SEBI Decisions on Public Offers and Derivatives

SEBI has made some regulatory pronouncements at its board meeting yesterday that concern public offerings of securities and the derivatives markets.

As regards public offerings:

(i) SEBI has decided that all investors in public offerings (including retail investors) “would be required to bring in 100% of the application money as margin along with the application for securities”. This creates a level playing-field and makes demands more realistic, by removing the disparity between retail investors and institutional investors as the latter are only required to bring in 10% of the application money under the current regulations. The change is to take effect from May 1, 2010.

For a further detailed analysis of this change, please see an editorial and a column in the Financial Express.

(ii) Reservation for employees in public/rights issues would be available to employees of subsidiaries and material associates of the issuer whose financial statements are consolidated with the issuer’s financial statements. This change seems to have been long overdue, because the current scheme of things presented some form of inconsistency. While employees of subsidiaries were eligible to be issued stock options in the parent company, they were unable to participate in a public offering of the parent through reservations. This was the case both under the erstwhile SEBI (Disclosure and Investor Protection) Guidelines, 2000 and the SEBI (Issue of Capital and Disclosure) Regulations, 2009, which inconsistency has now been removed.

(In an earlier move relating to securities offerings, SEBI has called for certain details of qualified institutional placements (QIPs) to be filed with the stock exchanges for display on their website. These include details such as “allottes in QIP who have been allotted more than 5% of the securities offered in the QIP, viz names of the allottees and number of securities allotted to each of them [and] pre and post issue shareholding pattern of the issuer”. This is expected to enhance transparency in the QIP process.)

As regards, derivatives, SEBI’s board meeting decided as follows:

The Board further decided in principle to allow the Stock Exchanges to introduce:

a. equity derivatives contracts with tenures upto 5 years;

b. derivative contracts on volatility indexes which have suitable track record, and

c. physical settlement of equity derivatives.

The last aspect of physical settlement bears importance. When stock derivatives were introduced in India about a decade ago, the strategy was to follow a phased process. Initially, trades were to be settled in cash (in the form of contracts for differences) and, after necessary systems were put in place, the settlement of derivative contracts were to be allowed through physical settlement (i.e. through delivery of securities). Until now, derivatives on the exchange have been cash-settled and SEBI’s decision is recognition of the transition to the next phase of derivatives trading in the Indian markets.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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