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Reforms to Rights Issues: A Major Highlight in SEBI’s September 2024 Board Meeting

In its September 30th, 2024, board meeting, SEBI introduced a major reform by reducing the timeline for rights issues from the existing average of 317 days to 23 days. This change is expected to significantly expedite the capital-raising process for companies, making it faster and more efficient for both issuers and investors.

Rights issues, where existing shareholders are given the right to buy additional shares at a discount, have long been seen as a favourable means of raising funds. However, the existing average timeline is comparatively lengthy, which may be a potential deterrent for companies, as they could be exposed to market volatility and investor uncertainty. The reduction brings various positives and highlights growing reforms in the market.

The Importance of the Reform

This reduction in the rights issue timeline is especially pertinent in today’s fast-growing markets, where the need for liquidity and quick access to capital is critical. Shorter timelines reduce the window for market fluctuations, thereby reducing chances of negative impact on share prices or investor sentiment. Companies, especially those needing immediate funds due to market opportunities or financial constraints, can now complete the fundraising process within a much shorter timeframe, allowing them to respond to market conditions more dynamically, and allow existing shareholders to participate in he continued growth of the issuer.

From an operational perspective, this shift also reduces the administrative burden associated with prolonged fundraising periods. Companies can now streamline their capital-raising process without the risk of their share prices being negatively affected by extended periods.

Implications for Issuers

For companies, the shortened timeline offers a great opportunity to raise funds more quickly, which can be crucial in times of economic instability or rapid market changes. Many companies may find this reform especially beneficial when looking for fast-tracked funding for business expansions, acquisitions, or debt reduction. The reduced timeline also mitigates the risk that prolonged processes might lead to a dilution of stock value or decreased investor confidence.

Moreover, this new framework could make rights issues a more attractive option compared to alternative fundraising methods, such as public offerings or taking on additional debt. Public offerings often involve extensive regulatory compliance, and borrowing can weigh down a company with additional liabilities. In contrast, rights issues, especially under the new timeline, offer a quicker and less cumbersome method of securing capital while keeping shareholder control largely intact.

Benefits for Investors

From an investor’s perspective, the quicker rights issue process reduces the uncertainty involved. Under the existing timeline, investors were often left waiting for extended periods, during which market dynamics could shift unfavourably. Now, with the shortened timeline, investors can make quicker decisions regarding their participation, reducing the risks associated with prolonged market exposure.

The new framework also allows investors to respond more efficiently to a company’s capital-raising needs, encouraging more active participation. Investors may be more likely to take up rights issues now, knowing that the process is quicker.

Boosting Confidence in the Capital Markets

This change is not just about improving efficiency; it’s also about restoring and boosting confidence in the Indian capital markets. Rights issues are a key indicator of market health, and a faster, more streamlined process indicates a more robust, dynamic market environment.

By reducing the timeline, SEBI is also aligning India’s rights issue processes more closely with global standards, making the Indian capital markets more attractive to both domestic and international investors.

Conclusion

SEBI’s decision to reduce the timeline for rights issues is a transformative step towards creating a more efficient and responsive capital-raising environment in India. For issuers, it provides a faster way to secure necessary funds, and for investors, it reduces the uncertainty tied to prolonged processes. This reform reinforces the use of rights issues as a preferred method for raising capital and could serve as a cornerstone for further regulatory developments aimed at modernising India’s capital markets and aligning it to more mature global standards.

SEBI Board Meeting Outcome

The SEBI board at its meeting held on March 29, 2023 has approved the following key amendments and changes to the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended (“LODR”) and the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018, as amended (“ICDR”).

Disclosure of material events

1. Introduction of quantitative materiality threshold for determination of materiality of events or information.

Regulation 4 of the LODR, casts the following obligations are on a listed entity:

  • The listed entity shall provide adequate and timely information to recognised stock exchange(s) and investors
  • The listed entity shall ensure that disseminations made under provisions of these regulations and circulars made thereunder, are adequate, accurate, explicit, timely and presented in a simple language.
  • Channels for disseminating information shall provide for equal, timely and cost efficient access to relevant information by investors.

Regulation 30(4) of the LODR requires disclosure of material information based on certain qualitative criteria, namely:

  • the omission of an event or information, which is likely to result in discontinuity or alteration of event or information already available publicly; or
  • the omission of an event or information is likely to result in significant market reaction if the said omission came to light at a later date;
  • In case where the criteria specified in sub-clauses (a) and (b) are not applicable, an event/information may be treated as being material if in the opinion of the board of directors of listed entity, the event / information is considered material.

Listed entities are also required to devise a materiality policy based on the above principles for disclosure of information. Generally, listed entities include a further quantitative criteria for disclosure of certain material events such as litigation. This may be in the form of any event which has a monetary or determinable impact, such as 10% of the profit after tax or 1% of the revenue of the listed entity. Basis the above amendment, similar monetary or quantifiable thresholds are likely to become applicable for all kinds of disclosures.

2. Timelines for disclosure of material events or information for decisions of the board of directors or emanating from within the listed entity

Presently, Regulation 30(6) of the LODR allows for disclosure of material events within a period of 24 hours from the event, with exceptions for certain decisions of the board, such as approval of dividends, buybacks, increases in capital or approval of financial results, which have to be intimated within 30 minutes of the conclusion of the meeting. The amendments approved would likely make the 30 minute timeline applicable for a wider range of board decisions, if not all, while the overall time period for disclosure of material information has been reduced from 24 hours to 12 hours.

