SEBI proposes to streamline the ICDR Regulations
By Pammy Jaiswal, (pammy@vinodkothari.com) & Nikita Snehil (nikita@vinodkothari.com)
The SEBI had constituted the Issue of Capital & Disclosure Requirements Committee (‘ICDR Committee) under the Chairmanship of Mr. Prithvi Haldea in June, 2017, to review the ICDR Regulations. The ICDR Committee suggested certain policy changes which were taken to the Primary Market Advisory Committee (‘PMAC’) of SEBI which comprises of eminent representatives from the Ministry of Finance, Industry, Market Participants, academicians, the Institute of Chartered Accountants of India and the Institute of Company Secretaries of India. Thereafter, pursuant to the recommendations made by the PMAC, SEBI vide its Press Release dated May 4, 2018[1], has come out with its Consultation Paper on Review of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, on its website for public comments.
Approach adopted by the ICDR Committee
The Consultation Paper provides that the ICDR Committee while reviewing the Regulations and Schedules, adopted the following approach:
- Simplify language and structure of the regulations to enhance its readability;
- Separate the chapters on the basis of the type of offering so that all relevant information pertaining to the regulations relating to a particular type of offering are available at one place;
- Align the regulations in line with the various informal guidance/ interpretative letters/ frequently asked questions regarding interpretation of various provisions of the regulations, issued by SEBI from time to time;
- Update the regulations with the changes that have taken place in the last few years, including in the Companies Act, 2013, adoption of Indian Accounting Standards, various ICDR related circulars, SEBI (Share Based Employee Benefit) Regulations, 2014, SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011, ASBA, abolition of MRTP, etc.;
- To identify policy changes in line with the present market practices and the prevailing regulatory environment.
In this regard, the present article, through the following table, portrays the major changes proposed by SEBI for issuance through rights issue, bonus, preferential allotment and QIPs, the rationale behind such changes and the impact of such proposed changes.
Chapter | Existing Provision | Proposed changes | Rationale | Remarks |
Rights Issue | ||||
Rights Issue – Roll over of non-convertible portion of partly convertible of debt instruments
| 21. (1) The non-convertible portion of partly convertible debt instruments issued by a listed issuer, the value of which exceeds fifty lakh rupees, may be rolled over, without change in the interest rate subject to compliance with the provisions of section 121 of the Companies Act, 1956 and the following conditions: | 64. {21. (1)} The non-convertible portion of partly convertible debt instruments issued by a listed issuer, the value of which exceeds ten crore rupees, may be rolled over, subject to compliance with the provisions of the Companies Act, 2013 and the following conditions: | It is proposed to increase the low threshold of Rs. 50 Lacs to Rs. 10 Crore. | Proposed change will make debt securities with non-convertible portion lesser than Rs. 10 crores to become ineligible for roll-over. Further, the reference to section 121 of the Companies Act, 1956 has been removed considering that the same is not present under the Act, 2013 and accordingly, the reference to the Act, 2013 has been made. |
Rights Issue – Issue of warrants | 4. (3) An issuer shall be eligible to issue warrants subject to the following: … (b) not more than one warrant shall be attached to one specified security (c) the price or conversion formula of the warrants shall be determined upfront and at least 25 of the consideration amount shall also be received upfront | 67. {4. (3)} An issuer shall be eligible to issue warrants subject to the following: a) the tenure of such warrants shall not exceed eighteen months from their date of allotment in the rights issue; b) A specified security may have one or more warrants attached to it; c) the price or formula for determination of exercise price of the warrants shall be determined upfront and disclosed in the letter of offer and at least twenty-five per cent. of the consideration amount based on the exercise price shall also be received upfront; Provided that in case the exercise price of warrants is based on a formula, twenty-five per cent. consideration amount calculated as per the formula with reference date being the record date shall also be received upfront. d) in case the warrant holder does not exercise the option to take equity shares against any of the warrants held by the warrant holder, the consideration paid in respect of such warrant shall be forfeited by the issuer. | It is proposed to introduce flexibility of having more than one warrant attached to a specified security and to clarify that the price or formula for determination of exercise price of the warrants shall be determined upfront and that if the warrant is not exercised, 25% of consideration will be forfeited | The proposed change will allow more than one warrant to be attached to a specified security and the same shall enable more flexibility to the warrant holder in terms of conversion decision. Further, 25% of the consideration based on warrant exercise price as paid shall be forfeited in case of non-exercise of option. |
Rights Issue – Record Date | 52. (1) A listed issuer making a rights issue shall announce a record date for the purpose of determining the shareholders eligible to apply for specified securities in the proposed rights issue. | 68.(1) {52. (1)} The issuer shall announce a record date for the purpose of determining the shareholders eligible to apply for specified securities in the proposed rights issue at least seven working days prior to the record date or such period as may be specified in the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. | It is proposed to make the provision of record date consistent with the SEBI LODR Regulations. | Proposed change is made to align ICDR with Listing Regulations. |
