SEBI completely restricts Retail Investors from AT1 instruments

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Qasim Saif | Executive

finserv@vinodkothari.com

Perpetual Non-Cumulative Preference Shares (PNCPS’) and Innovative Perpetual Debt Instruments (IPDIs) / Perpetual Debt Instruments (PDIs) (commonly referred to as AT1 instruments) are a kind of perpetual bonds without any redemption date that banks issue to meet their long term capital as well as their Additional Tier-I capital requirements. These instruments are treated as quasi-equity instruments, providing a unique blend of characteristics, that is, coupling the perpetual availability of funds with fixed periodic payments.

Despite having unique characteristics, the AT1 bonds are seen with distrust by investors because such instruments are more likely to default and in some circumstances carry more risk of non-repayment than equity. The return on such bonds is higher than tier 2 bonds however is significantly lower than the return on equity.

Recently, the AT1 bonds were all over the news when the Reserve Bank of India wrote down the liability towards the AT1 bonds issued by Yes Bank, without affecting the equity shareholders, resulting in a large number of people, including senior citizens, losing their savings who were lured to invest in AT1 bonds instead of fixed deposits, with a promise to pay higher returns. Our detailed write-up on this topic can be viewed here.

This write-up, however, deals with the recent changes brought in by SEBI for the listing of AT1 bonds.

Amendments proposed by SEBI

Though the AT1 Bonds are regulated by RBI guidelines issued in consonance with Basel III norms, however public issues and listing of these bonds are regulated by SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013.

SEBI on October 6, 2020,[1] issued a circular containing additional guidelines in regards to the issuance, listing and trading of AT1 Instruments. The additional guidelines are based on recommendations of the Corporate Bonds and Securitization Advisory Committee set up by SEBI. The Circular shall come into force with effect from October 12, 2020.

The additional guidelines prescribed and its analysis is as follows-

  1. Mandatory issuance through electronic book building platform

SEBI vide circular dated January 05, 2020,[2] mandated issuance of debt securities exceeding rupees two hundred crores to be undertaken through the electronic book building platform (“EBPF”). Now, SEBI has mandated that the issuance of AT1 instruments shall be compulsorily done through EBPF irrespective of the issue size.

Further, the January 2020 Circular did not include AT1 bonds, however, the October Circular has specifically included AT1 bonds within its ambit.

EBPF is deployed in large size issue because of the novelty of the system and higher cost as compared to other alternatives. However, the latest amendment on the use of EBPF irrespective of the issue size will increase smaller issuances costly, therefore, making them unviable.

  1. Only QIBs shall be allowed to participate in an issue

The most important change is that now only QIBs shall be allowed to participate in the issuance of AT1 bond; retail and other non-QIB investors have been excluded from the list of eligible investors to AT1 bonds.  The amendement is made with an intent to safeguard the retail investors from the risk possed by such instruments, as these complex instruments carry certain risk that are not generally not understood by the common people

The QIBs are better equipped for analyzing potential risk and whether or not such issuance is worth investing compared to other classes of the investor, this would hence form the first line of defense to protect the other investors, who would be benefited with skills and resources of QIBs.

This change however directly conflicts with the RBI Guidelines on this issue, which allows banks to issue AT1 bonds to retail investors with permission of its board via amendments to implementation of Basel III Capital Regulations in Indian on date September 1, 2014[3]

In any event, if the AT1 bonds are taken for listing, the conditions under SEBI Circular will have to be fulfilled and therefore, the issuances shall have to be restricted to QIBs only.

It shall be noted that the restriction is only on the issuance of securities and non-QIB investors can still purchase the securities from the open market.

However, there might be still concerns that such QIBs might engage in selling securities by misleading investors as it was alleged in the case of Yes Bank.

  1. Allotment and trading lot fixed

SEBI has further specified the minimum allotment of AT1 instruments shall not be less than rupees one crore and further the minimum trading lot is also fixed at rupees one crore.

As mentioned above that though retail investors may not be able to participate in issuances, they might purchase the bonds from stock markets, to further deter retail investment in such instruments the trading lot has also been fixed at rupee one crore.

