SEBI’s Board Meeting Decisions turn out to be  breather for Corporate Houses & Start ups

The Securities and Exchange Board of India (SEBI), in its Board Meeting held on 23rd June, 2015 has taken certain important decisions that aim at streamlining the regulatory framework with the dynamic business environment.

A gist and summary of the important decisions are outlined as follows:

1. SEBI’s move pertaining to opening of avenues for raising funds on Institutional Trading Platform (ITP) will provide a boost to Start-ups and other Companies:

   Under the extant ITP provisions, there are provisions for listing, without any provision for fund raising. SEBI, at its Board Meeting deliberated on the issue and granted approval for facilitating fund raising as well on the ITP platform. This decision of SEBI will be considered as a welcoming step that will not only manifold the growth of new generation entrepreneurs and start-ups but will benefit the economy at large.
   The decisions pertaining to amendments in the Regulations concerning ITP are provided herein:

   1. Accessibility Clause: Taking into consideration the broad framework of funding requirements of start-ups involved in technology business, the ITP is accessible to the following:
      1. companies which are intensive in their use of technology, information technology, intellectual property, data analytics, bio-technology, nano-technology to provide products, services or business platforms with substantial value addition and with at least 25% of the pre-issue capital being held by QIBs, or
      2. any other company in which at least 50% of the pre-issue capital is held by QIBs.  
   2. Restriction on holding: No person (individually or collectively with persons acting in concert) in such a company shall hold 25% or more of the post-issue share capital.
   3. Maximum Corpus of funds that can be raised: No cap if the funds are raised for General Corporate Purposes.
   4. Lock-in on Pre-issue capital: The entire pre-issue capital shall be kept under lock-in for a period of 6 months from the date of allotment uniformly for all shareholders.
   5. Valuation aspects for determining issue price: Looking at the broad aspects including initial stage of business, the determination of basis of issue price is left over on the issuer.
   6. Filing of Draft Offer Document: The Companies intending to get their shares listed on proposed ITP shall file draft offer document with SEBI for observations in terms of the provisions prescribed in SEBI (ICDR) Regulations, 2009.
   7. Who are eligible to invest in the Companies proposed to get listed on ITP:
      • Institutional Investors (QIB as defined in SEBI (ICDR) Regulations, 2009 along with family trusts, systematically important NBFCs registered with RBI and the intermediaries registered with SEBI, all with net-worth of more than Rs. 500 crore) and
      • Non-Institutional Investors (NIIs) other than retail individual investors.
   8. Allocation Process of Allotment in Public Offer:

      Allotment to institutional investors may be on a discretionary basis whereas to NIIs it shall
      be on proportionate basis. Allocation between the said two categories shall be in the ratio of 75% and 25% respectively.

   9. Investment size of individual Institutional Investor:

      No institutional investor shall be allotted more than 10% of the issue size. All shares allotted on discretionary basis shall be locked-in in line with the provisions of lock in applicable on Anchor Investors i.e. 30 days at present.

   10. Minimum Application Size and Minimum Trading Lot:

   Minimum Application size and minimum trading lot shall be Rs. 10 Lakhs.

   11. Minimum No. of Allotees in the Public Offer:

       The number of allottees in the public offer shall not be less than 200.

   12. Migration to Main Board:

       The ITP listed Companies are allowed to migrate to main board after 3 years subject to compliance with eligibility norms of the Stock Exchanges.

   13. Exemption to Category I & II Alternative Investment Funds (AIFs):

   As per SEBI (Alternative Investment Funds) Regulations, 2012, Category I and II AIFs are required to invest a certain minimum amount in unlisted securities. Accordingly, to encourage investment in Start-ups, SEBI approved the proposal that shares of companies listed on this platform may be treated as investment in unlisted securities for the purpose of calculation of the investment limits.

   CP Viewpoint:
   These decisions will surely boost up the listing and fund raising exercise by the Start-ups. Further, these relaxed norms would encourage more and more start-ups and techno based companies to get listed within the country instead of searching for options outside the country, leading to a spurt in inflow of FDI into the country.

2. SEBI’s approval to the proposal of reducing Public Holding Limit in raising further capital by Fast Track mode:

   To encourage the listed companies to garner funds to meet their funding requirements, the Capital Market Regulator has reduced the market capitalization of public shareholding requirement from Rs. 3000 crore to Rs. 1000 crore in case of Follow on Public Offerings (FPOs) and from Rs 3000 Cr to  Rs. 250 crore in case of Rights Issue (RIs), subject to compliance with following additional conditions:

   1. In case of rights issue, promoters shall not renounce their rights, except to the extent of renunciations within the promoter group, or for the purposes of complying with minimum public shareholding norms;
   2. Annualized delivery based trading turnover requirement of 10% of the total paid up capital;
   3. No conflict of interest between the lead manager and the issuer or its group or associate company in accordance with applicable SEBI Regulations;
   4. No suspension in trading in scrips of the Company on account of disciplinary measure in past 3 years;
   5. Issuer, promoter group and directors of the issuer should not have settled any alleged violation of securities laws through the consent mechanism with the Board in last 3 years.