Rights Issue – Filing of the draft letter of offer and letter of offer | 6. (1) No issuer shall make, (a) a public issue; or (b) a rights issue, where the aggregate value of the specified securities offered is fifty lakh rupees or more, unless a draft offer document, , along with fees as specified in Schedule IV, has been filed with the Board through the lead merchant banker, at least thirty days prior to registering the prospectus, red herring prospectus or shelf prospectus with the Registrar of Companies or filing the letter of offer with the designated stock exchange, as the case may be | 71. (1) {6. (1)} Prior to making a rights issue, the issuer shall, except in case of a fast track issue, file a draft letter of offer, with the concerned regional office of the Board under the jurisdiction of which the registered office of the issuer company is located, in accordance with Schedule IV, along with fees as specified in Schedule III, with the Board and with the stock exchange(s), through the lead manager(s). | It is proposed to clarify that filing of letter of offer with the Board is not required in case of a fast track issue, although the fee will be paid. | The proposed change shall do away with filing of the offer letter with the exchange which seems to a welcome change considering the timeline under fast track issue. |
Rights Issue – ASBA
| 58. (5)} The issuer shall provide the ASBA facility in the manner specified by the Board where not more than one payment option is provided. Provided that in case of qualified institutional buyers and non-institutional investors the issuer shall accept submit their bids applications using the ASBA facility only. Retail individual investors may either apply through ASBA facility or make payment through cheque or demand draft. | 76. {58. (5)} The issuer shall provide the ASBA facility in the manner specified by the Board where not more than one payment option is provided. Provided that the applicants in a rights issue shall be eligible to make applications through ASBA facility only if such applicant: (i) is holding equity shares in dematerialised mode; (ii) has not renounced entitlement in part or in full; and (iii) is not a renouncee | It is proposed to clarify that applicants in a Rights Issue shall make applications only through ASBA facility and will have the provision to make a physical application in in certain specified scenarios. | Proposed change will not allow applicants in a rights issue to participate in the following cases: · Applicant is holding equity shares in physical mode; · Applicant has renounced entitlement in part or in full; and · Applicant is not a renouncee. |
Rights Issue – Underwriting | 13. (1) Where the issuer making a public issue (other than through the book building process) or rights issue, desires to have the issue underwritten, it shall appoint the underwriters in accordance with Securities and Exchange Board of India (Underwriters) Regulations, 1993. | 81. (1) {13. (1)} If the issuer desires to have the issue underwritten, it shall appoint the underwriters in accordance with the Securities and Exchange Board of India (Underwriters) Regulations, 1993. Provided that the issue can be underwritten only to the extent of entitlement of shareholders other than the promoters and promoter group. | It is proposed to clarify that issue can be underwritten only to the extent of entitlement of public shareholders (and not for the entitlement of the promoters and promoter group). | Proposed change prohibits underwriting the offer made to the promoters in a rights issue. The same is logical considering that if promoters portion is also required to be underwritten , then one obviously cannot be sure of the subscription to the non-promoters’ portion. |
Rights issue – Fast Track Rights Issue – Eligibility Conditions | 10. (1)(c the annualised trading turnover of the equity shares of the issuer during six calendar months immediately preceding the month of the reference date has been at least two per cent. of the weighted average number of equity shares listed during such six months‘ period Provided that for issuers, whose public shareholding is less than fifteen per cent. of its issued equity capital, the annualised trading turnover of its equity shares has been at least two per cent. of the weighted average number of equity shares available as free float during such six months‘ period 10. (1)(k) annualized delivery-based trading turnover of the equity shares during six calendar months immediately preceding the month of the reference date has been at least ten per cent. of the weighted average number of equity shares listed during such six months‘ period;
| 99.(1) (d) ({10(1)(c)}- annualised trading turnover of the equity shares of the issuer during six calendar months immediately preceding the month of the reference date has been at least two per cent. of the weighted average number of equity shares listed during such six months‘ period: Provided that for issuers, whose public shareholding is less than fifteen per cent. of its issued equity capital, the annualised trading turnover of its equity shares has been at least two per cent. of the weighted average number of equity shares available as free float during such six months‘ period; 10(1)(k)} annualized delivery-based trading turnover of the equity shares during six calendar months immediately preceding the month of the reference date has been at least ten per cent. of the annualized trading turnover of equity shares during such six months‘ period; | It is proposed to clarify the delivery turnover should be as a percentage of the trading turnover. | The same is a clarificatory change. |
Rights issue – Fast Track Rights Issue – Eligibility Conditions | 10.(1)(f)(f) the impact of auditors‘ qualifications, if any, on the audited accounts of the issuer in respect of those financial years for which such accounts are disclosed in the offer document does not exceed five per cent. of the net profit or loss after tax of the issuer for the respective years.