3. Verification, confirmation or clarification of market rumours

With effect from October 1, 2023, the top 100 listed companies by market capitalisation will be required to verify, confirm or clarify on market rumours. This clarification or confirmation regime will be extended to the top 250 listed companies by market capitalisation on April 1, 2024. Based on the press-conference by the SEBI chairperson, we understand that this will be limited to mainstream media. One of the key points of interest will remain the definition of mainstream media, as the universe of information has increased exponentially in recent times with the advent of the digital news medium and social networking sites.

4. Disclosure of certain types of agreements binding listed entities

As per a recently released discussion paper, a new clause 5A is proposed to be incorporated in para A of Part A of Schedule III to the LODR to cover disclosure of any agreement that impacts the management or control of a listed entity or imposes any restriction or creates any liability on a listed entity. Further, agreements whose purpose and effect is to impact the management or control or impose any restriction or create any liability also needs to be disclosed. However, agreements entered by a listed entity for the business operations of a company (e.g. supply agreements, purchase agreements etc.) is proposed to be excluded from the scope of disclosures.

Further, the discussion paper had also proposed a takeover regulations type event based disclosure, making it obligatory on shareholders, promoters, promoter group members, directors, key managerial personnel or related parties to inform the listed entity of entering into such agreements.

Once enacted, the disclosure paper also envisaged disclosure of such agreements by June 30, 2023 and ratification by the board and shareholders of the listed entity at subsequent general meeting during Fiscal 2024.

Corporate governance norms

5. Periodic shareholder approval of special rights

With a view towards further strengthen  corporate governance norms at listed entities, SEBI has approved amendments to include a periodic approval of any special rights granted to certain shareholders. As per a recently issued discussion paper, the proposal was to seek shareholder approval for special rights, such as director nomination, at an interval of five years. The discussion paper had also proposed that the existing special rights available to shareholders be renewed within a period of five years from the date of notification of the amendments to the LODR. Depending upon the amendment regulations, it may also open flood gates for shareholders who were contemplating to avail special rights in a listed company. Moreover, as the SEBI board meeting mentions ‘any special right granted to a shareholder of a listed company’, it may lead to queries from private equity investors for retaining certain special rights (other than appointment of nominees) to be continued post the IPO of a company, on the grounds of the same being permitted in case of any listed company (subject to periodic shareholder approval).

6. Alignment of disclosure requirements for BTAs and schemes of arrangement

In terms of a recent discussion paper, SEBI had proposed to institute an additional mechanism for shareholder verification and approval of the process of disposal of undertakings or entities outside the scheme of arrangement process. Currently, the scheme of arrangement requires approval of the shareholders and stock exchanges, with certain exceptions and the amendment proposed would align the need to seek approval between business transfer agreements or slump sale arrangements with those applicable to schemes of arrangement.

The proposals included disclosure of objects and commercial rationale for such sale, disposal and/or lease to the shareholders with voting approval to be obtained from the majority of the minority shareholders. It should be noted that this approval would be in addition to approvals required from shareholders for disposal of assets under the Companies Act, 2013.

7. Periodic approval of directorship term

In the interest of good corporate governance at listed entities, all directors appointed to the board of a listed entity will need to go through periodic shareholders’ approval process, thereby providing legitimacy to the director to continue to serve on the board. In terms of the recent discussion paper, this would be on the similar lines being followed for the appointment / re-appointment of whole time directors and independent directors. The proposal set out in the discussion paper was to have such periodic shareholders’ approval at least once in every five years from the date of his / her first appointment to the board. For existing directors, who have not been subject to reappointment since April 1, 2019, the re-appointment would require to be obtained during Fiscal 2024.

8. Disclosure of financial statements by newly listed entities

Read with a recently issued discussion paper, the proposed amendment would require a newly-equity listed entity to disclose its first financial results post its listing, for the period immediately succeeding to the periods for which financial statements were disclosed in its offer document for initial public offer, within 15 days from the date of listing or as per the applicable timeline under LODR Regulations, whichever is later. The below illustration from the discussion paper dated February 20, 2023 helps explain the requirements:

For example, in case of listing on March 01, 2023, as per the requirement under ICDR Regulations, the issuer would have disclosed in its offer documents the financial results till the period ended September 30, 2022. Hence, post its listing, it would be required to disclose the financial results for the succeeding period, i.e., quarter ended December 31, 2022, within 15 days from the date of listing, i.e. by March 16, 2023.The annual financial results for the financial year ended March 31, 2023 would be required to be disclosed as per the timeline specified in the LODR Regulations, i.e., by May 30, 2023.

Having said that, SEBI in its board meeting has communicated that a streamlined approach will have to be followed by newly listed companies towards releasing their first set of financial results immediately post listing, primarily to bridge the gap between the financials as disclosed in the prospectus and subsequently post listing.

9. Timeline for filling up vacancies

Listed entities will be required to fill up the vacancy of the offices of directors, compliance officer, chief executive officer and chief financial officer within a period of three months from the date of such vacancy, to ensure that such critical positions are not kept vacant indefinitely.

