[Analysis] Proposed Changes to Rights Issue Process – Key Amendments and Impact
- Blog|Advisory|Company Law|
- 8 Min Read
- By Taxmann
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- Last Updated on 27 August, 2024
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A Rights Issue is a method of raising capital where a company offers its existing shareholders the opportunity to purchase additional shares at a discounted price, typically in proportion to their current holdings. This process allows shareholders to maintain their ownership stake while providing the company with funds for expansion, debt repayment, or other purposes. The Rights Issue process includes the company announcing the offer, setting the record date, determining the issue price and entitlement ratio, and offering shares to eligible shareholders within a specified period. Shareholders can either subscribe to the offered shares, sell their rights or let them lapse. The process is aimed at ensuring fair and equitable treatment while allowing companies to quickly raise funds.
Table of Contents
- Introduction
- Rationale Behind the Proposals
- SEBI’s Proposals to Amend the Rights Issue Process
- Conclusion
1. Introduction
On August 20, 2024, SEBI released a Consultation Paper concerning the proposed Faster Rights Issue, which includes the option of selective investor allotment. This initiative is part of SEBI’s efforts to enhance the capital-raising framework by streamlining the Rights Issue process. The proposed modifications aim to improve the efficiency and accessibility of Rights Issues, making them more appealing through simplified compliance, reduced timelines, and expanded investor choices. The primary goal of this consultation is to gather public feedback on these proposals that facilitate a quicker Rights Issue process with the capability for selective allotment. Stakeholders are invited to submit their comments by September 10, 2024.
2. Rationale Behind the Proposals
Over the past three fiscal years, an analysis of capital raised through Rights Issues, Preferential Allotments, and Qualified Institutional Placements (QIPs) shows that Rights Issues have garnered significantly less capital and are less frequently utilized compared to QIPs and Preferential Allotments. Despite the advantages of Rights Issues, such as the tradability of rights entitlement and equitable treatment of existing shareholders, they remain an underutilized method of fundraising. To make Rights Issues a more attractive option, SEBI has undertaken a comprehensive review of the existing process.
This evaluation involved consultations with key market intermediaries, including Depositories, Stock Exchanges, Registrars to an Issue (RTAs), and Merchant Bankers. The insights gained from these discussions were subsequently presented to the Primary Market Advisory Committee (PMAC) for consideration and recommendations during their meeting on July 22, 2024.
The critical proposals derived from these deliberations are outlined in the subsequent sections.
3. SEBI’s Proposals to Amend the Rights Issue Process
3.1 Discontinuation of the requirement of filing a ‘Draft Letter of Offer’ and ‘Letter of Offer’ with SEBI
SEBI proposes to eliminate the need to file a Draft Letter of Offer (DLoF) and Letter of Offer (LoF) with the regulatory body. Additionally, the proposal includes streamlining the content of the LoF to focus only on essential information pertinent to the Rights Issue, such as the purpose of the issue, pricing, record date, and entitlement ratio, etc.
| Comments |
| Currently, the preparation of a DLoF or LoF is a time-intensive process, typically requiring 50-60 days for Merchant Bankers to perform due diligence and compile necessary documentation. This lengthy process can deter issuers, leading them to opt for quicker fundraising methods like Preferential Allotments, which demand only minimal disclosures.
The proposed adjustments to eliminate the filing requirements for the DLoF and LoF, along with the rationalization of the LoF’s content, are anticipated to simplify the Rights Issue process significantly. These changes aim to reduce the duration and complexity of due diligence, thus making Rights Issues more appealing by minimizing delays and easing compliance burdens. |
3.2 Integration of disclosures of Fast Track Rights Issue into Simplified Letter of Offer
The SEBI has proposed enhancements to the Letter of Offer (LoF) for Fast Track Rights Issues by mandating the inclusion of the following disclosures:
- Compliance History – Details of any non-compliance with the listing agreement or SEBI’s Listing Obligations and Disclosure Requirements (LODR) Regulations over the three years immediately preceding the reference date.
