In order to promote rights issue as a preferred mode of fundraising, the Securities and Exchange Board of India (Sebi) on Tuesday proposed a plethora of measures, including the removal of the requirement of filing a draft document and the need to appoint a merchant banker to speed up the process.
The regulator has also suggested doing away with the different types of rights issues –– less than Rs 50 crore, fast-track and non-fast track — and introduced a simplified letter of offer with fewer disclosures such as the object of the issue, price, record date, and entitlement ratio.
“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 few issue-related information,” Sebi said in a consultation paper, inviting public comments by September 10.
A rights issue is an invitation from a company to its existing shareholders to purchase additional shares in the company.
Sebi has also proposed cutting the process timelines by half to T+20 from the date of board approval to closure of the issue, and down to T+3 from the date of closure to trading of the rights issue. It also suggested allowing the promoters and promoter group the right to renounce their entitlement in the rights issue in favour of selective investors with upfront disclosures.
Yash Ashar, senior partner at Cyril Amarchand Mangaldas, said, “Sebi has added clarity on renunciation by the promoter and promoter group as well as permitting institutions to backstop the issue. This is in line with global best practices and will make rights issues the quickest and most common way to raise capital in India.”
Further, the paper proposed that any unsubscribed portion of a rights issue could also be allotted to select investors, provided upfront disclosures are made.
“Allowing allotment to selective investors may also result in additional benefits such as safeguard against the failure of the issue, reduce the requirement of underwriting, and also help the issuer to better price the rights issue,” the Sebi paper said.
The regulator has also proposed transferring the role of intermediaries — merchant bankers and registrars — to the issuer or stock exchanges, allowing companies to proceed with a rights issue without appointing such intermediaries.
Sebi also proposed that stock exchanges and depositories develop a system for real-time validation of the applications within a period of six months from the implementation of the proposals contained in this paper.
Pointing out that the markets regulator’s proposals may risk prioritising issuer convenience over investor protection, Kunal Sharma, partner at Singhania & Co, said, “Regarding rationalising disclosures, decreasing intermediary intervention, and permitting more elasticity in allotments, Sebi seems to be oriented in favour of the issuers.”
Sharma added that the endeavour for efficient and shortened timelines may lead to increase in disclosure risks and lessened investor safeguards.
These proposals stem from a study by Sebi that showed that a total of Rs 15,110 crore was raised through rights issue in FY24, which was significantly lower than the Rs 68,972 crore raised through qualified institutional placement (QIP) and Rs 45,155 crore raised through preferential allotments.