Amendments to ICDR

10. Underwriting

In furtherance of the SEBI consultation of February 2023 on ICDR, , SEBI has approved amendments to the ICDR to legislate the difference between underwriting for shortfall in demand and underwriting for technical rejections or payment risk. In either case, if adopted, will require to be agreed upon by the issuer and the underwriters prior to the filing of the red herring prospectus and disclosed to the prospective investors. This development mandates issuers, selling shareholders (if any) and lead managers to evaluate the need to underwrite an IPO only at the red herring prospectus stage, after factoring all aspects during that phase until allotment of shares for any know or unknown event expected to hinder the IPO (whether directly or indirectly).

Suitable amendments to Regulation 40 of the ICDR, as suggested by the discussion paper are awaited.

11. Bonus issues

SEBI also approved two amendments in relation to bonus issues of shares by listed entities. First, as long as there is a mismatch between the issued and listed capital of a company, it shall not be entitled to undertake a bonus issue given that a bonus issuance announcement is price sensitive. Accordingly, SEBI has mandated to resolve such discrepancies in the share capital via seeking in-principal approvals by the issuer from the stock exchanges for all its pre-bonus shares. This is a positive move to iron out hindrances faced by bourses in granting in-principal approvals during the aforesaid situation as it only widens the existing gap.

Second, bonus issuances must henceforth be done compulsorily in dematerialised form. This is in line with the recent regulatory move of compulsory dematerialisation of securities and allotment and transfer of securities in dematerialised form including for issuers enroute an initial public offering. While this step is surely progressive, practically, this may impact certain issuers with legacy physical shareholders who remain untraceable. Probably, the registrars and stock exchanges may have to huddle up, to draw a road map to park such unclaimed bonus shares akin to the framework in case of rights issues, wherein such shares are kept in suspense account.

It is critical to note that the SEBI press release specifically mentions that the amendments to ICDR are ‘with the objective of increasing transparency and streamlining certain issue process’ and consequently, the above two developments are only some of the amendments approved by SEBI in its board meeting and one will have to wait for the fine print of the ICDR amendment regulations to get hold of the other amendments to ICDR.

This blog is authored by Capital Markets team.

SEBI notifies confidential DRHP filing norms

The Fourth Amendment introduces the construct of:

  • Confidential filing of draft offer documents for Indian issuers looking to undertake an initial public offering (“IPO”);
  • Monitoring of issue proceeds for preferential issues and qualified institutions placements (“QIP”), amongst others.

 

Highlights of the Process of Confidential Filing:

  1. The issuer prepares and files a draft red herring prospectus with SEBI and the stock exchanges (“Confidential DRHP”), however, this Confidential DRHP will not be available for public review or comments.
  2. The issuer needs to issue a public advertisement that it has filed the Confidential DRHP with SEBI, but not mentioning any other details of the public issue, neither guaranteeing that it will complete the IPO nor inviting comments from the public.
  3. SEBI reviews the Confidential DRHP and provides comments on the Confidential DRHP. Usually this involves a few rounds of comments from the regulator on the Confidential DRHP, which process one can reasonably expect to continue.
  4. Stock exchanges may also provide comments on the Confidential DRHP.
  5. After incorporating the comments received from SEBI and the stock exchanges, the issuer will be required to file an updated Confidential DRHP (“UDRHP-I”) reflecting the changes made to the Confidential DRHP pursuant to regulatory comments and other factual changes.
  6. At this stage, the issuer will also have to issue a second advertisement, informing the public of the filing of this UDRHP-I and inviting comments on the same. The period for inviting comments shall be 21 days. The key difference from the public filing process is that the draft document made available for public comments, has already undergone regulatory scrutiny and therefore more likely to be a more complete document from a disclosure perspective.
  7. Between stages 2 and 3, the issuer can approach a selected list of qualified institutional buyers (“QIB”), for marketing the IPO. This is a formalisation of the current public filing process, wherein issuers do conduct marketing post the filing of a draft red herring prospectus.
  8. Taking cue from the listing regulations, while the issuer is supposed to maintain a record of the investors it meets for marketing, presently there is no need to file this data with the regulators. Information shared with these QIBs will need to be limited to the Confidential DRHP. Parties may have to consider entering into non-disclosure agreements with these QIBs to ensure that the content of the Confidential DRHP remains within select set of participants and is not disseminated.
    Comment: It is interesting to note that while SEBI has asked for a minimum time gap of 7 working days between the closure of these investor meetings and filing of the UDRHP-I. These meetings can be conducted only until any observations are issued by SEBI on the Confidential DRHP.
  9. Fourth, after incorporating comments received from the public, the issuer will be required to file a further updated version of UDRHP-I, which is termed as UDRHP-II, to show changes pursuant to public comments and any factual changes.
  10. This UDRHP-II, with the IPO launch dates and other finalised details of intermediaries such as bankers to the offer, will be the red herring prospectus (“RHP”).
  11. Once finalised, the RHP will be filed with the registrar of companies (“ROC”).
    Comment: The process of opening and closing of the IPO remains the same as per the SEBI ICDR Regulations.

 

Other Key Considerations

Eligibility for OFS

  1. The holding period of 1 year for shares to be offered in an IPO is to be calculated from the date of filing of UDRHP-I.
  2. The Confidential DRHP will have to be redone in case there is any change in the size of the offer for sale by more than 50%.
    Comment: Practically, parties may have to decide on the indicative sellers in the IPO at the time of the Confidential DRHP itself, so that there are no substantial alterations, for various reasons, including the outcome of investor meetings.