- Investor Complaints – The percentage of investor complaints resolved by the issuer by the end of the quarter prior to the reference date, along with explanations for any resolution rate below 95%.
- Pending Legal Matters – Information concerning any pending show-cause notices, excluding those related to penalties, issued against the issuer or its promoters or whole-time directors as of the reference date.
- Trading Status – Confirmation that the issuer’s equity shares have not been suspended from trading due to disciplinary actions in the three years immediately preceding the reference date.
| Comments |
| Previously, issuers faced various filing requirements for Draft Letters of Offer (DLoF), which differentiated between types of Rights Issues, such as those under ₹50 crore, Fast Track, and Non-Fast Track. SEBI now aims to abolish these distinctions and, instead, integrate the eligibility conditions that were specific to Fast Track Rights Issues into the simplified LoF.
The proposed integration of these disclosure requirements into the simplified LoF aims to bolster transparency and streamline the Rights Issue process. By standardizing these disclosures, SEBI seeks to foster trust, facilitate informed decision-making among investors, and enhance the efficiency of the process while reducing regulatory complexities. |
3.3 Reduction of the timeline of the Rights Issue process to T+20 working days post-board approval
The SEBI has proposed a significant reduction in the timeline for the Rights Issue process. The new timeline is set to T+20 working days from the date of the board meeting that approves the Rights Issue to the closure date. Additionally, the timeline from the closure of the Rights Issue to the date of listing/trading is proposed to be shortened to T+3 working days.
| Comments |
| Currently, Non-Fast-Track Rights Issues typically extend up to 317 days from board approval to trading, and Fast-Track Rights Issues take around 126 days. The protracted durations are largely due to the absence of defined timelines for conducting due diligence and completing document filings. The proposed timeline reduction is anticipated to accelerate the fundraising process, enhance market efficiency, and enable quicker capital access for companies, making Rights Issues more appealing to both issuers and investors. |
3.4 Relaxing of promoter renunciation norms and allowing allotment of unsubscribed portions to ‘Selective Investors’
Existing norms restrict promoters from renouncing their rights (except within the promoter group) under certain conditions such as if the Rights Issue does not meet the minimum subscription requirements or in the case of Fast-Track Rights Issues. Moreover, Regulation 90(2) of the ICDR Regulations has ambiguities regarding the allotment of unsubscribed portions to individuals other than rights entitlement holders.
SEBI has proposed to relax these restrictions, permitting promoters/promoter groups to renounce their rights entitlements in favour of selective investors. It is also suggested that issuers be allowed to allocate any unsubscribed portions of the issue to selective investors at their discretion.
| Comments |
| The current regulations prioritize allocations to eligible shareholders and those renouncing their rights entitlements, with any remaining shares distributed among these groups based on their requests for additional securities. Although existing shareholders are granted the primary opportunity to participate in fundraising, many listed entities opt for raising funds through preferential issues targeted at a select group of investors, including promoters.
SEBI’s proposal to relax promoter renunciation restrictions and permit the allotment of unsubscribed shares to selective investors aims to inject greater flexibility into Rights Issues. This change seeks to address the current restrictions and inefficiencies by allowing promoters to transfer their rights to other investors and enabling issuers to distribute remaining shares more broadly, thereby enhancing the overall efficacy and attractiveness of Rights Issues. |
3.5 Elimination of the requirement of appointing a Merchant banker by an issuer for the Right Issue
The SEBI has put forward a proposal to eliminate the obligation for issuers to appoint a merchant banker for Rights Issues. Instead, the responsibilities traditionally handled by merchant bankers are proposed to be redistributed among the issuer, the Registrar to the Issue, and the Stock Exchanges/Designated Stock Exchange (DSE).
| Comments |
| Under Regulation 69(1) of the SEBI (ICDR) Regulations, 2018, issuers are currently required to appoint one or more registered merchant bankers as lead managers and coordinate with them to select other intermediaries. Merchant bankers often require 50-60 days to complete due diligence and document preparation, adding to the duration of the Rights Issue process. However, for Rights Issues under ₹50 crore, the appointment of a merchant banker is not mandatory.
