for establishing an e-trading platform for rights entitlements did not see the light of the day, SEBI had issued a circular for streamlining certain aspects of the rights issue process on January 22, 2020 (“January Circular”), with the intention of, among other things, reducing issue timelines and permitting trading of rights entitlements in dematerialized form. Pursuant to the January Circular, rights entitlements would have to be mandatorily credited to the demat account of eligible shareholders in dematerialized form, and physical shareholders were required to provide their demat account details to issuer or the registrar to the issue for credit of rights entitlements (within a period of two working days prior to the issue closing date). However, given certain impossibilities during the COVID-19 era, investors (especially those holding securities in physical form) may face several hurdles while undertaking the process of opening a demat account or communicating their demat account details to the issuer or registrar, prior to the issue closing date. While the January Circular was introduced with an intention of establishing an efficient process of credit of rights entitlements to respective demat accounts (which in turn would facilitate the existence of a robust rights entitlements trading platform), the onset of the COVID-19 pandemic has forced SEBI to offer certain relaxations to shareholders.
Keeping in mind the aforesaid challenges, SEBI has, vide the Circular, allowed physical shareholders to submit their applications re the rights issue, irrespective of whether they are able to open demat accounts or communicate details of the demat accounts in accordance with the requirements prescribed in the January Circular. However, the submission of applications by such physical shareholders would be allowed, subject to (a) the institution of a mechanism by the issuer, lead manager(s) to the issue and other intermediaries for allowing such shareholders to apply in the rights issue, and (b) adequate steps being taken by the issuer and lead manager(s) to the issue for communicating the mechanism described in (a) hereinabove to the aforesaid shareholders prior to opening of the issue. Further, such physical shareholders availing of the aforesaid relaxation shall not be eligible to renounce their rights entitlements, and shall receive shares in dematerialized form only.
In light of the aforesaid, we believe that issuers and intermediaries may need to consider utilizing the issuer’s suspense accounts (including the one opened in accordance with Regulation 39 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended (“SEBI Listing Regulations”)) where such rights entitlements and shares (to be credited to the physical shareholders who have applied for allotment of equity shares), will be kept in abeyance in electronic mode by issuers, until the aforesaid shareholders provide details of their demat account particulars to the issuer or registrar, in accordance with the procedure as prescribed under Regulation 39 of the SEBI Listing Regulations.
iv. Non-cash based application process
Pursuant to the January Circular, all eligible shareholders are mandatorily required to use the application supported by blocked amount (“ASBA”) mechanism while applying for shares in a rights issue. However, the onset of the COVID-19 pandemic may have created certain practical roadblocks with respect to the transition to an ASBA only mechanism.
Shareholders who have not transitioned to using an ASBA account may face hurdles while trying to do so in the COVID-19 era, especially in light of the existence of a nation-wide lockdown. Further, an SCSB, a critical intermediary at the forefront of the ASBA process, may find it difficult to function optimally with reduced staff strength, given the remote working landscape that is now prevalent across industries.
In light of the practical difficulties and systemic challenges faced by both investors as well as intermediaries, SEBI has permitted issuers (along with the lead manager(s), the registrar, and other intermediaries) to institute optional mechanisms (non-cash mode only) to accept the application money from the shareholders. In view of the aforesaid, issuers and other intermediaries may look to establish mechanisms whereby application monies can be paid by way of online transfers into designated accounts. However, the Circular clarifies that no third party payments shall be allowed in respect of any application.
In order to ensure that relaxations provided hereinabove are utilised by the issuer and intermediaries towards achieving investor protection, SEBI has, vide the Circular, imposed a duty on the issuer and the lead manager(s) to the issue to ensure, in respect of the mechanisms referred in points (iii) and (iv) above, that:
(a) the mechanisms shall serve as an additional option, and would not be a replacement of the existing process, and efforts are made to adhere to the existing prescribed framework;
(b) the mechanisms function in a transparent and robust manner (with adequate checks and balances), and the transparency, fairness and integrity of such mechanisms are to the satisfaction of the lead managers and registrar to the issue, without imposing additional costs on investors;
(c) FAQs, a dedicated online investor helpdesk and helpline are created to guide investors through the application process, and to resolve difficulties faced on a priority basis; and
(d) the issuer, lead manager(s), registrar and other intermediaries are responsible for all investor complaints.
B. Relaxations in respect of all offer documents
i. Relaxations in relation to digital signatures and electronic inspection of material documents
In respect of all offer documents filed until July 31, 2020, SEBI has now permitted:
(a) usage of digital signature certifications for authenticating and certifying offer documents; and
(b) the issuer and lead manager(s) to establish a procedure for electronic inspection of material documents.
While the former is an option that may be used by the issuer, the latter appears to be a mandatory requirement. In light of the aforesaid, issuers may now be required to look for cost-effective ways of providing access to these documents, which may be through secured mechanisms, such as password-protected dedicated portal on the issuer’s website (wherein entry may be permitted via communications sent by way of SMS, emails, etc.).
Moreover, on a plain reading of the Circular, it appears that this part of the Circular shall be applicable for ‘all offer documents filed until July 31, 2020’ (and not just limited to rights issues alone), which may mean that inspection of material documents shall only be done electronically in case of all issues wherein the respective offer document (i.e. red herring prospectus, prospectus, shelf prospectus and letter of offer, as the case may be) is filed until July 31, 2020.
In these turbulent times of the COVID-19 pandemic, SEBI is trying to leave no stone unturned to revive Indian capital markets. With the issuance of the April Circulars and the Circular, it is quite evident that SEBI is looking to improve access to real-time fund raising options, with a specific focus on making the rights issue process technology friendly. While SEBI has tried to restore issuers’ and investors’ confidence in Indian capital markets with a slew of relaxations, it has kept in mind investor protection ideals and traditions while offering the same.
However, it must be borne in mind that issuers, lead manager(s), registrars and other market intermediaries may face increased costs in the process of setting up the mechanisms discussed hereinabove. Moreover, it must not be forgotten that advertisements and other publicity materials issued pursuant to these relaxations would still have to pass the rigours of publicity restrictions prescribed under the SEBI ICDR Regulations. Regardless of the aforesaid, the efficacy of these relaxations can be completely examined only after the completion of few rights issues and interaction with market intermediaries.
Please refer to the SEBI circular dated May 6, 2020 (circular no. SEBI/HO/CFD/DIL2/CIR/P/2020/78) for more details.