 

Publicity

  1. Publicity activities for the period prior to UDRHP-I will require to be kept in line with past practices.
  2. Post filing of the UDRHP-I, the existing publicity restrictions and disclaimers will have to be followed.

 

Convertibles

  1. The issuer is entitled to retain outstanding convertible securities and rights available to shareholders to receive equity shares till SEBI issues observations.
  2. The public filing process contemplates that all such convertibles should be converted or be terminated or extinguished before the RHP is filed with the ROC.
  3. The Fourth Amendment has proposed that all such convertible securities and rights should be converted prior to the issuance of SEBI observations on the DRHP.
  4. The exceptions to this conversion requirement are options granted under employee stock option schemes and fully paid-up convertible securities, which are required to be converted on or prior to the RHP filing.
    Comment: While the wording has remained similar to the existing eligibility conditions under Regulation 5(2) of the SEBI ICDR Regulations, in future, SEBI may consider clarifying conversion of convertibles at the RHP filing with ROC stage for the confidential filing process.

 

Timelines

  1. In case of IPOs via the Confidential DRHP, the time period for opening of an IPO has been extended to 18 months from the date of final observations by SEBI, up from 12 months as per the public filing process.
  2. However, an issuer is required to file UDRHP-I by 16 months from the date of the observations.

 

Monitoring use of proceeds: Private placements not so private anymore?

  1. One of the key changes introduced through the Fourth Amendment is the requirement to have monitoring of use of proceeds of preferential allotments and QIPs above Rs. 100 crores.
  2. This requirement to have a credit rating agency monitor the use of funds raised (by other than by a public financial institution, insurance company or a bank) through preferential issues and QIPs aligns monitoring requirements with current IPOs and rights issues.
  3. Oversight of utilisation of money raised through public processes would always lead to greater compliance and is a move in the right direction. Having said that, SEBI may need to examine the existing disclosure regime for objects of QIPs and preferential issues in order to enable the credit rating agency to appropriately confirm the end-use.

 

Submission of offer documents

  1. In a reversal of the previous decentralisation of the IPO offer document review process, SEBI has not directed that offer documents be submitted to the head office.
    Comment: This has implications:
    a) a standardised approach to review of offer documents;
    b) while potential bottlenecking and increased review times due to increased number of offer documents, remains a potential area of concern.

Simplifying disclosures

As a follow up to ongoing directions issued by SEBI through observations and through the Association of Investment Bankers of India, certain amendments have been carried out to disclosure requirements in IPO offer documents under Part A of Schedule VI. The key changes can be summarised as follows:

 

Key Performance Indicators

  1. In order to simplify the use of performance indicators by issuers to showcase their growth and potential, SEBI has directed that all such ‘Key Performance Indicators’ or ‘KPIs’ will now need to be provided to all investors and defined in simple terms.
  2. If defined using technical terms, such technical terms must in turn be defined. KPIs must be certified by auditors/peer reviewed independent chartered accountant or cost accountant and such certificate will become a material document for inspection.
  3. The KPIs in turn must be approved by the audit committee of the issuer and explanation must be provided as to how the disclosed KPIs have been used historically by the management to track or monitor the operational or financial performance of the issuer.
  4. Importantly, KPIs disclosed to investors prior to the IPO must be disclosed in the offer document and those disclosed in the IPO offer document will require to continue to be disclosed post listing, for a one year period or till the IPO proceeds are utilised, whichever is later.

 

IPO price justification

Another amendment which is in line with recent SEBI directives, is the requirement to set out the justification of the IPO price.

  1. Issuers will now have to provide details of the price at which significant number of shares (exceeding 5% of the fully diluted pre-transaction share capital) have been issued in the last 18 months (whether in a single tranche or on a rolling basis over a 30 day period).
  2. Similarly prices at which significant number of shares (exceeding 5% of the fully diluted pre-transaction share capital) have been acquired by promoters, selling shareholders, members of the promoter group or shareholders with the right to nominate directors to the board have been transacted in the last 18 months (whether in a single tranche or on a rolling basis over a 30 day period) have to be disclosed.
  3. Moreover, SEBI has also now formalized the requirement of the price band advertisement specifically including a mention of the recommendation from a committee of independent directors of the issuer re the price band being justified based on quantitative factors / KPIs disclosed in ‘Basis for Issue Price‘ section vis-à-vis the weighted average cost of acquisition of primary issuance / secondary transaction(s) disclosed in ‘Basis for Issue Price‘ section.

 

This blog is authored by Capital Markets team.

 

Disclaimer for Updates / Client Alerts 

This update is not an advertisement or any form of solicitation and should not be construed as such. This update has been prepared for general information purposes only. Nothing in this update constitutes professional advice or a legal opinion. You should obtain appropriate professional advice before making any business, legal or other decisions. JSA and the authors of this update disclaim all and any liability to any person who takes any decision based on this publication.

Recent Key Reforms Enforced by SEBI

Pursuant to a board meeting of the Securities and Exchange Board of India (“SEBI”) held on September 30, 2022 (“Press Release”), a series of reforms and amendments were enforced by SEBI.

A summary of the key reforms and amendments are as follows:

  1. Introduction of pre-filing of offer document as an optional alternative mechanism for the purpose of initial public offer on the main board of stock exchanges

SEBI has approved the proposal of a pre-filing mechanism of offer documents as an alternative to the existing mechanism of filing offer documents, in relation to initial public offers on the main board of the stock exchanges.

