Discussion Paper On “Revisiting The Capital Raising Process” By SEBI India

Discussion Paper On “Revisiting The Capital Raising Process” By SEBI IndiaPerry4Law Organisation (P4LO) has been recommending that maintenance and inspection of document in digital form must be explored for corporate related matters in India. This is more so when electronic delivery of services in India may be a reality very soon due to projects like Digital India and Internet of Things (IoT) (PDF).

In a good move, Securities and Exchange Board of India (SEBI) has issued a Discussion Paper on “Revisiting the Capital Raising Process” By SEBI India (PDF). SEBI has also invited public comments upon the same either through e-mail or post on or before January 30, 2015. A format has also been prescribed for better results and responses in that particular format would be better for the consultation process. SEBI is undertaking this review to facilitate expeditious capital raising by industry while ensuring adequate investor protection.

SEBI has noted that existing listed issuers have preferred private placement including Qualified Institutional Placement (QIP) route vis-à-vis a subsequent offerings by way of Further Public Offer (FPO) / Rights Issue. Further, participants in various forums have indicated that issuers have inclination towards private placement, because of shorter time frame and lower costs associated with such route. Keeping this in mind, SEBI has been exploring ways and means to further curtail the timeline from the present 12 days duration.

In view of the above, SEBI has released the abovementioned discussion paper that contains proposal on the following two areas and seek public comments on the same:

I. Proposal on use of Secondary Market infrastructure for making Public Issue (“e-IPO”)

II. Proposal on Fast Track Issuances (FPO and Rights Issue)

I. Proposal on use of Secondary Market infrastructure for making Public Issue (“e-IPO”)

SEBI has already issued a circular on October 04, 2012 and thereby provided an additional mechanism for investors to submit application forms in public issues using the stock broker network of stock exchanges, who may not be syndicate members in an issue. The additional mechanism was to run parallel to the existing mechanisms / processes to submit applications in public issues.

According to the proposed norms, Investors can also fill the application form online and submit it on the web portal of trading member, DP/ RTA or SCSB (in case of ASBA), if provided by the intermediary. Under this case, the investor will not be required to physically sign any paper as even the Companies Act, 2013 recognizes the electronic form of a document. This will help eliminate printing application form and thereby reduce the overall cost of public issuance.

On receipt of application, the Stock Broker / DP / RTA/ SCSB will have to lodge the application on the bidding platform. Once the bid has been entered in the bidding platform by a stock broker, clearing corporation will block 100% funds from the cash collateral of the stock broker. For bids made through Depository Participant and RTA, subsequent to bidding, the application will be forwarded to Self Certified Syndicate Bank (“SCSB”) for blocking of funds. For direct ASBA applications, existing process of bidding and blocking of funds by the SCSB shall continue.

Investors will not be able to withdraw bids upon closure of the issue. Upon closure of the issue, the bid book shall be made available to the Registrar by Stock Exchanges and Depositories. Details of payment confirmation for the bids will be made available by banks, and clearing corporation to the Registrars. Based on the bid file and payment confirmations, Registrars will finalise the basis of allotment. On approval of basis of allotment by Stock Exchanges, Registrars will give instructions to clearing corporations and banks to credit funds in the public issue account maintained by the clearing corporation. Excess money received will be refunded to the investors by the stock broker / bank, as the case may be. Upon confirmation of receipt of public issue amount by the clearing corporation to the Registrar, instruction will be issued to Depositories to credit securities directly to the investor’s account. On confirmation of the same, Stock Exchanges will issue the listing and trading notice. Based on trading notice, funds will be transferred from public issue account of the clearing corporation to issuer’s account.

Investors would get SMS/e-mail alert for allotment under the IPO, similar to alerts being sent to investors for secondary market transactions. On account of the above, the post issue timelines will reduce from T+12 days to T+6 days. Once the process gets stabilised, timelines can be further curtailed to T+3/2 days. Further, on account of reduction in printing of application forms, the overall cost of public issues will also come down.

The suggested changes shall be applicable for applications in the retail and employee reservation categories. Primary Market Advisory Committee (PMAC) of SEBI while deliberating on the matter proposed that ASBA should be made non-mandatory for non-retail clients as well since the secondary market infrastructure is proposed to be used and thereby the (unutilized / excess) funds of the clients (both retail and non-retail) available with the Brokers can be used for applying in the IPOs/FPOs/RI, instead of bringing additional funds. Another view in this respect was that parity among the investors shall be maintained by mandating 100% ASBA for retail investors also as ASBA has been working well and has scope for reducing timelines by eliminating cheques from the process.

