India: SEBI's Big Bang Changes: Impact Analysis

The Securities and Exchange Board of India ("SEBI") at its board meeting held on August 16, 2012 has introduced substantial reforms to the primary and secondary market in order to provide stimulus to the securities market. The reforms primarily aim at revitalizing the mutual fund industry and the capital raising exercise in India. Alongside, SEBI has finally rolled out the regulatory framework governing the investment advisors. With the introduction of a separate regulation, all investment advisors which are primarily engaged in rendering advice pertaining to investments will now be subject to registration and regulation by SEBI.

I. Amendments To The Sebi (Issue Of Capital And Disclosure Requirements) Regulations, 2009

After a detailed review of the extant legislative and regulatory framework of the primary market, SEBI felt the need for invigoration of the primary market and accordingly suggested a slew of reforms in relation thereto which are as follows:

Increasing the reach of IPOs to retail investors:

1. Similar to the reforms suggested in the mutual fund segment and with the aim of increasing participation of investors in the initial public offering ("IPO") process, SEBI has resolved to widen the broker network of stock exchanges for the purpose of distributing IPOs in electronic form. The IPOs may be accessed by the members of the general public, either physically or electronically, through the channel of brokers. For those who do not prefer to deal with brokers may download the application forms directly through the website of the stock exchange and also view the status of their applications online. The facility of Application Supported by Blocked Amount ("ASBA") will also be made available to applicants applying through this route.

2. The share allotment procedure is proposed to be modified to ensure that every retail applicant, irrespective of the size of his application, gets a minimum bid allotted subject to availability of shares in aggregate. The minimum application size for all investors is proposed to be increased to INR 10,000 - INR 15,000 as against the existing INR 5,000 - INR 7,000. By doing so, SEBI intends to gratify more number of smaller applicants in cases of oversubscribed issues. This would also ensure wider participation of retail public in the primary market thereby improving liquidity of the stock.

Facilitation of capital raising by issuers:

For the purpose of (i) achieving a speedy completion of the fund raising process by the issuers, (ii) enabling compliance with the minimum public shareholding requirement, (iii) streamline the disclosure process in IPOs, SEBI has proposed the following measures:

1. Reduction in average market capitalisation for fast track issues: Under Regulation 10 of the SEBI (Issue of Capital & Disclosure Requirements) Regulations 2009 ("ICDR"), every listed company desirous of raising capital under a fast track route was required to have a market capitalisation of INR 5,000 crore. This market capitalisation has now been reduced from INR 5,000 crore to INR 3,000 crore so as to facilitate further public offerings and rights issue through fast track route. As a matter of recapitulation, the fast track issuance route which was introduced in 2007 for enabling listed companies' to have quick access to further capital. However this route never really took off because the requirement of INR 5000 core market capitalisation was seen as one of the hindrance for listed companies to opt for capital raising under fast track route. In such circumstances, the reduced market capitalisation requirement as proposed by SEBI can act as breather for listed companies waiting to opt for this route.

2. Promoters' contribution made easy: Under Regulation 32 of the ICDR, the promoters of the issuer company are required to contribute in the public issue to the extent of 20% of the post issue capital and such promoter contribution shall be locked in for a period of three years. The requirement being very onerous in nature, it was observed that the promoters of issuer companies were often unable to meet the statutory 20% contribution requirement themselves. As a result of this, SEBI has proposed that in order to satisfy the statutory requirement, the promoters may now take the aid of SEBI registered Alternative Investment Funds ("AIF") such as SME funds, infrastructure funds, private equity funds etc. subject to a maximum of 10%. Such flexibility is likely to open up more avenues for participation by private equity funds while easing up the burden of promoters. However, it is yet to be seen whether the 10% contribution made by SEBI AIFs will also be subject to similar lock-in requirements and whether they will be regarded as promoters.

3. Additional methods for compliance with minimum public shareholding requirement: In its first Board meeting of the year 2012, SEBI had decided to provide alternative methods for companies to increase their public shareholding to 25% or more with the introduction of (i) Institutional Placement Programme and (ii) Offer for sale of shares through stock exchanges. Further in line with the same, SEBI has in this board meeting decided to prescribe additional methods for complying with the 25% requirement which methods include rights issue and bonus issue. SEBI has also specified that it may come up with additional options to meet the minimum public shareholding requirement and existing options may undergo some modifications in order to make them more feasible. However, the implementation of the SEBI proposal in terms of rights issue/ bonus issue remains largely to be tested especially in case of right issues which off late has not seen favorable response from the market.

4. Re-filing of the prospectus not required: Unlike the erstwhile threshold of 10%, any changes upto 20% in the objects of the issue will not warrant any re-filing of the offer document with the SEBI. The proposal seeks to save the issuer companies of the hassle and costs involved in re-filing of the offer document each time they breached the threshold of 10%, thereby offering the companies more flexibility on utilization of IPO proceeds. In a rapidly changing external environment, such flexibility would prove to be very valuable.

5. Pricing norms for QIPs modified: To enable QIPs to flourish even in deteriorating market conditions, SEBI has allowed issuers to offer a maximum discount of 5% to the price calculated as per the ICDR. This is likely to create incentive for QIBs as well as private equity investors and could kick start the institutional placements in a weak primary market.

6. Additional Disclosures: In addition to the existing disclosure requirements, it is proposed that listed companies shall file a comprehensive annual disclosure statement with the SEBI, which filings are aimed at providing updated information to the investors. The SEBI's proposal is directed towards the alignment of the existing disclosure requirements in India with the 20F filing prescribed by the United States Securities and Exchange Commission ("US SEC") by which foreign private issuers provide certain information to the US SEC. While the proposal will certainly go a long way in ensuring transparency and disclosure by Indian corporates, compliance mechanisms will have to be put in place for listed companies in order to comply with requirement associated with the continued listing thereby resulting in more increased compliance cost and management time.

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