The fixing of minimum allotment size may not be of major importance as the issuance would only be to QIBs who, usually invest larger sums of money, however, minimum allotment size is generally kept in parity with trading lot size to create a uniform lot of securities and avoid forming of odd lots, hence fixing of minimum allotment size is mainly to bring it with parity with trading lot size.

  1. Increased disclosure requirements

Issuers of AT1 bonds are required to make disclosures as prescribed under Schedule I of SEBI (NCPRS) Regulations, in addition to that the issuer shall now have to make disclosures that are prescribed under Annex I and provisions of circulars mentioned in Annex II of the October Circular.

Along with that specific disclosures about the following shall have to be made in the offer document:

  1. Details of all the conditions upon which the call option will be exercised by them for AT1 instruments
  2. Risk factors, to include all the inherent features of these AT1 instruments such as discretion of issuer in terms  of  writing down the principal  / interest, to skip interest payments, to make an early recall etc. without commensurate right for investors to legal recourse,even if suchactions of the issuer mightresult in potential loss to investors.
  3. Point of Non-Viability clause: The absolute right, given to the RBI, to direct a bank to write down the entire value of the outstanding  AT1 instruments/bonds,  if it thinks the bank has passed the Point of Non-Viability or requires a public sector capital infusion to remain a going concern.

These additional disclosures will give the investors a better understanding of the instrument and what they are signing up for.

Impact on currently listed AT1 Bonds

The majority of additional guidelines are in respect of securities that would be now be issued hence would have no impact on bonds already issued/listed on securities market. However, the conditions with respect the trading lot could impact the holders of AT1 bonds as they might have investments, not in multiple of one crore, which might result in the creation of odd lots.

Generally, special windows are provided by stock exchanges where investors can sell their odd lots to the market maker, intermediaries, or other concerns hence a special window, in this case, might be provided to deal with odd lots that might be created due to additional guidelines.

Conclusion

Given the tone of the changes made by the SEBI, it is very clear that the changes are highly inspired by the events that led to retail investors burning their hands in the case of Yes Bank. Most of the changes seem to carry the intent of deterring the retail investors from investing in these securities. The following paragraph from the circular makes the situation clear:

“Given the nature and contingency impact of these AT1 instruments and the fact that full import of the discretion is available to an issuer, may not be understood in the truest form by retail individual investors.”

Additional guidelines would without doubt restrict retail investment in AT1 bonds however, the added conditions in likelihood would jeopardize whatever little interest investors had on this product. Though the protection of investors is a goal of SEBI, so is the promotion of capital markets in India; hence, the regulation might be welcomed on the investor protection front but there are serious doubts on how good it will do for the development of the AT1 bonds market in India.

Links to related articles –

https://vinodkothari.com/2020/03/at1-bonds-blessed-with-perpetuity-or-cursed-with-mortality/

https://vinodkothari.com/2019/03/should-oci-be-included-as-a-part-of-tier-i-capital-for-financial-institutions/

[1] https://www.sebi.gov.in/legal/circulars/oct-2020/issuance-listing-and-trading-of-perpetual-non-cumulative-preference-shares-pncps-and-innovative-perpetual-debt-instruments-ipdis-perpetual-debt-instruments-pdis-commonly-referred-to-as-additi-_47805.html

[2] https://www.bseindia.com/downloads1/SEBI_EBP_Circular_Jan_5_2018.pdf

[3] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=9202&Mode=0

SEBI rationalizes eligibility and disclosure requirements for rights Issue in ICDR Regulations

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Snapshot of SEBI Board Meeting dated 29th September, 2020

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(corplaw@vinodkothari.com)

SEBI in its Board Meeting held on 29th September, 2020 has approved amendments in various Regulations which shall come into effect by way of amendment in the respective Regulations. The brief highlights of the same are as below:

Strengthening role of Debenture Trustees

SEBI, in the recent past, has brought in certain amendments in order to strengthen the role of DTs so as to protect interest of debenture holders. The latest amendment in the existing DT Regulations was made by SEBI (Debenture Trustees) (Amendment) Regulations, 2017 which aimed to streamline provisions of DT Regulations with the CA, 2013 and other SEBI Regulation and also to enable DTs to secure the interest of investors.