The proposed removal of the requirement to appoint a merchant banker is aimed at simplifying the process, reducing associated costs, and shortening the time needed to raise funds. This change is expected to make Rights Issues more accessible, particularly for smaller issuers, by streamlining regulatory compliance. |
3.6 Concurrent handling of application validation and allotment finalization by Stock Exchanges and Depositories
The SEBI has suggested that stock exchanges and depositories should handle the validation of applications and the finalization of allotment bases concurrently—a task currently managed by the Registrar to the Issue. Moreover, stock exchanges and depositories are expected to develop a system for real-time application validation within six months of these proposals being implemented.
| Comments |
| According to Regulation 69(7) of the SEBI (ICDR) Regulations, 2018, issuers must appoint a registrar to the issue that is registered with SEBI and has connectivity with all depositories. Currently, the ICDR Regulations do not specify many activities that must be performed independently by the Registrar to the Issue (RTA), except for independently certifying that the subscription has reached at least 90% of the offer as per Regulation 84(3).
The suggested transition of responsibilities from RTAs to stock exchanges and depositories for application validation and allotment finalization is poised to enhance operational efficiency, decrease processing times, and ensure more accurate and streamlined issuance processes. This modification could expedite fund mobilization and bolster investor confidence by ensuring quicker and more reliable transactions |
3.7 Prohibition of Rights Issue for companies with trading suspensions
In line with the stipulations of Regulation 61, SEBI has proposed an additional eligibility criterion for Rights Issues: companies whose shares are currently suspended from trading should be prohibited from initiating such offerings.
| Comments |
| Presently, the ICDR Regulations lack specific eligibility guidelines for conducting a Rights Issue when a company’s shares are under trading suspension. This new proposal aims to prevent companies facing trading suspensions from using Rights Issues as a means to solve liquidity or financial challenges without first addressing the underlying issues. By requiring that only companies with actively trading shares can proceed with Rights Issues, SEBI intends to protect investor interests and uphold market discipline. |
3.8 Extension of applicability of ICDR Regulation to all Rights Issues
The SEBI proposes that the ICDR Regulations apply uniformly to all Rights Issues, regardless of their monetary value. Additionally, the proposal includes the requirement for a monitoring agency for all Rights Issues to oversee and report on the utilization of the raised funds, ensuring their proper and transparent use.
| Comments |
| Under the current framework of Regulation 60 of the ICDR Regulations, Rights Issues valued below ₹50 crore are exempt from these regulations. Conversely, Regulation 82(1) mandates the appointment of a monitoring agency[1] for Rights Issues exceeding ₹100 crore to oversee the utilization of proceeds. Notably, some issuers exploit this by conducting multiple Rights Issues under ₹50 crore within a single financial year to sidestep comprehensive ICDR Regulations, including due diligence and Draft Letter of Offer (DLoF) filings.
The proposed changes to extend ICDR Regulations to all Rights Issues, coupled with the obligatory appointment of a Monitoring Agency, are designed to significantly bolster investor protection and enhance regulatory oversight. By bringing Rights Issues below ₹50 crore under the ICDR umbrella, the amendments aim to close loopholes that have allowed issuers to circumvent stringent regulatory standards by fragmenting their fundraising efforts into multiple smaller issuances. |
4. Conclusion
The suite of reforms suggested by SEBI is geared towards modernizing and refining the Rights Issue process to make it more streamlined and accessible for issuers, while simultaneously boosting investor protection. These regulatory adjustments, which focus on aligning requirements, shortening timelines, and introducing enhanced flexibility, are poised to promote broader adoption of Rights Issues as a favoured fundraising mechanism, thereby fostering a more transparent and disciplined capital market.
[1] A credit rating agency registered with SEBI
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