SEBI pursuant to its “Consultation Paper on Pre-filing of Offer Document in case of Initial Public Offerings” (“Consultation Paper”), discussed the concerns of the issuer companies proposing to raise funds by an initial public offer (“IPO”), including disclosure of sensitive information in the draft red herring prospectus, which may be beneficial to competitors of such issuer companies, without the certainty that the IPO would be executed.

In terms of the Consultation Paper, issuer companies will have the option under the pre-filing mechanism to file the draft red herring prospectus with SEBI and stock exchanges, without making it available for public, for an initial scrutiny period only (“Confidential Filing”). SEBI will provide its observations on the Confidential Filing. In the event the issuer company proposes to undertake the IPO, an updated draft red herring prospectus after incorporating the comments received from SEBI on the Confidential Filing (“UDRHP I”) will be filed with the SEBI and stock exchanges and will also be made available for public comments for at least 21 days.

The issuer company will be required to file a further updated documents with the SEBI and stock exchanges incorporating (a) comments received from the public; and (b) any regulatory or factual updates in UDRHP I, as applicable (such document, “UDRHP 2”). Pursuant to SEBI taking note of changes in the UDRHP-II, the issuer company may file the Red Herring Prospectus (“
RHP”) with Registrar of Companies (“RoC”), stock exchange(s) and SEBI.

While SEBI pursuant to its Press Release has approved the proposal of pre-filing of offer document, the finalised framework for pre-filing mechanism of offer documents is yet to be notified by SEBI, based on comments received on the Consultation Paper. Further, while the consultation paper clearly specified that marketing of the IPO can only be undertaken post UDRHP-1 filing, a clarification on the same is pending from SEBI.

  1. Monitoring of utilization of issue proceeds raised through preferential issue and qualified institutions placement (QIP) issue, in terms of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“SEBI ICDR Regulations”)

SEBI has approved the proposal to introduce monitoring of utilization of issue proceeds raised through preferential issues and qualified institutions placement (QIP), with credit rating agencies as monitoring agencies, for issues of size above Rs. 100 crores. This will enable shareholders to stay abreast of and keep a track on the status of the utilization of funds raised by the company as against the disclosed objective of utilization of funds. Further, since monitoring of the utilization of proceeds is required for all pubic and rights issue with an issue size of above Rs 100 crores, this reform has now aligned the requirement of monitoring of utilization of proceeds with that of the public and rights issues, which we feel is a positive step towards attaining overall investor protection.

  1. Disclosure of key performance indicators (“KPIs”) and price per share of the issuer, in public issues, based on past transactions and past fund raising from the investors

Issuers proposing to raise funds by IPOs will now have to disclose the (i) KPIs, and (ii) price per share of the issuer company, based on past transactions and past fund raising done by it from investors prior to IPO (“Pre-IPO Fund Raising”), under the ‘Basis for Issue Price’ section of the offer document, as well as in the price band advertisement to be issued by the issuer company in terms of the SEBI ICDR Regulations.

In relation to the Pre-IPO Fund Raising, SEBI has specified that the price per share of the issuer company based on primary or new issue of shares and based on secondary sale / acquisition of shares, during the 18 months period prior to the IPO will have to be disclosed and in case there are no such transactions during the 18 months period prior to IPO, then information for price per share of the issuer company would have to disclosed based on last five primary or secondary transactions done within three years of the IPO. Further, the weighted average cost of acquisition (“WACA”) based on primary/ secondary transaction(s) and ratio of WACA vis-à-vis IPO floor price and cap price will have to be disclosed in the offer documents and in the price band advertisement.

A committee of the independent directors of the issuer company will also have to provide a justification on the price band based on quantitative factors/ KPIs vis-à-vis the WACA of primary issuance and secondary transaction(s).

While this amendment is a step in the right direction, there are certain points which may need clarity from SEBI. For instance, in relation to disclosure of price per share of the issuer company, SEBI in its consultation paper dated February 18, 2022, clearly specified that Pre-IPO Fund Raising of both equity shares and convertible shares would have to be considered for calculating the price per share of the issuer company. However, basis the Press Release, we are unable to ascertain whether the issuance of both convertible securities and equity shares would have to be considered for the calculation of the aforesaid parameter.

  1. Amendments to the Listing Regulations in re appointment and removal of independent directors

In terms of Regulation 25 (2A) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“Listing Regulations”), the appointment, re-appointment or removal of an independent director of a listed entity, shall be subject to the approval of shareholders by way of a special resolution. Further, in accordance with the Section 149 (10) of the Companies Act, 2013, no independent director shall hold office for more than two consecutive terms.

SEBI by way of its Press Release has provided flexibility in the approval process for appointment and / or removal of independent directors by approving an alternate method for the appointment and removal of independent directors appointed for the first term

If the special resolution for appointment of an independent director is unable to attain the requisite majority, under alternative method, such independent director will be deemed to be duly appointed if following thresholds are met:

  • Threshold for an ordinary resolution in terms of the Companies Act, 2013;
  • Threshold for majority of minority shareholders.

 

The aforesaid thresholds would similarly be applicable for the removal of an independent director appointed under this alternate mechanism.

Further, while SEBI in its “Consultation Paper on Review of Regulatory Provisions related to Independent Directors” dated March 1, 2021, has defined “minority shareholders” as shareholders, other than the promoter and promoter group, we await clarification on the exact scope and meaning of “minority shareholders”.