The Board Meeting approved that DTs shall convene meeting of debenture holders for enforcement of security, joining of inter-creditor agreement (ICA) etc. The requirement of forming a ICA comes from the RBI Prudential Framework for Resolution of Stressed Assets and the Resolution Framework for COVID-19 related stress. By virtue of these notifications, there is a mandatory requirement of Inter-Creditor Agreements (ICA) by the lending institution governed by the RBI, for the purpose of invocation of a resolution plan of any defaulting borrower. The aforesaid frameworks recognize that even other lenders to the borrower which are other than the lending institutions, such as debenture trustee, may sign the ICA, if they so desire. In line with the same, SEBI is proposing the DTs to convene meeting for joining ICA to safeguard the interests of the debenture holders.

Keeping the same intent, DTs are also bestowed with the responsibility of monitoring the asset cover for debentures and obtain half yearly certificate from statutory auditor. The Board approved following additions to the responsibility of DTs:

  • DTs to exercise independent due diligence of the assets of the company on which charge is being created
  • DTs shall convene meeting of debenture holders for taking required action for enforcement of security, joining the inter-creditor agreement etc.
  • Carry out continuous monitoring of asset cover including obtaining mandatory certificate from statutory auditor on half yearly basis
  • Creation of recovery expense fund at the time issuance of debt securities for utilisation in the event of default or to take legal action to enforce the security.

Pursuant to the text of the Board Meeting, it seems that SEBI is going to introduce a new concept of ‘recovery expense fund’ for creating fund for expenses that might be required to recover debts due to debenture holders in case of default.

Apart from the aforesaid, the existing provisions of the Companies Act, 2013 does have a requirement of transferring funds by specified class of companies to Debenture Redemption Reserve (‘DRR’) and also transfer certain amount of funds for debentures maturing during the next year to specified account/securities (‘hereinafter referred to as DRF’). However, these funds/reserves are for recovery of debts, whereas, recovery expense fund is a pool of fund for incurring expenses for recovering debts by DTs. Nevertheless, introduction of a separate fund requirement for any event of default seems to be a new compliance burden on companies. Further, whether such fund has to be created as an internal book entry transfer within the company like in case of DRR or transfer it outside the company in trust of the DT, is something we have to look for. Definitely, companies like NBFCs and HFCs which are frequently involved in raising funds through debentures shall have a new compliance to be ensured, if such amendment is made effective.

Amendments in SEBI (Delisting of Equity Shares) Regulations, 2009

SEBI (Delisting of Equity Shares) Regulations 2009 provides for voluntary delisting of equity shares from stock exchanges which provide the overall framework for voluntary delisting by a promoter or acquirer through a process referred to as Reverse Book Building. The Board Meeting has approved of exempting listed subsidiary from complying with the book building process if following conditions are met:

  1. The listed subsidiary is a wholly owned subsidiary of the company by virtue of scheme of arrangement
  2. The listed subsidiary is a subsidiary of the company for a minimum of 3 years
  3. The listed subsidiary and the holding company should be in the same line of business
  4. The shares of listed subsidiary and the holding company should be listed on recognised stock exchange for a minimum of 3 years
  5. Votes casted by public shareholders of listed subsidiary for delisting of securities should be 2 times in favour of the number of votes cast against it.
  6. The company should be compliance of provisions relating to scheme of arrangement under SEBI (LODR) Regulations, 2015

The process of Reverse Book Building is a price discovery mechanism in order to provide a price on which the public shareholders can exit from the company. Accordingly, the intent of exempting a wholly-owned listed subsidiary from undergoing the said mechanism seems logical by virtue of the fact that such a company will have a sole shareholder.

Disclosure by Informants under PIT Regulations

SEBI vide SEBI (PIT) (Third Amendment) Regulations, 2019 had introduced Chapter III under the existing PIT Regulations providing for a mechanism to submit by a person, a voluntary information with SEBI about alleged violation of insider trading laws. The procedural requirements to be followed by an informant while submitting the information with SEBI have been provided in the said chapter along with the format of the disclosure prescribed under Schedule D of the Regulations.

