SEBI Discussion Paper on “Revising the Capital Raising Process”

There is a concern that issuers
have resorted to private placements and qualified institutional placements
(QIPs) to raise capital from specified investors rather than to public
offerings of shares. This is due to the excessive burden and costs associated
with a public offering of shares. Being cognizant of this tendency, SEBI has
proposed measures to nudge issuers to move away from private raising of capital
and into the public markets. This also enables public investors to have access
to investment opportunities created by capital raising efforts of issuers. Towards
this end, SEBI yesterday issued a Discussion
Paper on “Revising the capital raising process”
for public consultation
(comments are due by January 30, 2015). The discussion paper addresses two
specific aspects, viz. (i) the use of secondary market infrastructure for
making applications in a public offering (e-IPO), and (ii) fast tracking
issuances by listed companies.
E-IPOs
SEBI’s proposal involves the use of
secondary markets infrastructure for carrying out IPOs, which are essentially
primary market transactions. Under this system, investors will be able to
submit their applications to IPOs by placing orders through their
SEBI-registered intermediaries. To begin with, this process is available only
through Application Supported by Blocked Account (ASBA), and not other payment
processes. The investors may submit their application electronically, and need
not physically sign the forms. This is consistent with the recognition of
electronic documentation in the Companies Act, 2013.
This process is intended to reduce
the overall timeline for IPOs. While this effort is understandable, it is
focused largely on the procedural and mechanical aspects of the issue process.
Other matters such as disclosures and the responsibility for information
contained in the offer documents remain the same. In other words, the proposed
changes are procedural rather than substantive.
Follow-on Offerings
Conceptually, offerings of
securities by existing listed companies can do with less stringent regulation
given that such companies are required to comply with securities regulation and
secondary market disclosure norms under the listing agreement. In this behalf,
SEBI had previously allowed existing listed companies, subject to certain
conditions, to access the markets through rights issues and follow-on public
offerings (FPOs) without the requirement of filing an offer document with SEBI.
This liberalised procedure was hardly utilised by companies given the onerous
nature of the conditions imposed to quality for such offerings. Just by way of example,
one of the conditions is that “the average market capitalisation of public
shareholding of the issuer is at least Rs. three thousand crore”. By this
yardstick, according to SEBI, only 183 companies in India qualify. Now, SEBI
has proposed to relax some of these conditions so that they universe of
companies that can qualify to partake the liberalised procedures is enlarged.
For instance, the market capitalisation requirement above is proposed to be
reduced to Rs. 250 crores. Such a market capitalisation requirement is sought
to be done away with altogether for offerings by Central Public Sector
Enterprises (CPSEs) so long as other conditions are satisfied. This might be a
frontrunner to the massive disinvestment programme of the government that is on
the anvil.
All of these measures from SEBI
indicate its zeal towards boosting the primary markets, and to provide issuers
and investors with greater option for capital raising and investments. However,
while these changes are facilitative in nature, it is not clear whether they by
themselves would bring about visible change in the attitude of the issuers
towards capital raising.

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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