| 99.(2)(m) {10(1)(f)} there are no auditors‘ qualifications on the audited accounts of the issuer in respect of those financial years for which such accounts are disclosed in the letter of offer. | To improve the requirements for fast track issues, it is proposed that for a company to be eligible to make a fast track rights issue, it should not have any audit qualifications.
| Proposed change will not allow companies having audit qualification to come up with fast track rights issue. Such change will have due implications on the compliance status of the listed company. |
Bonus Issue | ||||
Bonus Issue | No issuer shall make a bonus issue of equity shares unless it has made reservation of equity shares of the same class in favour of the holders of outstanding [compulsorily] convertible debt instruments[ if any,] in proportion to the convertible part thereof The equity shares so reserved for the holders of fully or partly compulsorily convertible debt instruments shall be issued at the time of conversion of such convertible debt instruments on the same terms or same proportion at which the bonus shares were issued | An issuer shall make a bonus issue of equity shares only if it has made reservation of equity shares of the same class in favour of the holders of outstanding compulsorily convertible debt instruments, optionally convertible instruments, warrants, or lenders who loans are convertible into equity, if any, in proportion to the convertible part thereof. The equity shares so reserved for the holders of fully or partly compulsorily convertible debt instruments, optionally convertible instruments, warrants, or lenders who loans are convertible into equity, shall be issued at the time of conversion of such convertible debt instruments, optionally convertible instruments, warrants, or loans, as the case may be, on the same terms or same proportion at which the bonus shares were issued.
| All cases of convertible instruments, warrants and loans convertible into equity should be covered. There could be lenders (especially in cases of CDR, whereby lenders have the option to convert their loans to equity. In such cases, there should be a reservation for them.
| Proposed change may not be flexible considering that every convertible instrument may or may not be opted for conversion. In such cases where the option of conversion is not exercised, bonus issue reserved with respect to such instruments will turn futile. |
Preferential Issue | ||||
Conditions for Preferential Issue | 72. (2) The issuer shall not make preferential issue of specified securities to any person who has sold any equity shares of the issuer during the six months preceding the relevant date: … Provided that the above restriction shall not apply to any sale of equity shares by any person belonging to promoter(s) of the promoter group which qualifies for inter-se transfer amongst qualifying persons under Regulation 10 (1) (a) of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeover Regulations), 2011
| 159. (1) Preferential issue of specified securities shall not be made to any person who has sold any equity shares of the issuer during the six months preceding the relevant date: Provided that the above restriction shall not apply to any sale of equity shares by any person belonging to promoter(s) of the promoter group which qualifies for inter-se transfer amongst qualifying persons under regulation 10 (1) (a) of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeover Regulations), 2011 or in case of transfer of shares held by the promoters or promoter group on account of invocation of pledge by a lender. | This proviso was inserted to restrict any person from taking benefit of short swing profits which is not applicable in this case. It is now proposed that for transfer pursuant to invocation pledge by the lender may be excluded as this is an involuntary sale by the lender and the promoter is not a party to the sale decision. | The proposed change seems to provide genuine relaxation in case of transfer pursuant to invocation pledge by the lender, as the promoter is not involved in the said transaction. |
Disclosures for Preferential Issue | 73. (1) The issuer shall, in addition to the disclosures required under section 173 of the Companies Act, 1956 or any other applicable law, disclose the following in the explanatory statement to the notice for the general meeting proposed for passing special resolution:
(e) the identity of the natural persons who are the ultimate beneficial owners of the shares proposed to be allotted and/or who ultimately control] the proposed allottees, the percentage of post preferential issue capital that may be held by them and change in control, if any, in the issuer consequent to the preferential issue.