The aforesaid provisions however do not provide for any limitation period for submitting such an information with SEBI. Accordingly, SEBI has decided to provide for a time period of 3 years. The manner of calculating the said period shall come clear only once the amended text is released.  Further, the Meeting approved to make changes in Schedule D of the Regulations so as to require informants to specifically disclose details such as:

  1. Details of securities;
  2. Trades by suspect;
  3. UPSI based on which insider trading is alleged;

Disclosure of forensic audit by listed entities

SEBI has in the past ordered forensic audit for various companies, however, there was no requirement of disclosing the same by the company to the investors at large, except if considered material by the company under Part B of Schedule III of SEBI (LODR) Regulations, 2015. Accordingly, SEBI at its Board Meeting has decided to direct companies to disclose initiation and submit report of forensic audit along with comments of management to the stock exchange without applying any test of materiality.

Though it is not clear as of now, however, it seems that SEBI will introduce this disclosure requirement as an amendment to Schedule III Part A Para A of SEBI (LODR) Regulations, 2015 as it is to be disclosed by the company without applying any test of materiality i.e. deemed to be material.

SEBI intends to bring transparency for investors especially public investor holding larger interest in listed entities to have information about lapses in the company, which otherwise was not being disclosed by the company. SEBI requires every listed entity to disclose following w.r.t. forensic audit:

  1. Initiation of forensic audit along with name of entity initiating forensic audit along with reasons, if any
  2. Final forensic audit report on receipt by the listed entity along with comments of the management.

Adding Strain to Injury: Amendments impose Additional procedural requirements for insolvency applications

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–Megha Mittal

(resolution@vinodkothari.com)

On 24th September, 2020, the Ministry of Corporate Affairs notified the Insolvency and Bankruptcy (Application to Adjudicating Authority) (Amendment) Rules, 2020 (“Amendment Rules”)[1] in exercise of its powers under section 239 of the Insolvency and Bankruptcy Code, 2016 (“Code”), thereby requiring an advance copy of all applications filed before under section 7, 9 or 10 of the Code, to be served to the Corporate Debtor and the Insolvency and Bankruptcy Board of India (“IBBI”).

By way of the said Amendment Rules, it is now required that-

  • An application intended to be filed under section 7, 9 or 10, has to be served to the Corporate Debtor and the Board, prior to filing before the Adjudicating Authority (“AA”)
  • The application filed before the AA must contain a proof of service to the Corporate Debtor and the Board;
  • Disclosure by the Insolvency Professional (IP) with respect to the ongoing assignments at the time of filing;
  • The application to be filed by the Operational Creditor must contain a certificate by the bank/ financial institution, where the creditor has its accounts, with respect to the sums which have been received by the Operational Creditor from the Corporate Debtor.

In this Article, we analyse the Amendment Rules, more specifically the requirement of advance notice, and its implications.

Service of the Application- ensuring a fair chance to be heard

NCLT and Principles of Natural Justice

The NCLT is a quasi-judicial body, constituted under section 408 of the Companies Act, 2013, and is subject to powers and duties set out under the National Company Tribunal Rules, 2016, as well as the Companies Act- One such duty is to ensure that the Rules of Natural Justice are abided by[2].

The Rules of Natural Justice, viz, (i) Rules against bias[3]; and (ii) the right to be heard[4] are not derived from any statute or constitution- it is based on common and moral law to ensure there is no contempt of justice. One of the components of the right to be heard is a “proper notice”, which ensures that the person who would be affected upon filing of the application is given notice of such filing to show cause against the proposed action. As such, whenever an application is filed, under any statute, or before any authority, it is a pre-requisite to serve an advance copy to the respondent.

Hence, the requirement to serve an advance copy of the application, to the corporate debtor existed prior to the Amendment Rules.

Additional service upon IBBI

The Amendment Rules now provide that an advance copy of the application has to be served on the Board as well, which in the humble view of the Author, seems to be a superfluous requirement.