This blog is authored by Capital Markets team.

 

Disclaimer for Updates / Client Alerts 

This update is not an advertisement or any form of solicitation and should not be construed as such. This update has been prepared for general information purposes only. Nothing in this update constitutes professional advice or a legal opinion. You should obtain appropriate professional advice before making any business, legal or other decisions. JSA and the authors of this update disclaim all and any liability to any person who takes any decision based on this publication.

SEBI advisory on exemptions relating to Promoter Group

Securities and Exchange Board of India (“SEBI”) has issued an advisory dated April 26, 2022, to the Association of Investment Bankers of India mandating changes and clarifying processes in for exemptions with respect to classification and inclusion of details of members of promoter group of a company en route an initial public offering (“Advisory”).

Regulation 2 (1) (pp) (ii) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, as amended (“SEBI ICDR Regulations”) includes an immediate relative of a promoter or its spouse in the definition of the promoter group. As per the Advisory, any exemption sought with respect to inclusion of such members in promoter group of the issuer shall have to be necessarily accompanied with either (a) a reference or affidavit from the relative stating in clear terms that the person does not want to be part of the promoter group or (b) a memorandum of understanding (“MoU”) duly signed between the promoter and the said relative. Accordingly, formal communication between the issuer or promoter and the concerned relative of the promoter will require to be placed before SEBI along with the exemption application. The communication may be supported by an affidavit issued by the relative declaring their intention to not be named as part of the promoter group. Alternatively, a formal family settlement agreement or MoU setting out estrangement will be required to be presented.

Further, an immediate relative in relation to whom an exemption is being sought, should not be holding any interest in the issuer including through equity or debt, or as a vendor, supplier, client or otherwise. Therefore the issuer or promoter will require to demonstrate complete separation of business interests of the immediate relative from the issuer. However, no clarification has been provided in respect of time frame or period within which such transactions or interests may have been held.

The Advisory also clarifies that any such exemption shall have to be obtained prior to filing of the draft red herring prospectus with SEBI.

Prior to this Advisory, issuers used to send applications to the relatives of the promoters and their spouses for obtaining their consent for inclusion of their name(s) in the offer documents, in the absence of obtention of which, it would seek an exemption from SEBI for removal of the name of such relative(s) from the promoter group and non-disclosure of confirmation required from promoter group in respect of such relative(s). The exemption applications were previously filed immediately prior to or co-terminus with the filing of the draft offer document with SEBI. Therefore, the Advisory has escalated concerns that this requirement to obtain positive confirmations or affidavits or additional documentation demonstrating estrangement, may potentially be a serious hurdle to IPO-bound companies.

While SEBI’s intention appears to be prevention of the abuse of exemption process to conceal disclosure of some promoter group members, the proposed solution may give rise to regulatory impediment in genuine cases where a member of the promoter group may mala fide withhold signing of necessary documents.

This blog is authored by the JSA Capital Markets Team.

SEBI’s views of accessibility and legibility

A summary of the Accessibility Guidelines are as follows:

Quick Response Code (“QR Code”)

For all draft red herring prospectuses (“DRHPs”) filed on or after April 1, 2022, the cover page of the DRHP, red herring prospectus or prospectus(“offer document”) should contain a QR Code which links to a separate page on the website of the lead merchant banker (colloquially known as the left lead), where the offer documents, abridged prospectus, any corrigenda or addenda, and price band advertisement is available.

The QR Code should lead through not more than one click through filter (for jurisdiction specific restrictions or disclaimers) to the offering material.

Non-left lead merchant bankers may continue to upload the document based on current practices.

 

Content of offer documents

Cover Page: To ensure legibility, the Accessibility Guidelines sets out that the cover page of offer documents (containing the QR Code), should be at least font size 10 with utilisation of margins to ensure space for the increased font size.

Financials: Financial statements should be included in a manner such that legibility is ensured, including through use of landscape formats and narrower page margins.

Capital Structure: Details of allottees should be included in the table itself to the extent possible, especially for allotments to promoters, members of the promoter group or institutional shareholders. Only disclosures on allotments to employees or a large number of allottees should be provided in paragraph form through footnotes.

Risk Factors: Language in risk factors should be simplified to avoid repetition within and across risk factors. Percentages, wherever are mentioned, should be accompanied with corresponding numerical amounts. Data, as much as possible, should be presented in a tabular format for better understanding and legibility.

 

SEBI Observation responses and UDRHP

SEBI Responses: SEBI response should be properly formatted and with font size of at least 10. Responses provided to SEBI observations should clearly indicate whether the information is proposed to be disclosed in the offer document or is for SEBI’s review only. If data is not proposed to be disclosed, the rationale for the same should be clearly mentioned.

UDRHP: Changes to offer document as a result of SEBI observations should be highlighted in a different colour, in the comparison submitted to SEBI, for easier review.

 

Main board listing

All advertisements relating to an issue, should clearly disclose that the securities will be listed on the main board or on SME platforms. Similar disclosures to be made in case of advertisements for rights issues.

 

This blog is written by Pracheta Bhattacharya and Harish Choudhary.

Securities market code to include SEBI Act – Government securities act and depositories act, Budget 2021

The consolidation of securities laws, existing decriminalisation of offences under the Companies Act and the proposed decriminalisation under the LLP Act marks an important move towards making Indian corporate legal framework, simpler, business friendly and ultimately (hopefully) reducing compliance costs.  The securities market code is in line with previous discussions on the NFRA. It marks a step towards streamlining the multiple laws, ordinances, guidelines and regulations. If drafted and executed in a proper manner, it will be helpful to market participants and remove any possible conflicts in the regulatory framework and will provide clarity in policy making to investors and stakeholders.