The said proposal may be used for debt issues as well. However, in order to make this mechanism applicable to debt issues, suitable amendments may be required under SEBI (Issue and Listing of Debt Securities) Regulations, 2008.  It is proposed to discontinue the three day monitoring report considering the reduction of overall timelines to T+6. A framework for redressal of investor grievances has been laid out. A framework for use of mobile applications for making bids in public issues has been suggested for implementation in future.

Public Comments On The Proposal

In view of the above, public comments are solicited on the above proposal specifically on the following points:

(a) Should the requirement of having an abridged prospectus along with application form be made non- mandatory?

(b) Should ASBA be mandated for all investors?

(c) If ASBA is continued as a voluntary mechanism for retail investors, should it be made voluntary for non-retail investors as well?

(d) Should NACH mechanism by NPCI be mandated for collecting payment from investors?

(e) Any suggestions/modifications on the mechanism proposed above in order to achieve reduction in time and cost of capital raising?

II. Proposal on Fast Track Issuances (FPO and Rights Issue)

For a fast track issuance under SEBI (ICDR) Regulations, 2009 (“ICDR Regulations”), no draft offer document is required to be filed with SEBI. In such cases, SEBI does not issue any clarifications/observations. Issuer can open the issue immediately after filing the Red Herring Prospectus (“RHP”).

Under the existing regulatory framework, fast track route is available to all listed issuers proposing to undertake a rights issue or a follow on public offering (FPO) subject to fulfillment of the prescribed eligibility criteria. During various interactions with market participants, SEBI has received suggestions on re-considering the criterion related to market capitalisation of public shareholding as only a few companies are eligible based on the said criterion.

In view of the above, an analysis on the matter was placed before the Primary Market Advisory Committee (PMAC) of SEBI for deliberation. After deliberations, PMAC made various recommendations. PMAC has analysed that even if the public float criterion is relaxed to Rs. 1000 crore, only 359 companies would be eligible. Hence, this may not serve the intended purpose of making large number of issuers eligible for rights issue through fast track route.

SEBI in the past has observed certain concerns in offer documents filed by existing listed companies seeking to raise money from public. Often existing listed companies are being investigated by SEBI for which show cause notice is yet to be issued by SEBI. Such issuers may not be aware of such proceedings.  Based on the details of such investigation, SEBI often asks for additional disclosures in the offer document in case of subsequent issues of the said issuer. If the requirement of public float is diluted further without any additional requirements to ensure investor protection, such issuers may access the capital market without any SEBI intervention and/or adequate disclosure.

Based on deliberations, it is proposed that the fast track route may be extended to companies having an average market capitalisation of public shareholding between Rs. 250 crores to Rs. 3,000 crores, subject to fulfillment of certain additional conditions, along with the existing conditions stated in Regulation 10 of ICDR Regulations. The additional conditions proposed are as under:

(i) Promoters should mandatorily subscribe to their rights entitlement and should not renounce their rights, except to the extent of renunciations within the promoter group, or for the purposes of complying with minimum public shareholding norms.

(ii) Shares of the company should not have been suspended (except for corporate actions) from trading in past 3 years.

(iii) Annualised delivery based trading turnover requirement of 10% of the total paid up capital.

(iv) No direct or indirect conflict of interest should be there between the lead manager, its group or associate company with the issuer or its group or associate company.

(v) Issuer, promoter group and directors of the issuer should not have settled any alleged violation of securities laws through the consent mechanism with the Board in last 3 years.

In addition to above, for facilitating divestment of Central Public Sector Enterprises (CPSEs), it is recommended that the fast track issue route shall be available to them without the requirement of a minimum average market capitalisation of public shareholding subject to CPSEs complying with all the other existing conditions for Fast Track route. Also, in case where CPSE is not able to comply with any of these conditions, SEBI may, based on the merits of the case, consider granting exemption.

Public Comments On The Proposal

In view of the above, public comments are solicited on the above proposal at para 4 specifically on the following points:

(a) Should the existing criteria of minimum market capitalisation of public float be lowered?

(b) If yes, what should be the level of market capitalisation of public float that should be considered for issues under fast track route?

(c) If the requirement of minimum market capitalisation of public float is lowered what additional conditions should be introduced so as to ensure only credible issuers access the market through fast track route without vetting by SEBI?

(d) Are the additional conditions proposed above are sufficient or further additional conditions may be specified?

(e) Any other suggestions to facilitate fast tracking of issues by existing listed issuers and at the same time ensuring adequate protection of investors?

Considering the implications of the said matter on the market participants including listed companies, market intermediaries and investors, public comments on the policy framework proposed above are solicited by SEBI, preferably in prescribed manner.