First, the Central Government (MCA) has failed to provide any stated objectives or purpose behind such a requirement. While it may be argued that the same is for ensuring proper records and data, it must be noted that those applications which are eventually admitted, are anyway required to be informed to Board. The extant reporting requirement under the IBBI (Insolvency Process for Corporate Persons), Regulations, 2016 (“CIRP Regulations”), inter-alia intimation to IBBI in Form A, disclosure requirements forms CIRP-1, already ensure that sufficient information is provided to the Board to execute its functions as such.

However, if the objective behind such additional requirement was merely record keeping, the same could have also been provided for by integration or a simple cross-linking process with the already existing data rooms, from where the regulatory bodies may extract information as and when required. For instance, the e-filing portal of NCLT may make necessary arrangements such that once an application is filed on the portal, the information regarding such filing is simultaneously given to the Board.

Such a set-up would not only fulfil the understandable objective behind the Amendment Rules, but only waive off this additional burden levied upon the applicants. This would also be in concurrence with consistent suggestions of stakeholders towards creation of a common repository of data related to the Code.

It further remains unanswered whether in case of any supplementary filing and/ or rectified filing upon directions of the Bench, such advance service would be required again? In absence of any stated objective behind such Amendments, it would be difficult to comment if at all such re-servicing of a copy of the application would be required.

Readers may recall that a similar requirement of impleading the MCA in all applications filed under the Code was made mandatory by an order of the Hon’ble NCLT, Principal Bench, dated 22.11.2019[5] but later on nullified by an over-ruling order of the Appellate Tribunal[6] as one leading to duplicity of information and records. Similarly, the requirement of advance notice to the Board seems to be of a similar nature, and hence, in view of the Author, should not be added as a mandate.

Other Amendments

In addition to the service requirements as discussed above, the Amendment Rules also introduce further reporting obligations on the IPs and the Operational Creditors- the same has been discussed herein below-

Reporting of ongoing assignments by IPs

The Amendment Regulations, by way of an additional clause in Form 2, now requires that while giving consent to act as an RP, the Insolvency Professional must disclose the number of ongoing assignments that s/he has undertaking as on the day of filing of application.

In view of the Author, while the same is not required as information of similar nature is already required to be provided in Form IP-1. Hence, the same may be removed for the sake of brevity.

Obtaining Certificate by Banks/ Financial Institutions

As per Form 5 under Rule 6, of the NCLT Rules, an application filed by an operational creditor, other than creditors having their account with a foreign bank/ institution, must annex a copy of the relevant accounts from the banks/financial institutions maintaining accounts of the operational creditor confirming that there is no payment of the relevant unpaid operational debt by the operational debtor,if available.

 Hence, the operational creditors could simply self-certify their bank statements and submit the same on affidavit, as being a part of the application.

However, the Amendment Rules have substituted the above requirement with a new form, namely Form 5A, which is a certificate required to be obtained from the bank/ financial institution that the amount for which the application is being filed, has not been received by the creditor.

The Author is of the view that the said requirement would only lead to needless complication and delays. This would not only impose an additional requirement upon the creditors, but would also burden the banks/ financial institutions who may receive requests for such certificate in large volumes. Hence, it is suggested that the earlier modus shall continue, and the requirement of such certificate may be done away with.

Further, it is also pertinent to note that recent amendment in section 4 of the Code, whereby the minimum default amount for filing an application under the Code, was increased from Rs. 1 lakhs to Rs. 1 crore already led to a massive sweep-out of OCs from the purview of IBC. Further procedural burden, for example requirement of a bank certificate, would only make recourse a tougher for the OCs.

Implications

From the discussion above, we can gather that a common element through-out the Amendment Rules is increased disclosure/ reporting/procedural requirements. The Author humbly states that while the consistent efforts of the Government and Board, and the common suggestions from the stakeholders has been directed towards easing the superfluous, more-than-needed reporting and disclosure requirement, the Amendment Rules come as a complete deviation.

While the objectives, purpose of advance service is neither explicitly stated not implied from the text, it must be noted that the same is not a substitution of existing regulations, but an additional requirement for concerns already covered. The Amendments infact lead to elongated procedures, which do not serve any additional purpose.