Provided that if there is any listed company, mutual fund, bank or insurance company in the chain of ownership of the proposed allottee, no further disclosure will be necessary. | 163. (1) The issuer shall, in addition to the disclosures required under the Companies Act, 2013 or any other applicable law, disclose the following in the explanatory statement to the notice for the general meeting proposed for passing the special resolution:
identity of the natural persons who are the ultimate beneficial owners of the shares proposed to be allotted and/or who ultimately control the proposed allottees, the percentage of post preferential issue capital that may be held by them and change in control, if any, in the issuer consequent to the preferential issue:
Provided that if there is any listed company, mutual fund, scheduled commercial bank, insurance company registered with the Insurance Regulatory and Development Authority of India, foreign portfolio investor other than Category III foreign portfolio investor, foreign venture capital investor or alternative investment funds in the chain of ownership of the proposed allottee, no further disclosure will be necessary.
| There is a need to consider inclusion of Category I foreign portfolio investors, Category II foreign portfolio investor, foreign venture capital investors and alternative investment funds in the exclusions in this proviso. These categories are registered with SEBI and hence their KYC is already done at the time of their registration. | The proposed changes seeks to do away with the double disclosure requirements or the Category I foreign portfolio investors, Category II foreign portfolio investor, foreign venture capital investors and alternative investment funds. |
Adjustments in pricing – Frequently or Infrequently traded shares | 76B. The price determined for preferential issue in accordance with regulation 76 or regulation 76A, shall be subject to appropriate adjustments, if the issuer: (a) makes an issue of equity shares by way of capitalization of profits or reserves, other than by way of a dividend on shares; (b) makes a rights issue of equity shares; (c) consolidates its outstanding equity shares into a smaller number of shares; e) divides its outstanding equity shares including by way of stock split; f) re-classifies any of its equity shares into other securities of the issuer; g) is involved in such other similar events or circumstances, which in the opinion of the concerned stock exchange, require adjustments.
| 166. The price determined for a preferential issue in accordance with regulation 164 or regulation 164A, shall be subject to appropriate adjustments, if the issuer: a) makes an issue of equity shares by way of capitalization of profits or reserves, other than by way of a dividend on shares; b) makes an issue of equity shares after completion of a demerger wherein the securities of the resultant demerged entity are listed on a stock exchange; c) makes a rights issue of equity shares; d) consolidates its outstanding equity shares into a smaller number of shares; e) divides its outstanding equity shares including by way of stock split; f) re-classifies any of its equity shares into other securities of the issuer; g) is involved in such other similar events or circumstances, which in the opinion of the concerned stock exchange, require adjustments.
| It is proposed to include demerger where the equity shares of the resulting entity are listed post demerger. Through a demerger, an undertaking of the company is demerged into a separate company and such resulting company’s shares are listed. Post the listing of the resulting company, the value of the demerged company goes down and it trades accordingly. Hence, adjustment for pre-demerger market price needs to be made. | The proposed amendment broadens the scope of these regulation to demerger as well, where the said adjustment is required post the demerger. |
Payment of consideration | 77. (1) Full consideration of specified securities other than warrants issued under this Chapter shall be paid by the allottees at the time of allotment of such specified securities:
Provided that in case of a preferential issue of specified securities pursuant to a scheme of corporate debt restructuring as per the corporate debt restructuring framework specified by the Reserve Bank of India, the allottee may pay the consideration in terms of such scheme.
{77.(2) and (3)}An amount equivalent to at least twenty five per cent. of the consideration determined in terms of regulation 76 shall be paid against each warrant on the date of allotment of warrants. | 169.(1) Full consideration of specified securities other than warrants, shall be paid by the allottees at the time of allotment of such specified securities except in case of shares issued for consideration other than cash.
Provided that in case of a preferential issue of specified securities pursuant to a scheme under the corporate debt restructuring framework specified by the Reserve Bank of India, the allottee may pay the consideration in terms of such scheme.
(2) In the case of warrants, an amount equivalent to at least twenty five per cent. of the consideration determined in terms of regulation 76 shall be paid against each warrant on the date of allotment of warrants and the balance seventy five per cent. of the consideration shall be paid at the time of allotment of the equity shares pursuant to exercise of options against each such warrant by the warrant holder. Alternately, twenty five per cent. of the consideration can be computed on the basis of the current market price and the balance can be paid based on the price at the time of exercise.
| It is proposed to remove the limit of attaching one warrant to a specified security and the issuer will have the flexibility to decide number of warrants to be attached to a specified security.