Quote by Arka Mookerjee, published in CNBC, Moneycontrol, Indian Express, Fortune India, IIFL Group, Yahoo.com, Firstpost.

Relaxation to Minimum Public Shareholding Requirements

Background

The Securities and Exchange Board of India (“SEBI”) has, after taking into consideration requests received from listed entities and industry bodies as well as considering the prevailing business and market conditions, decided to grant relaxation from the applicability of the circular dated October 10, 2017 (Circular No. CFD/CMD/CIR/P/2017/115) on the actions to be taken in case of non-compliance of the minimum public shareholding (“MPS”) requirements.

What is minimum public shareholding?

In terms of the Securities Contracts (Regulation) Rules, 1957, as amended (“SCRR”) read with Regulation 28 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended (“Listing Regulations”), listed companies are required to maintain public shareholding of at least 25%. The obligation to reach and maintain this MPS threshold of 25% is attracted in three separate instances:

(a) Initial listing – In terms of Rule 19(2)(b) of the SCRR, the minimum offer and allotment to public in terms of an offer document by a company seeking listing, has to be within the range of at least 10% to at least 25%, subject to the post-issue market capitalisation of the listed company. If the post-issue market capitalisation of the listed company is more than Rs. 1,600 crores, the listed entity has the option, but not obligation, to offer and allot less than 25% of its capital to the public. The relaxation of issuing less than 25% of its capital to the public is available subject to the listed entity meeting the MPS threshold of 25% within a period of three years from the date of listing of its securities;

(b) Continuous listing – In terms of Rule 19A of the SCRR, every listed company, other than a public sector company, is required to maintain the MPS threshold of at least 25%. In case of a public sector company which has public shareholding below 25% on the commencement of the Securities Contracts (Regulation) (Second Amendment) Rules, 2018, a period of two years has been provided from the date of such commencement to restore the MPS to 25%. For companies covered under (a) above, the obligation to maintain MPS initiates from the date upon which the threshold of 25% MPS is first achieved.

(c) Violation of continuous listing – In the event that a listed entity, other than a public sector company, breaches the MPS threshold of 25%, it is required to bring back MPS threshold to 25% within a period of 12 months from the date of the breach of the threshold. For public sector companies, a two-year window is provided to restore the MPS threshold to 25%. Further, a three-year time period is provided to listed companies for restitution of the MPS threshold for breaches caused by issue of depository receipts or implementation of a resolution plan under Section 31 of the Insolvency and Bankruptcy Code, 2016.

Non-compliance of the MPS requirements

In terms of Regulation 97 of the Listing Regulations, a recognized stock exchange is charged with the duty to monitor compliance with the provisions of the Listing Regulations. Further, Regulation 98 of the Listing Regulations provides for penal actions that may be undertaken by stock exchanges in case of failure to comply with the provisions of the Listing Regulations, including the requirement to maintain MPS threshold. Towards this end, SEBI issued a circular dated October 10, 2017 (Circular No. CFD/CMD/CIR/P/2017/115), directing stock exchanges to review compliance with MPS requirements based on shareholding pattern/ other filings made with them by the listed entities from time to time and within fifteen days from date of observation of non-compliance, to issue notices to such entities intimating all actions taken/ being taken as per this circular and advise the entities to ensure compliance. On observing non-compliance, the recognised stock exchanges may take actions such as (i) levying of a fine against the listed entities for each day of non-compliance; (ii) freezing the entire shareholding of the promoters and promoter group in conjunction with depositories; (iii) freezing of all securities held in the dematerialized beneficial ownership accounts of the promoters and promoter group; and (iv) banning the promoters, promoter group and directors from taking up any new position as director of a listed entity. The recognised stock exchange may also consider compulsory delisting of the non-compliant listed entity.

Manner of achieving MPS

SEBI has by way of a circular dated November 30, 2015 (Circular No. CIR/CFD/CMD/14/2015) provided the mechanisms through which a listed entity may achieve compliance with MPS threshold. The approved mechanisms include (a) issue of fresh shares to public through prospectus (further public offering); (b) offer for sale of shares by promoters to public through prospectus (further public offering); (c) sale of shares by promoters through the stock exchange offer-for-sale mechanism; (d) offer for sale of shares by promoters by way of a qualified institutions placement; (e) rights issues with the promoters and/or members of the promoter group forgoing their entitlement; and (f) bonus issues with the promoters and/or members of the promoter group forgoing their entitlement. Mechanisms not specifically set out in this circular or elsewhere under SEBI regulations, can also be utilised, subject to approval of SEBI.

Relaxation provided by SEBI

Given the current volatility in the markets, SEBI, in its recent circular dated May 14, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/81) (the “Circular”) has provided a temporary relaxation to listed entities for whom the due date for complying with the minimum public shareholding fell within the time period of March 1, 2020 to August 31, 2020. SEBI has also advised recognized stock exchanges not to take any penal action as envisaged in the SEBI circular dated October 10, 2017 (Circular No. CFD/CMD/CIR/P/2017/115) against such entities in case of non-compliance during the said period. Penal actions, if any, initiated by stock exchanges from March 1, 2020 till May 14, 2020 for non-compliance of the MPS requirements by such listed entities may be withdrawn.