In this pretext the Author is of the humble view that the Amendment Rules do not provide any ease, clarification and/ or assistance in the filing process. As such, the Central Government may consider a roll-back of the same.

[1] https://www.ibbi.gov.in/uploads/legalframwork/27e336abe5b5328297a2ba5b35b39fac.pdf

[2] Sec 424 (1) of the Companies Act, 2013

[3] Nemo judex causa in sua

[4] Audi Alteram Partem

[5] Read our views on this order, in our article- https://vinodkothari.com/2019/11/mandatory-impleadment-of-mca-as-a-respondent/

[6] By an order dated 22.05.2020

Eligibility and disclosures under rights issue rationalized

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– Qasim Saif, Executive

corplaw@vinodkothari.com

Background

SEBI has on 23rd September 2020 released a press release[1] intimating about amendments to be made in SEBI ICDR Regulations, 2018 (“ICDR Regulations”/ “Regulations”) 2018. Further, on 28th September 2020, SEBI issued a notification bringing the SEBI (ICDR) (Fourth Amendment) Regulations, 2020[2] (“Amendment”) which was notified in official gazette on 1st October 2020. The Amendment is specifically focused for matters in relation to rights issue by listed entities. Several changes have been made which includes increasing the threshold for applicability, truncated disclosures in the letter of offer, removing the requirement for appointing a compliance officer, etc. At various places, the amendment is for the purpose of clarification or straightening of language of the Regulations.

In this article we have discussed the major amendments along with the probable impact.

Areas for amendments

1.     Increase in issue size for checking applicability

Erstwhile, ICDR Regulations were applicable in case of a rights issue for a size exceeding INR 10 crores. Further, the draft letter of offer (“draft LOF”) in such cases is required to be filled with SEBI for its observations. In other cases, i.e. where the issue size is less than INR10 crores the letter of offer (“LOF”) is to be filled with SEBI for information and dissemination on the SEBI’s website in accordance with Regulation 3. As a matter of temporary relaxation, SEBI vide its Circular dated 21st April, 2020 (April Circular) increased the aforesaid threshold to INR 25 crore for issues opening on or before March, 2020.

By virtue of the Amendment, the limit of INR 10 crores under Regulation 3 has been increased to INR 50 crores.  This would mean that while the general conditions and compliance will now be applicable to issue size of INR 50 crore or more, listed companies with a lower issue size will be required to file the LOF with SEBI for informative purpose.

As a result of the Amendment, while the applicability threshold has been increased, however, the companies with a lower issue size are still required to prepare the LOF in terms of the requirements of the ICDR Regulations and file the same with SEBI. Accordingly, while the change will surely be of relief to the entities which are now outside the applicability these Regulations, however, preparation of the LOF in terms of these Regulations will still be required.

Further to this, it should also be noted that practically filling of draft LOF for the purpose of obtaining observations from SEBI and then making prescribed changes generally takes several months. Accordingly, now since many entities will not be required to take the observations from SEBI, the same should help entities raise funds faster.

2.     Relaxation in eligibility to make right issue, for members of promoter group and promoter or director of company who are director in entities, which were earlier debarred by SEBI

Regulation 61 of ICDR Regulations state that an issuer shall not be eligible to make a rights issue of specified securities:

a) if the issuer, any of its promoters, promoter group or directors of the issuer are debarred from accessing the capital market by the Board;

b)if  any  of  the  promoters  or  directors  of  the  issuer  is  a  promoter  or  director  of  any  other company which is debarred from accessing the capital market  by the Board.

c) if any of its promoters or directors is a fugitive economic offender.

Further, explanation to the said Regulations state that “the  restrictions  under  (a)  and  (b)  above  will  not  apply  to  the  promoters  or directors  of  the  issuer  who  were  debarred  in  the  past  by  the  Board  and  the period  of debarment is already over as on the date of filing of the draft letter of offer.”

However, the language of the said explanation did not cover promoter group or other entities where the promoter or director of the issuer holds similar and which is debarred by SEBI. This lacuna in the language of the existing text gives an impression to result in a permanent restriction on right issue if the members of the promoter group were debarred or unless the concerned person vacated the post in the other entity which was debarred by SEBI from accessing the capital market.