   CP Viewpoint:
   In our view point, on one hand reduction of public holding in FPOs & RIs would accelerate the Fast Track Issues, but on the other hand the imposition of additional restriction of no consent during preceding 3 years might act as a bottleneck in the process.

3. SEBI’s review of Offer for Sale (OFS) of Shares through Stock Exchange Mechanism:
   1. To ensure increased retail participation in the OFS process, OFS notice shall be continued as per present practice i.e. latest by T-2 days, however, T-2 day shall be reckoned from banking day instead of trading day.
   2.  To simplify the bidding process for retail investors, now it would be mandatory for the seller to provide the option to retail investors to place their bids at cut off price (default option) in addition to placing price bids.
4. Approval of norms of reclassification of Promoters as Public:

   To resolve the practical problems being faced by the Corporate Houses, SEBI approved the proposal of putting in place a regulatory framework for re-classification of promoters in listed companies as public shareholders under various circumstances.

   Accordingly, existing promoter of a listed entity may cease to be a promoter and/or re-classify itself as public in the following circumstances, on compliance with the following conditions:

   1. In case of change in Promoter:
      • When a new promoter replaces the previous promoter subsequent to an open offer or in any other manner, re-classification shall be permitted subject to approval of shareholders in the general meeting.
      • Shareholders need to specifically approve whether the outgoing promoter can hold any Key Management Personnel (“KMP”) position in the company. In any case, the outgoing promoter may not act as KMP for aperiod of more than 3 years from the date of shareholders’ approval.
      • The outgoing promoter can’t hold more than 10% shares of the company.
   2. In case of Inheritance:

      In case of transmission/succession/inheritance, the inheritor shall be classified as promoter.

   3. In case of Company not having any identifiable promoter:

      Existing promoters may be re-classified as public in case the company becomes professionally managed and does not have any identifiable promoter. A company will be considered as professionally managed for this purpose, if:

      1. No person or group along with Persons Acting in Concert (PACs) taken together holds more than 1% shares of the company (including any convertibles/outstanding warrants/ADR/GDR Holding).
      2. Mutual Funds/Banks/Insurance Companies/Financial Institutions/FPIs can each hold up to 10% shares of the company (including any convertibles/outstanding warrants/ADR/GDR Holding).
      3. Erstwhile promoters and their relatives may hold KMP position in the company only subject to shareholders’ approval and for a period not exceeding 3 years from the date of shareholders’ approval.
   4. Other Conditions:
      1. The outgoing promoter shall not have any special rights through any formal or informal arrangements.
      2. The outgoing promoter shall not, directly or indirectly, exercise control over the affairs of the company.
      3. Increase in public shareholding pursuant to re-classification of promoters may not be counted towards achieving compliance with minimum public shareholding (MPS) requirement under clause 40A of equity listing agreement read with rule 19A of the Securities Contracts (Regulations) Rules, 1957 (SCRR).
      4. If any public shareholder seeks to re-classify itself as promoter, it shall be required to make an open offer to the shareholders and would not be eligible for exemption from the said obligation.
      5. The event of re-classification may be disclosed as a material event in accordance with the listing agreement/regulations.
   5. Power to take measures on a case to case basis:

      SEBI has allocated power to the Chairman to take required measures on a case to case basis.

   CP Viewpoint:
   In our view point, these parameters would remove the prevailing ambiguities on how to reclassify a Promoter as a Public shareholder.

5. Interim Use of Funds by the Issuers:

   To prevent misuse of funds during the interim period pending utilization by the issuer, for funds raised through public / rights issue in accordance with SEBI (ICDR) Regulations, 2009, the Board decided that net Issue proceeds pending utilization (for the stated objects) shall be deposited only in the Scheduled Commercial Banks included in the Second Schedule of Reserve Bank of India Act, 1934. In case of public / rights issue of Indian Depository Receipts, the issuer shall keep the funds in a bank having a credit rating of A or above by an international credit rating agency.

   CP Viewpoint:
   In our view point, the said decision is in the interest of investors at large as this would plug all the loops in utilization of funds raised by the issuer through public / rights issue.

6. Rationalizing the Process of Public Issues – Obviating the need to issue cheques

   In order to reduce the post-issue timeline for listing from existing T+12 days to T+6 days, increase the reach of retail investors and reduce the costs involved in public issue of equity shares and convertibles and by considering the reach and advantages of ASBA, SEBI has made it mandatory for all investors to make ASBA applications in public issues.

   CP Viewpoint:
   In our view point, the said decision would smoothen the process of Public Issues thereby leading to reduction of paper work and cost involved in public issues.