The Circular shall come into force immediately.

Please refer to the SEBI circular dated May 14, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/81) for more details.

Key aspects of SEBI’s circular re relaxations relating to procedural matters in issues and listings

Introduction

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.

Conclusion

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.

This blog is authored by Arka Mookerjee, Siddhartha Desai, and Ananth Balaji Sundararaman.

SEBI’s measures to facilitate fund raising from capital markets in the current COVID-19 scenario

In view of the COVID-19 pandemic and nation-wide lockdown and with a view to improving access to funding to corporates through capital markets, the Securities and Exchange Board of India (SEBI), by way of press release dated April 21, 2020, bearing no. PR No.23/2020, has granted certain temporary relaxations from compliance with certain provisions of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, as amended, (SEBI ICDR Regulations) related to rights / public issuances by listed entities.

Pursuant to the press release, SEBI has notified two circulars dated April 21, 2020, each for (i) relaxations to issuers from certain provisions of the SEBI ICDR Regulations in respect of rights issue; and (ii) one-time relaxation to issuers with respect to validity of SEBI observations. The contents of the circulars are as follows:

(i) Relaxations to issuers from certain provisions of the SEBI ICDR Regulations in respect of rights issue

SEBI, vide its circular dated April 21, 2020, (circular no. SEBI/HO/CFD/CIR/CFD/DIL/67/2020) has granted temporary relaxation to the (a) minimum subscription requirements for rights issues; (b) threshold for not filing the draft letter of offer; and (c) eligibility conditions related to fast track rights issues. These relaxations are applicable to right issues that open on or before March 31, 2021 and are not applicable for issuance of warrants.

(a) Eligibility conditions related to fast track rights issues

SEBI has granted the following temporary compliance relaxations with respect to the eligibility conditions related to fast track rights issues:

  • The eligibility requirement related to period of listing of equity shares of the issuer on any stock exchange and compliance with the equity listing agreement or the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, as applicable, has been reduced from 3 years to 18 months;

  • The requirement of average market capitalisation of public shareholding of INR 250 crores has been reduced to INR 100 crores; The condition related to no audit qualifications on issuer’s audited accounts has been replaced with the requirement to disclose the impact of audit qualifications on issuer’s financials; The condition related to suspension from trading of equity shares of issuer as a disciplinary measure has been reduced from 3 years to 18 months; and Certain other eligibility conditions with respect to period of compliance with the provisions of the listing regulations, ongoing action initiated by SEBI against the issuer / promoters / directors and settlement of violation of securities laws have also been relaxed.

(b) Minimum subscription requirements for rights issues

The existing minimum subscription to be received in a rights issue shall be at least 90% of the offer through the letter of offer. However, in order to provide greater flexibility in fund raising, this threshold for minimum subscription requirements for a rights issue has been reduced from existing 90% to 75% of the offer size, subject to the condition that if the rights issue is subscribed between 75% to 90%, issue will be considered successful subject to the condition that out of the funds raised, at least 75% of the rights issue size shall be utilized for the objects of the issue other than general corporate purpose.

(c) Threshold for not filing the draft letter of offer with SEBI

An issuer in case of rights issue of size less than INR 10 crores shall prepare the letter of offer in accordance with SEBI ICDR Regulations. However, in order to reduce the time involved in fund raising and for easing the compliance requirements due to the COVID-19 pandemic, the threshold for not filing the draft letter of offer has been increased from INR 10 crores to INR 25 crores in a rights issue.

Please refer to the SEBI circular dated April 21, 2020, (circular no. SEBI/HO/CFD/CIR/CFD/DIL/67/2020) for more details.

(ii) One-time relaxation to issuers with respect to validity of SEBI observations

In view of representations from various industry bodies, SEBI, vide its circular dated April 21, 2020, (circular no. SEBI/HO/CFD/DIL1/CIR/P/2020/66) has provided one-time relaxation with respect to validity of SEBI observations.

As per SEBI ICDR Regulations, any public issue/rights issue may be opened within 12 months from the date of issuance of the observations by SEBI. However, due to the prevailing COVID-19 pandemic, for all public/rights issuers whose SEBI observations have expired or shall expire between March 1, 2020, and September 30, 2020, SEBI has extended the validity of those observations by 6 months from the date of its expiry, subject to an undertaking from the lead manager of the issue confirming compliance with the SEBI ICDR Regulations.

Further, an issuer, whose offer document is pending receipt of SEBI observations and whose estimated issue size is increasing or decreasing by more than 20% shall be required to file a fresh offer document. However, SEBI has relaxed this requirement and permitted to increase or decrease the fresh issue size by up to 50% of the estimated issue size (instead of the present limit of 20%) without requiring to file fresh draft offer document with SEBI. This relaxation shall be applicable for all issues (i.e. IPOs, rights issues and FPOs) opening before December 31, 2020, subject to the following conditions:

  • there has been no change in the objects of the issue;

  • the lead manager undertakes that the draft offer document is in compliance with provisions of the SEBI ICDR Regulations;

  • and the lead manager shall ensure that all appropriate changes are made to the relevant section of draft offer document and an addendum, in this regard, shall be made public.

Please refer to the dated April 21, 2020, SEBI circular (circular no. SEBI/HO/CFD/DIL1/CIR/P/2020/66) for more details.