The Sebi (Issue of Capital and Disclosure Requirements) Regulations, 2009 prescribe the process of fund raising by public companies that are proposing to raise funds from the public for the first time and also those whose securities are already listed on stock exchanges.
These Regulations were notified on August 26, 2009, and since then, in the past decade there have been numerous developments, both in the regulatory framework and market practices, which have had an impact on the application of these regulations.
A need was thus felt by the capital markets regulator to review and realign the regulations with the latest developments and to overhaul the text of the regulations to make it more comprehendible and easier to understand.
With this background, in June 2017, Sebi had constituted a committee under the chairmanship of Prithvi Haldea, the founder-chairman of PRIME Database. The committee, based on its comprehensive review of the regulations, had placed its recommendation before the Primary Market Advisory Committee of Sebi after which, the regulator issued a consultation paper on May 4, 2018, for review of the regulations along with the proposed redrafted regulations, opening it to the public for its views.
Focus On IPOs And Other Offerings
The most striking feature of the proposed regulations is the realignment of chapters of the existing regulations on the basis of manner of offerings — IPO, FPO, Rights Issue, QIP etc.
Each of these chapters is proposed to be a self-serving code without any need of cross-referencing to the other provisions of the regulations. Further, the provisions have also been rearranged based on the sequence of their transaction. This move would not only lead to an ease of interpreting regulations, it will also avoid conflicting provisions.
In terms of other suggested changes, we see no major policy shifts proposed under the amended regulations other than some tweaks made towards incorporating provisions of recent changes in Companies Act, Takeover Regulations, Listing Regulations etc.
The consultation paper also caters to the emerging market participants such as hedge funds, alternative investment funds, foreign portfolio investors, non-banking financial companies etc... within their regulatory framework by incorporating specific provisions and exemptions with regard to such entities.
Further, a much needed clarity has been provided on the meaning of the term “sold” under Regulation 72 of Regulations, which prohibited entities who had sold issuer’s shares in the past six months from participating in a preferential issue by the issuer.
In a number of interpretative letters issued by Sebi, it had taken a view that inter se transfer among the members of promoter group constitutes ‘sale’ and therefore, such promoters will also be prohibited from subscribing to the shares proposed to be issued under a preferential issue.
The consultation paper clarifies and excludes application of the said prohibition from inter se transfers, be it for consideration or by way of gift.
Targets for Issuers
However, some of the changes suggested in the consultation paper would require a rethink by Sebi. For example, it is recommended that the underwriting obligations should be restricted to the minimum level of acceptance required for a successful issue, i.e. 90% of the issue size as opposed to the current rule of requiring underwriting of the complete issue size.
We believe that such changes may give wrong incentives to the issuers and the merchant bankers who may only work towards achieving minimum subscription level and not for 100% subscription, as has been offered to the public.
Similarly, it is proposed that the criteria to determine ‘promoter group’ should be made less stringent by including only those entities that hold 20% or more shareholding in promoter/issuer company, instead of the existing criteria of 10% stake.
Considering that the definition of ‘promoter group’ under the regulations is relied upon for several other purposes, such as to consolidate shareholding for determining the obligation to make an open offer under the takeover related laws and for making disclosures under the listing norms, increasing the threshold to 20% may not be a right move.
That Sebi has chosen to adopt a more thorough and streamlined process for reworking the existing regulations signifies a wilful departure from the entrenched reactionary tendencies, which Indian regulators have traditionally been frowned upon for.
It would be an interesting exercise to peruse the final set of regulations which will be notified by Sebi after considering the committee’s recommendations and the responses received from securities market participants and to check whether the final regulations will actually boost investors’ confidence and understanding of the regulatory regime or further obfuscate the same.
Anil Choudhary is a partner at Finsec Law Advisors.