It is also proposed to clarify that the 25 per cent. consideration can be based on the pricing formula computed using the current market price, and the balance consideration can be paid at the time of exercise which can be subsequently determined at the time of final pricing. | The proposed changes provide two things:
(a) relaxation- the flexibility to decide number of warrants to be attached to a specified security shall now vest with the issuer.
(b) Clarificatory – the same will remove any ambiguity regarding the pricing. |
Qualified Institutions Placement | ||||
Restrictions on amount raised – QIP | 89. The aggregate of the proposed qualified institutions placement and all previous qualified institutions placements made by the issuer in the same financial year shall not exceed five times the net worth of the issuer as per the audited balance sheet of the previous financial year. | Deleted | Companies suffer losses for a variety of reasons including slowdown in their sectors, which leads to erosion of their net worth.
These companies, while in the process of turning around are unable to raise funds through QIP as their pre-QIP net worth will be small or negative. As such, these companies have to look for other avenues for fund raising which may be time consuming and expensive options. QIB investors are in a better position to evaluate such opportunities and QIBs also are not required to be given any protection. Hence, it is proposed to delete this requirement. | The proposed change will provide the companies an ease in raising the amount through QIPs. |
Appointment of merchant banker – QIP | 83. (2) The merchant banker shall, while seeking in-principle approval for listing of the eligible securities issued under qualified institutions placement, furnish to each stock exchange on which the same class of equity shares of the issuer are listed, a due diligence certificate stating that the eligible securities are being issued under qualified institutions placement and that the issuer complies with requirements of this Chapter. | 174.(3) The lead manager(s) shall, while seeking in-principle listing approval for the eligible securities, furnish to each stock exchange on which the same class of equity shares of the issuer are listed, a due diligence certificate stating that the eligible securities are being issued under qualified institutions placement and that the issuer complies with requirements of this Chapter, and also furnish a copy of the preliminary placement document along with any other document required by the stock exchange. | The issuer should have the choice of listing (and trading) eligible securities such as CCDs (other than equity shares) issued through the QIP process either at the time of allotment or at the time of conversion. If these remain unlisted, a clarification is needed that the in-principle listing approval has to be sought at the time of issuance but the same can be listed and traded on conversion of such securities. New clause has been added with a proviso to bring out that difference. | As per the proposed changes, furnishing the preliminary document will provide detailed information. Further, the proposed changes provides the option to the issuer an option not to list the securities as well. |
Minimum no. of allottees | 87. (2) The qualified institutional buyers belonging to the same group or who are under same control shall be deemed to be a single allottee. Explanation: For the purpose of subregulation (2), the expression “qualified institutional buyers belonging to the same group” shall have the same meaning as derived from sub-section (11) of section 372 of the Companies Act, 1956; | 180. (2) Qualified institutional buyers belonging to the same group or who are under same control shall be deemed to be a single allottee.
For the purpose of sub-regulation (2), the expression “qualified institutional buyers belonging to the same group” shall mean entities where (i) any of them controls directly or indirectly, through its subsidiary or holding company, not less than fifteen per cent. of the voting rights in the other; or (ii) any of them directly or indirectly, by itself, or in combination with other persons exercise control over the others; (iii) there is a common director, excluding nominee director amongst the investor, its subsidiary or holding company and other investor. | Given that the Companies Act, 2013 does not have corresponding provision for Section 372 of the Companies Act, 1956, it is proposed to define ‘same group’ to bring more clarity. | The proposed changes seeks to align the Regulation with Companies Act, 2013 and to provide clarification in the absence of the corresponding provision in the Companies Act, 2013. |
Conclusion
Owing to the various regulatory changes brought in for the listed entities, updating and aligning the SEBI ICDR Regulations is much required. Therefore, the proposed amendments will help in merging all the previous SEBI Circulars related to these Regulations and updating the same with the requirements of the Companies Act, 2013 and the various SEBI Regulations, to maintain uniformity.
[1] https://www.sebi.gov.in/reports/reports/may-2018/consultation-paper-on-review-of-sebi-issue-of-capital-and-disclosure-requirements-regulations-2009_38859.html
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