On May 04, 2018 SEBI issued a consultation paper for review of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR Regulations) along with the proposed re-drafted regulations, soliciting public opinion. A striking feature of the proposed regulations is the re-alignment of chapters on the basis of manner of offerings, i.e. IPO, FPO, Rights Issue, QIP, etc. Each of these chapters are self-serving codes which have been rearranged based on the sequence of their transactions, without a need of cross-referencing to the other provisions of the regulations. Further, for the purposes of ease interpretation, the provisions have also been re-arranged based on the sequence of their transaction.
The consultation paper also cater to the emerging market participants, such as, hedge funds, alternative investment funds, foreign portfolio investors, non-banking financial companies, etc. within their regulatory framework by incorporating specific provisions and exemptions with regard to such entities. Further, much needed clarity has been provided on the meaning of the term “sold” under Regulation 72 of ICDR Regulations which prohibited entities who had sold Issuer’s shares in past six months from participating in a preferential issue by the Issuer. In a number of interpretative letters issued by SEBI, it had taken a view that inter se transfer amongst the members of promoter group constitutes ‘sale’ and therefore, such promoters will also be prohibited from subscribing to the shares proposed to be issued under a preferential issue. The Consultation Paper clarifies and excludes application of the said prohibition from inter se transfers, be it for consideration or by way of gift.
However, some of the changes suggested in the Consultation Paper would require re-thinking by SEBI. For example, it is recommended that the underwriting obligations should be restricted to the minimum level of acceptance required for a successful issue, i.e. 90% of the issue size as opposed to the current rule of requiring underwriting of the complete issue size. We believe that such change may give wrong incentives to the Issuers and the merchant bankers who may only work towards achieving minimum subscription level and not for 100% subscription, as has been offered to the public.
Further, it is proposed that the criteria to determine ‘promoter group’ should be made less stringent by including only those entities which hold 20% or more shareholding in promoter / Issuer company, instead of the existing criteria of 10% shareholding. Considering that the definition of ‘promoter group’ under the ICDR Regulations is relied upon for several other purposes, such as, to consolidate shareholding for determining the obligation to make an open offer under the Takeover related laws and for making disclosures under the Listing norms, increasing the three hold to 20% may not be a right move.
The fact that has SEBI chosen to adopt a more thorough and streamlined process for reworking the existing ICDR Regulations signifies a wilful departure from the entrenched reactionary tendencies, which Indian Regulators have traditionally been frowned upon for. It would be an interesting exercise to peruse the final set of regulations which will be notified by SEBI after considering the Committee’s recommendations and the responses received from securities market participants and to check whether the final regulations will actually boost investors’ confidence and understanding of the regulatory regime or further obfuscate the same.
