Sebi proposes streamlining rights issue process, disclosure requirements

Aug. 20, 2024, 1:05 p.m.

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On Tuesday, market regulator Sebi proposed streamlining the disclosure requirements in offer documents and reducing the processing time for rights issues to make them a more attractive fundraising option.

Additionally, the regulator suggests allowing companies to allocate rights issue shares selectively to certain investors. They propose establishing safeguards and eliminating the requirement for issuers to engage a merchant banker for rights issues.

In its consultation paper, the regulator has proposed mandating the appointment of a ‘monitoring agency’ to supervise the use of proceeds from all types of rights issues of equity shares.

Currently, companies issuing securities worth less than Rs 50 crore through a rights issue are exempt from engaging a monitoring agency.

Furthermore, Sebi recommends that companies whose shares are suspended from trading should not be permitted to undertake rights issues. Currently, there are no specific eligibility criteria for making rights issues.

The proposals are aimed at making rights issues a preferred mode of raising funds as Sebi noted that the amount raised through rights issues in FY24 was lesser than the amount mobilised through other available modes – QIPs and preferential allotments – during this period. Further, the number of rights issues was also substantially less than the preferential allotments.

The Securities and Exchange Board of India (Sebi) is seeking public feedback on these proposals until September 10th.

In the consultation paper, the regulator has proposed to rationalise the content of a ‘Letter of Offer’ by requiring it to disclose only the relevant information regarding the rights issue, such as the object of the issue, price, record date and entitlement ratio, among others.

“In case of Rights Issue, for an investor to take an investment decision, only additional information is required viz object of the issue, price, entitlement ratio, promoter’s participation, etc.

“Thus, it can be inferred that investing in a company by way of rights issue is more or less akin to a secondary market purchase. Hence, in case of rights issue, there seems to be no requirement for aggregating the information, which is already available in the public domain except for few issue-related information,” Sebi said.

Sebi has also proposed shortening the current indicative timelines for rights issues. They suggest reducing the time from the board meeting approving the rights issue to the closing date to T+20 working days.

Currently, for non-fast track rights issues, it takes on average 317 days to complete the process – from the date of board approval till the date of trading, whereas for fast-track right issues, it takes on average 126 days.

The regulator has proposed removing the requirement for companies issuing rights offers to appoint a merchant banker. Instead, they suggest that the tasks currently performed by merchant bankers be assigned to the Registrar to Issue or stock exchanges.

Sebi has also proposed that the validation of applications and the finalization of the basis of allotment, currently handled by the Registrar to the issue, could be carried out concurrently by stock exchanges and depositories.

The regulator has also suggested easing restrictions on renunciation by promoters, allowing the promoter or promoter group to renounce their rights entitlement in favor of any selective investor.

This is subject to upfront disclosure of the details of such renunciation to be made through advertisement. Further, the same should also be disclosed to the stock exchange for dissemination on their website. The details of the disclosure should include the name of the renouncee(s) – selective investor(s)– name of the renouncer– promoter/promoter group, among others.

Advertisement Sebi has suggested that the issuer may be mandated to disclose certain information in the proposed simplified ’letter of offer’. This includes details of the non-compliance with the listing agreement or the LODR rules for at least three years, the percentage of the complaints redressed by the issuer and in case the redressal is less than 95 per cent, the reasons thereof and also, the issuer is required to disclose details of any show-cause notices.