The explanation shall now read as follows “the  restrictions  under  (a)  and  (b)  above  will  not  apply  to  the  persons  or  entities  mentioned therein  who  were  debarred  in  the  past  by  the  Board  and  the period  of debarment is already over as on the date of filing of the draft letter of offer.” After the amendment, all the mentioned persons or entities are now covered under the explanation and hence on completion of period of debarment, the issuer shall be eligible to undertake the right issue.

The above amendment is much needed clarification in the language rather than a relaxation

3.     Firm arrangement towards 75% of finance of capital expenditures only

Regulation 62 (1) (c) of ICDR Regulations require that issuer shall make  firm  arrangements  of  finance  through  verifiable  means  towards  seventy  five per cent of the stated means of finance for the specific project proposed to be funded from right issue,  excluding  the  amount  to  be  raised  through  the  proposed  rights  issue  or through existing identifiable internal accruals.

The Amendment introduces an explanation to the said clause stating “For the purpose of this regulation ‘finance for the specific project’ shall mean finance of capital expenditures only.”

The addition of explanation provides a clarity on calculation of amount that the company has to make firm arrangement for. The explanation also provides a simplification in compliance, as in most projects the capital expenditure are highly predictable unlike revenue expenditure that vary significantly and may not be estimated accurately.

4.     Removing the requirement to appoint a Compliance officer.

The Regulation 69 (8) of the ICDR Regulations require appointment of Compliance Officer by the issuer who  shall  be  responsible  for  monitoring  the compliance of the securities laws and for redressal of investors’ grievances. The said regulation has been omitted by the amendments.

Further the name of Part IV of Chapter III of ICDR Regulations has been suitably changed from “Appointment of Lead Managers, Other Intermediaries and Compliance Officer” to “Appointment of Lead Managers and Other Intermediaries”

Removing the requirement to appoint a compliance officer is a much needed amendment since the lead manager/ designated lead manager to the issue is any way required to ensure compliance with several applicable laws. Accordingly, it was a redundant practice to designate a compliance officer separately for a rights issue.

5.     Changes in Disclosure requirements

Regulation 70 of ICDR Regulations require that certain disclosure be made under LOF and Draft LOF. The SEBI has proposed that specified entities shall be required to make disclosures in format provided under Part A or Part-B of Schedule VI.

Disclosure requirements under Part B of Schedule VI have been rationalized to avoid duplication of information in LOF, especially the information which is already available in public domain and is disclosed by the companies in compliance with the disclosure requirements under SEBI listing regulations.

However, the Issuer not fulfilling the conditions above will be required to make disclosures in the format given in Part B-1 of Schedule VI, the disclosures in Part B-1 would be more detailed than that in Part B, however it shall be truncated as compared to Part A, that is applicable for IPO or FPO.

The Part-B of Schedule VI states that following entities shall be eligible to make disclosers under the given format –

1) Issuer has been filing periodic reports, statements and information in compliance with listing regulations for the last one year (instead of the last three years as required earlier) immediately preceding the date of filing Draft LOF or LOF as the case may be.

2) Statement above shall be available on website of Stock Exchanges.

3) the  issuer  has  investor  grievance-handling  mechanism  which  includes meeting of the Stakeholders’ Relationship Committee at frequent intervals, appropriate delegation of power by the board of directors of the issuer as regards  share  transfer  and  clearly  laid  down  systems  and  procedures  for timely and satisfactory redressed of investor grievances

The mentioned rationalization of disclosures would not only save the listed entities from duplication of task of providing same information that is already disclosed repeatedly but will also ease the accessing of reports by the stakeholders. The decluttering of the disclosures would be beneficial for all, Issuer, investor as well as regulators.

6.      Relaxation in Minimum 90% subscription criteria

Regulation 86(1) of ICDR Regulations require that the minimum subscription to be received in the right issue shall be at least ninety per cent of the offer through the offer document, the said limit was temporally relaxed to 75% by the April Circular.

