SEBI qualifies QIP for achieving MPS

By Chahat Jain (corplaw@vinodkothari.com)

Compliance with MPS requirement will no longer be a pre-requisite in order to be eligible to undertake Qualified Institutional Placement.

SEBI, in its board meeting held on December 28, 2017[1] decided to introduce Qualified Institutions Placement (QIP) and Sale of shares up to 2% held by promoters/promoter group in open market, subject to certain conditions, to enable listed companies to comply with the MPS requirement. It also approved necessary amendments in SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (“ICDR Regulations”).

Accordingly, SEBI vide notification no. SEBI/LAD-NRO/GN/2018/01 dated February 12, 2018[2] amended regulation 82 of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 ICDR Regulations thereby omitting clause (c) which provided as under:

‘it is in compliance with the requirement of minimum public shareholding specified in the Securities Contracts (Regulation) Rules, 1957’

In addition to the above circular, SEBI vide circular SEBI/HO/CFD/CMD/CIR/P/43/2018 dated February 22, 2018[3] has specified the following conditions for open market sale:

the listed entity shall, at least one trading day prior to every such proposed sale, announce the following details to the stock exchange(s) where its shares are listed:
- the intention of the promoter/promoter group to sell and the purpose of sale;
- the details of promoter(s)/promoter group, who propose to divest their shareholding
- total number of shares and percentage of shareholding proposed to be divested
- the period within which the entire divestment process will be completed.
The listed entity shall also give an undertaking to the recognized stock exchange(s) obtained from the persons belonging to the promoter and promoter group that they shall not buy any shares in the open market on the dates on which the shares are being sold by promoter(s)/promoter group as stated above.
The listed entity, its promoter(s) and promoter group shall ensure compliance with all applicable legal provisions including that of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 and Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

Background

Rule 19A of Securities Contracts (Regulation) Rules, 1957 stipulates every listed entity to maintain a public shareholding of 25%. Listed public sector companies have been provided additional time till August 21, 2018 to comply with the requirements.

Accordingly, listed entities that have a public shareholding of less than 25% are required to adopt any of the following methods to comply with the MPS requirements as stipulated by SEBI vide circular no. CIR/CFD/CMD/14/2015[4] dated November 30, 2015:

Issuance of shares to public through prospectus;
Offer for sale of shares held by promoters to public through prospectus
Sale of shares held by promoters through the secondary market in terms of SEBI circular CIR/MRD/DP/05/2012 dated February 1, 2012
Institutional Placement Programme (IPP) in terms of Chapter VIIIA of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009
Rights Issue to public shareholders, with promoter/promoter group shareholders forgoing their entitlement to equity shares,that may arise from such issue
Bonus Issues to public shareholders, with promoter/promoter group shareholders forgoing their entitlement to equity shares,that may arise from such issue
Any other method as may be approved by SEBI on a case to case basis. For this purpose, the listed entities may approach SEBI with appropriate details. SEBI would endeavor to communicate its decision within 30 days from the date of receipt of the proposal or the date of receipt of additional information as sought from the company.

SEBI based on several applications received by it from listed entities seeking relaxation under method (vii), proposed two additional methods through its memorandum[5] to achieve minimum public shareholding (MPS) requirements by listed entities.

As provided in the press release relating to SEBI’ board meeting, QIP offers a quick solution to listed entities enabling them to meet MPS requirements apart from meeting their funding requirements. Also, sale of a certain small percentage of shares through open market will facilitate quicker and cheaper compliance for listed entities where promoters hold shares marginally above the threshold limit.

Conclusion:

This is surely a welcome move as listed entities contemplating to undertake QIP for achieving MPS will not be required to now approach SEBI for specific approval. Additional method of open market sale is complementary. Conditions as specified by SEBI for open market sale are much befitting. Though the last resort of approaching SEBI for approval of any other method is still open for listed entities. A circular amending the rule 19A of the Securities Contracts (Regulation) Rules, 1957 can be expected to be rolled out soon.

[1] https://www.sebi.gov.in/media/press-releases/dec-2017/sebi-board-meeting_37183.html

[2] https://www.sebi.gov.in/legal/regulations/feb-2018/sebi-issue-of-capital-and-disclosure-requirements-amendment-regulations-2018_37851.html

[3] https://www.sebi.gov.in/legal/circulars/feb-2018/manner-of-achieving-minimum-public-shareholding_37953.html

[4] https://www.sebi.gov.in/legal/circulars/nov-2015/manner-of-achieving-minimum-public-shareholding_31141.html

[5] https://www.sebi.gov.in/sebi_data/meetingfiles/jan-2018/1515574564737_1.pdf