SEBI decides to tighten the rules for fundraising by IPO and preferential issue – Company law / commercial law

India: SEBI decides to tighten the rules for fundraising by IPO and preferential issue

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On December 28, 2021, the Securities and Exchange Board of India (“SEBI“) decided to tighten fundraising standards through the initial public offering (“IPO) and preferential issue. He decided to among others restrict the use of funds raised by the IPO for unidentified acquisitions, revise the limit on pre-issue holdings that may be offered for sale in the IPO by an issuer with no track record, increase the foreclosure for key investors, relax foreclosure requirements and problem pricing methodology among other changes.

According to the rulings, several regulations will be amended to address regulatory loopholes that have recently emerged while witnessing several public issues as described below:

Key changes:

SEBI Regulations (Capital Issuance and Disclosure Requirements), 2018:

  1. Conditions for issue objects: companies, having defined objects for future inorganic growth without identifying any acquisitions or investment targets in the offering document, were prohibited from spending on such unidentified acquisitions and l general object of the company exceeding 35% of the proceeds of the IPO, while the amount allocated to such unidentified acquisition or investment target may not exceed 25% of the proceeds of the IPO. These limits do not apply if the acquisition project or the strategic investment object has been identified and specific information on this subject has been provided in the offer document.
  2. Terms of offer to sell (OFS) to the public in the context of an IPO where DRHP is filed by an issuer with no previous record: large shareholders holding more than 20% of the shareholding before the issue of the company have were prevented from offering for sale more than 50% of their pre-issue stake on the day of listing. In addition, shareholders holding less than 20% of their stake before the issue were not allowed to offer for sale more than 10% of their stake before the issue on the day of listing.
  3. Monitoring agency and reporting on the use of the proceeds of the issue: Credit rating agencies will be allowed to act as a monitoring agency instead of the commercial banks and public financial institutions programmed to monitor the use of the proceeds of the issue, which monitoring will continue until the proceeds of the issue are fully utilized instead of the current 95%. The amount raised for GCP will also be subject to monitoring which will need to be disclosed in the monitoring report, which will be submitted to the audit committee on a quarterly basis instead of an annual basis.
  4. Price Range: SEBI has decided to set a minimum price range of 5% for the pound issue, which issue uses the price discovery process of generating and recording investor demand for shares before arriving. at an issue price. This implies that the difference between the floor price and the upper price range must be at least 5%.
  5. Blocking for Principal Investors: The blocking period for principal investors has been increased from 30 days to 90 days from April 2022, which will only apply to 50% of their allocation, while the balance of 50% will remain blocked for 30 days. Primary investors are institutional investors who are encouraged to buy shares of a company prior to its IPO in order to improve the popularity of the issue. This change aims to benefit and give confidence to other investors.
  6. Revised allocation methodology for non-institutional investors: the retail investor quota has been split by requiring that 1/3 and 2/3 of the retail investor quota be reserved for investors with a demand size of (i ) Rs. 2-10 lakhs and (ii) more than Rs. 10 lakhs respectively.
  7. Pricing methodology: At present, the price of the shares to be allotted under the preferential issue must be at least above the average of the weekly highs and lows of the volume weighted average price (VWAP) of the shares in question. scholarship during 26 weeks or VWAP during the 2 weeks preceding the date concerned. These deadlines have been reduced to 60 days and 10 days respectively while considering that the existing standard of 26 weeks is a very long period to determine the price given the volatility of the market.
  8. Mandatory requirement of the valuation report: from now on, it will be mandatory to provide a valuation report from the registered independent expert in the event of a change of control / allocation of more than 5% of the diluted share capital after the issue. In addition, the change of control can only be carried out on a reasoned recommendation from a committee of independent directors.
  9. Blocking provisions for the preferential issue: Currently, the shares allocated under the preferential issue are subject to a blocking period so that said shares cannot be unloaded immediately after the issue to benefit from a price arbitrage. SEBI has decided to reduce the blocking period from 3 years to 18 months (in the case of promoters) and from 1 year to 6 months (in the case of non-promoters) to harmonize it with the blocking requirements in the event of an issue. public that have recently been reduced.
  10. Pledge of shares: It was decided to authorize the pledge of shares allocated to promoters / group of promoters under preferential issuance during the period of unavailability for the purposes of fulfilling the loan condition sanctioned for the financing of the objects of the preferential emission.

SEBI Regulation (Registration Obligations and Disclosure Requirements), 2015:
The appointment or reappointment of any person, including as a full-time director or managing director or manager, which has been previously rejected by the shareholders at a general meeting, is only carried out with the approval prior to the shareholders. In addition, it was decided to modify the regulations relating to the issue of securities in dematerialized form in the event of a request for the issue of duplicate shares, etc. This measure will improve the ease, convenience and security of transactions for investors.

SEBI regulation (alternative investment funds), 2012:
It was decided to introduce Special Situation Funds (SSF) which will only invest in stressed assets such as stressed loans available for acquisition, guarantee receipts issued by asset reconstruction companies, securities of companies in difficulty, etc. The SSF will have characteristics like minimum corpus of Rs. 100 Crores, minimum investment of Rs. 10 Crores by an investor / Rs. 5 Crores by an accredited investor, initial and continuing disclosure requirements mandated by RBI for CRA investors, etc.

SEBI Regulations (Mutual Funds), 1996:
It was decided to mandate the trustees to obtain the consent of the unitholders through a voting process if the majority of them decide to wind up a plan or to prematurely redeem units of any closed plan. The results of the vote must be published within 45 days of the publication of the notice of the circumstances leading to the liquidation.

SEBI Regulation (Foreign Portfolio Investors), 2019:
It was decided to amend the regulations to allow SEBI to generate unique REIT registration numbers by receiving the basic information of applicants wishing to register with REITs from one of the SEBI registered custodians.

Alpha Rajan & Partners Commentary:
While these changes were intended to be made to SEBI regulations for the benefit of investors and to improve disclosure and oversight standards, these changes may however pose certain challenges and impact the plans of issuers intending to raise funds. by IPO or preferential issue.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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