The amendment proposes to remove mandatory requirement of minimum 90% subscription in case the issue is for the purpose of financing other than capital expenditure for a project, provided that the promoters undertake to subscribe fully to their portion of rights entitlement.

The said relaxation should help the issuers looking for financing their business by right issue, specifically for general financing needs of business. The condition that the promoters would be needed to subscribe their entitlements completely would help safeguard the interest of other subscribers.

7.     Application in plain paper to contain all the disclosures under the ICDR Regulations

Regulation 78 of ICDR Regulation allow shareholders to make application on plain paper in case he/she has not received application from for the right issue. SEBI has included a proviso to the regulation stating that “SCSBs shall accept such application forms only if all details required for making the application as per these regulations are specified in the plain paper application”.

On a general basis an application form contains following details to be entered by the shareholder-

– Name of Issuer

– Name and address of the Equity Shareholder including joint holders;

– Registered Folio Number/DP and Client ID no.;

– Number of Equity Shares held as on Record Date;

– Number of Rights Equity Shares entitled to;

– Number of Rights Equity Shares applied for;

– Number of additional Rights Equity Shares applied for, if any;

– Total number of Rights Equity Shares applied for;

– Total amount paid

– Particulars of cheque/demand draft;

– Savings/Current Account Number and name and address of the bank where the Equity Shareholder will be etc.

8.     FTRI in case of pending Show Cause Notice

Regulation 99 of the ICDR Regulations provide for eligibility criteria for Fast Track Rights Issue (FTRI). FTRI is a faster method of raising funds through right issue whereby the issuer is not required to file draft LOF to SEBI for observations, this makes the process of right issue comparatively faster, enabling issuer to get funds faster.

Clause (h) of the aforesaid regulation restricts the rights issue in case show cause notice have been issued or prosecution proceedings have been initiated by the  Board  and  pending  against  the  issuer  or  its  promoters  or  whole-time  directors.

The amendment provides that the above clause shall now exclude the cases where notice is issued in regards to proceedings for imposition of penalty. However it shall be necessary that disclosures along with potential adverse impact on the issuer are made in the letter of offer.

The said amendment would help compliant companies against whom SCN is issued for violations that are not of serious nature and require only imposition of penalty. As discussed FTRI facilitates faster and cheaper raising of finance by the company, the relaxation would promote the companies to undertake right issue for fund raising activities.

Conclusion

Rights issue has been constantly gaining popularity in India with corporate giants such as Reliance Industries, Shriram Transport Finance and Bajaj electrical have chosen the same as a way to raise funds during the pandemic. In order to promote the right issue as a way of raising funds and ease the funding for listed companies the SEBI has made the amendment.

The Amendments are in the directions to make the offer by way of rights issue easier and do away with disclosures or compliance requirements which were duplicated or redundant. Further, the relaxation in minimum subscription and eligibility criteria for FTRI should come to the rescue of the listed entities to raise funds in the times when most businesses are facing liquidity issues.

[1] https://www.sebi.gov.in/sebiweb/home/HomeAction.do?doListing=yes&sid=6&ssid=23&smid=0

[2] https://www.sebi.gov.in/web/?file=https://www.sebi.gov.in/sebi_data/attachdocs/sep-2020/1601363043311.pdf#page=1&zoom=page-width,-16,610

Our related write ups can be viewed here-

https://vinodkothari.com/2020/04/highlights-of-sebis-temporary-relaxations-for-rights-issue/

https://vinodkothari.com/2020/04/mof-amends-fdi-norms-for-rights-issue-and-insurance-sector/

[1] https://www.sebi.gov.in/sebiweb/home/HomeAction.do?doListing=yes&sid=6&ssid=23&smid=0

[2] https://www.sebi.gov.in/web/?file=https://www.sebi.gov.in/sebi_data/attachdocs/sep-2020/1601363043311.pdf

Companies (Amendment) Act, 2020

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Other related resources –

  1. https://vinodkothari.com/2020/12/first-phase-of-commencement-of-companies-amendment-act-2020/
  2. https://vinodkothari.com/2020/12/enforcement-status-of-companies-amendment-act-2020/