Changes to Capital Markets Regulations

On October 25, 2010, SEBI announced a number of changes to regulations governing capital markets.

1. Public offerings.

A new regime is being established for IPOs by insurance companies. Rather than issue a new set of guidelines for that industry, SEBI has decided to apply the ICDR Regulations, 2009 along with additional industry-specific disclosures such as specific risk factors, overview of the insurance industry and a glossary of terms. Other changes in public offering norms include enhancement of a maximum application size for retail individual investors to Rs. 2 lakhs across all issues, the introduction of mandatory pro forma financial statements for issuer companies that have undergone a merger or restructuring after the last disclosed financial statements and the removal of a requirement for minimum promoters’ contribution in a further public offering (FPO).

In progressively addressing issues of gun-jumping, SEBI now requires investment banks to submit a compliance certificate “as to whether the contents of the news reports that appear after the filing of the [draft offer document] are supported by disclosures in offer document or not”. An item which is noteworthy is the reference to news reports appearing in media where the issuer has a private treaty with such media group. This will ensure that the securities are sold pursuant to the offer document, which constitutes the single source of information for marketing purpose as also for legal consequences (such as liability of misrepresentation).

2. Preferential Issues

In a measure that tightens restrictions on issue of securities to promoters, SEBI has provided that promoters (or promoter group) are ineligible to receive equity shares, convertible securities or warrants for a period of one year if they have failed to exercise previously issued warrants. This will operate as a disincentive against issue of warrants to promoters and promoter group, and further curb the misuse of warrants. For a previous discussion on regulation of such warrants, see here and here).

3. Rights Issue for IDRs

SEBI has proposed a new framework for rights issues for foreign companies that have outstanding Indian depository receipts (IDRs). Issuers are required to circulate a wrap document that contains information specific to IDR holders. The level disclosures will be similar to that expected in a rights issue by an Indian company. On a related note, the IDR holders of Standard Chartered were faced with certain legal and regulatory issues regarding their ability to participate in the bank’s recent rights offering, and it is hoped that the new regulatory framework will iron out those issues.

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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