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Highlights from SEBI’s Latest Board Meeting

Finsec Law Advisors

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SEBI has issued a press release discussing the regulatory decisions it has taken during its board meeting held on June 23, 2015. Apart from approving changes proposed in recent discussion papers relating to fast track issuances and offers for sale through stock exchanges, the following are the major decisions of SEBI.

The all new - Institutional Trading Platform

SEBI has introduced a simplified framework for several large young companies to list in what is essentially a reform of the previously rather unworkable ITP segment. If one were to condense the new ITP (NITP), it allows companies, particularly technology oriented companies to raise capital for general corporate purpose from sophisticated investors. To be sure, this platform is for capital raising and it is for rather large companies (minimum investment of Rs. 10 lacs (Rs. 1 million) with minimum 200 investors means a total capital raise of Rs. 20 crores) of capitalisation of approximately Rs. 100 crores or upwards. The NITP is also a big change from the nit-picking ITP requirements which included the maximum age of the company, the maximum revenue of the company, the maximum size of the company etc. The NITP is a big step forward, not just from the ITP in existence but also from the draft proposal for the NITP which was full of silly requirements. It is a tribute to SEBI's openness that all the silliness has gone away (Finsec among many had commented on the draft paper).

It should be noted that except for the purpose of raising funds and some relaxations in reaching the valuations, there is no relaxations from either disclosure standards (with a minor exception relating to immaterial issues which can now be disclosed on the website of the company) or corporate governance standards. In other words, this is not a forum like the AIM market or other alternate segments. This is a big boys market where both the issuer and the investors are big boys (minimum issue size and trading lots are both Rs. 10 lacs (Rs. 1 million)). The main purpose of NITP is to bring a market which was travelling abroad - onshore. This is likely to be effective in achieving that purpose.

Over the medium term it would be good to see the NITP being transformed from a separate trading segment into the primary board itself, where the trading size remains large to protect less sophisticated investors from participating. This should achieve the purpose of segmenting sophisticated investors from the unsophisticated without fragmenting the market into different segments. This integration is straightforward from a disclosure perspective too as the companies are complying with almost identical standards of disclosures in quality and frequency. Finally, it would be great to see SEBI relax the rather archaic rule restricting companies from using raised funds for general corporate purpose for all companies. SEBI’s job is to remove ignorance and fraud from the market, not stupidity.

Promoters Re-classified

SEBI has decided to put in place a regulatory mechanism for the re-classification of promoters of listed companies as public shareholders. As per SEBI’s ICDR Regulations, shareholders who are in control of a company, who are instrumental in planning a company’s public offer of securities or those who are named as promoters in the offer document, along with those related to such persons, are considered to be part of the promoter/ promoter group. Till date, there was no clarity on how and when promoters would seize to be part of the promoter/ promoter group and become ‘public shareholders’.

As per the press release, SEBI will allow the re-classification of promoters as public shareholders in two circumstances. The first situation is when a new promoter replaces the existing promoter, for instance, by making an open offer. The existing promoter can be re-classified as a public shareholder provided their shareholding drops below 10% of the share capital of the company and subject to receiving approval from its shareholders. Both these conditions seem to be too onerous, especially since one can become a promoter without either holding over 10% of the share capital or obtaining shareholder approval.

The second situation applies to companies which are considered to be ‘professionally managed’, i.e., no person or group (along with persons acting in concert with them) hold more than 1% of the share capital of the company. In such circumstances, the existing promoters may be re-classified as public shareholders while the company becomes a company not having any identifiable promoter. However, Mutual Funds/ Banks/ Insurance Companies/ Financial Institutions/ FPIs may individually hold upto 10% of the share capital. With the threshold at 1%, it seems unlikely that many companies will achieve the status of being ‘professionally managed’ implying that SEBI is not comfortable with allowing a company to exist promoter-less.

On re-classification, the press release discusses further conditions that will be applicable, the most important of which are: (a) The existing promoter must not have any special rights through any formal or informal arrangements; (b) Subsequent to promoter re-classification, their shareholding cannot be counted towards satisfying the minimum public shareholding norms. As the press release does not provide clarity on what constitutes ‘special rights’, it would seem that the condition is too expansive. In regard to the second condition, SEBI has apparently created a third category of shareholders who neither fall within the promoter/ promoter group or under the public shareholder category.