Mr. Arnab Goswami is a Final Year BBA LL.B. (Hons. in Corporate Laws) student of UPES School of Law, Dehradun
Investor confidence, not only from institutional investors but also from retail ones, is propelling the current boom in the Indian capital markets. Numerous factors, such as a cut in corporate tax rates and the government's heavy investment in infrastructure projects1, fuel the line-up of initial public offerings ('IPO') in the primary market and the successful fund raising by companies, indicating a very healthy state of affairs. The Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 ('SEBI (ICDR) Regulations') primarily govern the process of raising capital by listed entities. The SEBI (ICDR) Regulations consist of 12 chapters and 20 schedules. The chapters mostly deal with various types of issues, such as IPOs on the main board, rights issues, further public offers ('FPO'), preferential issues, qualified institutional placement, IPOs of Indian Depository Receipts, rights issues of Indian Depository Receipts, IPOs by small and medium enterprises, innovator growth platforms, social stock exchanges, bonus issues, and miscellaneous provisions. Hence, companies have a variety of options to raise capital, based on their unique needs.
Initial Public Offer on Main Board
Before filing the offer documents (such as the red herring prospectus, prospectus, or shelf prospectus) with the Securities and Exchange Board of India ('SEBI') and the Registrar of Companies ('RoC'), issuers must comply with the conditions of Chapter II of the SEBI (ICDR) Regulations.2
An IPO need not be of only of equity shares; rather, it can also be of convertible debt instruments and warrants. In the case of an IPO of convertible debt instruments, the issuer shall not be in default of payment of interest or repayment of the principle amount in respect of debt instruments issued by it to the public (if any) for a period of more than six months. Regulation 13 of the SEBI (ICDR) Regulations prescribes the eligibility criteria for an issuer to issue warrants in an initial public offer.
Part III of Chapter II of the SEBI (ICDR) Regulations sets out the rules for the minimum promoters' contribution. This means that the issuer's promoters must hold at least 20% of the post-issue capital. This contribution can come in the form of equity shares or subscriptions to convertible securities. Regulation 15 of the SEBI (ICDR) Regulations specifies which securities, such as shares received through bonus issues, are not eligible for the minimum promoter's contribution.
Part IV of Chapter II3 lays down the lock-in requirements of the specified securities held by the promoters and persons other than promoters. The promoters must lock in the specified securities for eighteen months from the date of allotment in the initial public offer. Persons other than promoters are subject to a six-month lock-in period, except for equity shares allotted to employees under the employee stock option scheme, equity shares held by a venture capital fund or alternative investment fund of category I or II, and foreign venture capital investors. The rationale behind this is to ensure that promoters or persons other than promoters do not misuse the public issue as a dump and exit pathway, which consequentially might have an adverse impact on retail shareholders.
Rights Issue
A rights issue means an offer of specified securities by a listed issuer to the shareholders of the issuer as on the record date fixed for any corporate purposes. Chapter III of the SEBI (ICDR) Regulations deals with the eligibility requirements for an entity to make a rights issue. An entity initiates a rights issue by issuing a letter of offer to the shareholders. The issuer can also make a rights issue of convertible debt instruments, which requires obtaining a credit rating from at least one credit rating agency and appointing at least one debenture trustee in accordance with the provisions of the Companies Act, 20134 and the Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993.5 For the issue of warrants, the issuer needs to ensure that the tenure of the warrant does not exceed eighteen months from their date of allotment in the rights issue.
The issuer may also opt for a fast-track rights issue ('FTRI') if it fulfills the conditions laid down in Regulation 99 of the SEBI (ICDR) Regulations. FTRI is an expedited method of raising capital via a rights issue.6 Unlike traditional methods, FTRI does not require the issuer to submit a draft letter of offer to SEBI for observations, which streamlines the process and allows for a quicker rights issue, enabling the issuer to access funds more expeditiously.
Further Public Offer
A further public offer means an offer of specified securities by a listed issuer to the public for subscription by any existing holders of such specified securities. Chapter IV of the SEBI (ICDR) Regulations deals with further public offers ('FPO'). Recently, Vodafone Idea Limited7 undertook this route to raise funds from the public. Similar to an IPO, an issuer may make a FPO of convertible debt instruments and warrants, provided the issuer's equity shares are already listed and it is not in default in payment of interest or repayment of the principal amount in respect of debt instruments issued by it to the public (if any) for a period of more than six months.
According to Regulation 112 of the SEBI (ICDR) Regulations, the minimum promoters' contribution requirements for the FPO route do not apply when the issuer lacks an identifiable promoter, such as Indian companies like ITC Limited, Larsen & Toubro Limited, etc., but they do apply otherwise.8 Regulation 113 of the SEBI (ICDR) Regulations provides the minimum promoters' contribution requirements. Similar to FTRI, Part X of Chapter IV provides the provisions pertaining to fast-track further public offers ('FTFPO').
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Footnotes
1. Nishant Kumar, What Is Causing IPO Boom in India? Why Are Experts Worried about Investor Frenzy? | Stock Market News, MINT (2024), https://www.livemint.com/market/ipo/stock-market-today-what-is-causing-the-ipo-boom-in-india-why-are-experts-worried-about-investor-frenzy-11719923337118.html (last visited Jul 16, 2024).
2. Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018, The Gazette of India: Extraordinary, pt. III, § 4 (Sep. 11, 2018).
3. Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018, The Gazette of India: Extraordinary, pt. III, § 4 (Sep. 11, 2018).
4. The Companies Act, 2013, No. 18, Acts of Parliament, 2013 (India).
5. Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993, The Gazette of India: Extraordinary, pt. III, § 4 (1993).
6. Vinod Kothari Consultants, Eligibility and Disclosures under Rights Issue Rationalized – Vinod Kothari Consultants, https://vinodkothari.com/2020/10/eligibility-and-disclosures-under-rights-issue-rationalized/ (last visited Jul 16, 2024).
7. Business Standard, Vodafone Idea's FPO: A Rs 287 Crore Bonanza for Investment Bankers, (2024), https://www.business-standard.com/companies/news/vodafone-idea-s-fpo-brings-big-payday-for-investment-bankers-124042600997_1.html (last visited Jul 16, 2024).
8. Should investors worry about companies with no promoters? Here's a reality check - CNBC TV18, CNBCTV18 (2023), https://www.cnbctv18.com/business/companies/icici-bank-lt-vedanta-itc-gcpl-iex-share-price-promoters-exit-annual-returns-17726951.htm (last visited Jul 16, 2024).
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