SEBI and further ease of listing – A step in the right direction

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Over the past few years, the Indian stock market has soared on account of various factors. The growing GDP index and a number of policy changes have made investment in securities market a more lucrative option.[1]
Following its policy on making progressive reforms to ease listings and limit the width and scope of information requests, SEBI constituted the Issue of Capital and Disclosure Requirements Committee (“ICDR Committee”). The ICDR Committee came out with a consultation paper for review of the SEBI ICDR Regulations on May 4, 2018 (“Consultation Paper”) with the intent to, among others:
• simplify the language and complexities in the SEBI ICDR Regulations, and
• incorporate changes or new requirements which have occurred due to change in market practices and regulatory environment.
Pursuant to the recommendations of the Primary Market Advisory Committee (“PMAC”) of SEBI and on receiving public comments on the Consultation Paper, SEBI in its board meeting dated June 21, 2018, has given its approval to, among others, the following important proposed changes to the SEBI ICDR Regulations:

Public Offers:

Change in timeline for announcement of price band: the timeline for announcement of price band for a public issue has been reduced from five working days to two working days before opening of an issue
Changes to the disclosure requirements of financial statements in offer documents for public issues and rights issues: (i) financial disclosures for an issuer company are to be made for a period of three years instead of five years, (ii) restated and audited financial statements of an issuer company are to be disclosed in a consolidated, as opposed to the current requirement of disclosing such financial statements on a consolidated as well as standalone basis. However, the audited standalone financials of the issuer and its material subsidiaries shall have to be disclosed on the website of the issuer company, and (iii) incorporation of the principles governing disclosures of Indian Accounting Standards (IndAS) on Indian GAAP (IGAAP) Financials;
Changes in modes for meeting any shortfall in minimum promoters’ contribution: Shortfall of up to 10% in minimum promoters’ contribution may be met by bringing in contribution from institutional investors. In addition to Alternative Investment Funds, such institutional investors may be foreign venture capital investors, scheduled commercial banks, public financial institutions and insurance companies registered with IRDAI, all of whom may bridge the shortfall in minimum promoters’ contribution without being identified as “Promoters”;
Changes to the definition of ‘promoter group’: , The definition of ‘promoter group’ has been approved to be amended for cases where the promoter of an issuer company is a body corporate. The amended definition contemplates: (i) increasing the shareholding threshold from 10% to 20% or more, for identifying ‘promoter group’. Accordingly, any other body corporate in which a corporate promoter holds 20% or more, or which holds 20% or more of such promoter would be classified ‘promoter group’; and (ii) any body corporate in which a group of individuals or companies, or a combination thereof, holds 20% or more equity share capital in that body corporate, and also holds 20% or more of the issuer, can be classified as promoter group as long as the common shareholders are acting in concert[2];
Changes to the definition of ‘group companies’: The current definition of ‘group companies’ which refers to the companies covered under the applicable accounting standards, and other companies considered material by the board of an issuer, has often been felt to be generic. Consequently, this leaves room for interpretational differences. SEBI has now approved the certain changes to such definition to make it more specific, primarily to state that, a group company shall include such companies, (i) other than promoter(s) and subsidiary(ies) of the issuer, with which there were related party transactions, during the period for which financial information is disclosed in the offer documents, as covered under the applicable accounting standards, and (ii) as considered material by the board of the issuer[3];
Additions to the Anchor Investor Category: In addition to mutual funds promoted by lead managers, insurance companies and FPIs, promoted by entities related to the lead manager have now been permitted to participate in the Anchor Investor category. Category III FPIs however are an exception to this[4]; and
Underwriting of an IPO to be aligned to requirements of minimum subscription: As opposed to the current requirement of underwriting 100% of an IPO, SEBI has now approved that, if 90% of the fresh issue is subscribed in a IPO (on the main board), underwriting will be restricted only to such extent.
Rights offers:
Change in threshold for submission of draft letter of offer (“DLOF”) to SEBI in case of a rights issue: The threshold for submission of a DLOF to SEBI in case of a rights issues has been increased to ₹ 10 Crores (aggregate value of specified securities offered) as opposed to the current requirement of ₹ 50 Lacs. Accordingly, an issuer shall be required to file a DLOF with SEBI only if the aggregate value of the specified securities offered in such rights issue is ₹ 10 Crores or more;
Change in eligibility for making a fast track issuance: Currently, issuers with audit qualifications are eligible to undertake a fast track rights issue, provided that the impact of such qualification, if any, on the audited accounts of the issuer in respect of the financial years for which accounts are disclosed in the offer document does not exceed 5% of the net profit or loss after tax of the issuer. SEBI now mandates that for a company to be eligible to make a fast track rights issue, it should not have any audit qualifications or adverse opinion against it.

SME offers:

Minimum size of application by anchor investors: The minimum application size by an anchor investor has been approved to be reduced to ₹ 2 Crore from the existing threshold of ₹ 10 Crore.

Institutional Placement Programme (“IPP”) and other changes:

Deletion of certain provisions: SEBI has approved the deletion of: (i) provisions pertaining to raising of funds by way of an IPP, and (ii) provisions pertaining ‘safety net arrangement’ and ‘IPO grading’.
It should be noted that while SEBI has approved the aforementioned recommendations of PAMAC in its board meeting, such changes shall come into force only upon the revised SEBI ICDR Regulations, in part or full, being notified by way of an official gazette.
Observations:
The prospectus of any public or rights issue is required to carry relevant and material information. Market participants, including, issuers, lead managers, auditors and lawyers have been grappling with some of the requirements in the SEBI ICDR Regulations, which seemed out of context and not relevant for investors. For instance, the five year accounts did not seem necessary, and in keeping with global standards, reducing this to three years seems practical and more viable. Further, SEBI’s approval on the proposal for clarifying the definition of “group companies” is a welcome change to the ambiguities and speculation around the categorization from deal to deal. Similarly, allowing other entities to contribute towards “promoters’ contribution” and linking underwriting to subscription seems market friendly, and is a step that appreciates the overarching commercial consideration of every public offer.
While we welcome the proposed changes by SEBI, there is still room to relook at the regulations to address additional practical issues which arise from the current definition of ‘promoter group’ under the SEBI ICDR Regulations which includes ‘immediate relatives’ of the promoters, which definition further includes, relations such as, ‘father-in-law’, ‘mother-in-law’, ‘brother-in-law’ and ‘sister-in-law’ of a promoter of an issuer, and companies in which they hold 20 per cent shareholding. Consequently, an issuer whose business is run totally independent of such relatives may be barred from access to capital markets on account of their conduct or conduct of companies where any of them hold 20 % or more of the equity share capital. One option is to include those relatives who are acting in concert with the promoter of the issuer company.
Nevertheless, although we await the fine print of the revised regulations, SEBI’s endeavor to rationalize the SEBI ICDR Regulations is a welcome step.

[1] National Stock Exchange of India, ‘Indian Securities Market: A review’. Last accessed at, www.nseindia.com
[2] This shall also be applicable on rights issues, to the extent provided under the SEBI ICDR Regulations.
[3] This provision shall also be applicable to rights issues, in case such rights issue is made under Part A of Schedule VIII, of the SEBI ICDR Regulations.
[4] This shall also be applicable to all issuances where participation by ‘anchor investors’ are contemplated.

 

Author

1. Madhurima Mukherjee, Partner

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Date: July 13, 2018