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AN ANALYSIS OF SEBI’S AMENDMENT ON ADVANCING MARKET ACCESSIBILITY: EMPOWERING ENTITIES THROUGH EXPANDED PROMOTER CONTRIBUTIONS AND CCS INCLUSION
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AN ANALYSIS OF SEBI’S AMENDMENT ON
ADVANCING MARKET ACCESSIBILITY: EMPOWERING ENTITIES THROUGH EXPANDED PROMOTER
CONTRIBUTIONS AND CCS INCLUSION
AUTHORED BY - GOURI MAHABALSHETTI
INTRODUCTION:
An Expert Committee of the Securities and Exchange Board of India
(hereinafter referred to as “SEBI”) was established to review the SEBI (Listing
Obligations and Disclosure Requirements) Regulations, 2015 (hereinafter referred to as
“LODR Regulations”) and the SEBI (Issue of Capital and Disclosure Requirements)
Regulations, 2018 (hereinafter refereed to as “ICDR Regulations”). The
Committee's mandate was to identify ways to facilitate ease of doing business by examining and recommending
improvements to these regulations. Pursuant to the SEBI’s press conference held
on October 4th 2023, SEBI invited suggestions from public and regulated
entities on amending the LODR Regulations and the ICDR Regulations.[1]
This would facilitate ease of doing business and reduce the cost of compliance
under the above-mentioned SEBI regulations for companies set to go public.
The proposed changes in the paper address several critical areas of
regulatory reform. Some of the proposals floated in this regard are: Firstly,
the inclusion of equity shares received from the conversion or exchange of
fully paid-up Compulsory Convertible Securities (CCS) and depository receipts
will now count towards the Minimum Promoters’ Contribution (MPC). Additionally,
non-individual shareholders and promoter group entities will be allowed to
contribute to the MPC without being identified as promoters. The thresholds for changes in issue
size that necessitate a fresh filing of the draft offer document will be
updated.[2]
In addition, under the LODR Regulations, changes will include the
applicability of provisions based on average market capitalisation,
requirements for filling critical managerial personnel vacancies, timelines for
prior intimation of board
meetings, and the interval between
meetings of the Risk
Management Committee.
I.
INCLUSION
OF CCS
FOR THE
PURPOSE OF MINIMUM PROMOTER
CONTRIBUTION
A.
The existing regime:
The ICDR Regulations state that the promoters must contribute either
twenty per cent of the proposed issue size or twenty per cent of the post-issue
capital, which is subject to a lock-in period.[3]
Furthermore, only fully paid-up equity shares that have been held by the
sellers for at least one year before the draft offer document can be offered
for sale to the public. If equity shares received through the conversion or exchange of fully paid-up
CCS, including depository receipts, are being sold, the holding period for both the
convertible securities and the resulting equity shares will be combined to
calculate the one-year requirement.[4]
This one-year holding period must be satisfied at the time of filing the draft
offer document.
Additionally, specified securities acquired within the preceding three
years under certain conditions, such as non-cash consideration involving asset revaluation or bonus issues
funded by revaluation
reserves or unrealised profits, are ineligible. Additionally, specified
securities acquired by promoters, alternative investment funds, foreign venture
capital investors, scheduled commercial banks, public
financial institutions, insurance companies, or non-individual public
shareholders at a price lower
than the issue price within the past year are also ineligible unless the
price difference is paid to the issuer.
However, specified securities meeting certain exemptions are eligible,
including those acquired through court-approved schemes under the Companies
Act, 2013 or those held for over one year before the draft offer document,
provided full conversion or exchange details are disclosed. Securities pledged
with creditors are categorically ineligible.
B.
Proposed Amendment:
The Committee proposed including equity shares obtained from converting
fully paid-up compulsory convertible securities in the Minimum Promoters'
Contribution. The recommendation was that conversion should occur between
the filing of the draft red herring prospectus (DRHP) and the red herring
prospectus (RHP), allowing
flexibility for shareholders if the Initial Public Offer (IPO) does not proceed. Previously,
under the old ICDR Regulations, CCSs held for over a year before filing the
DRHP were not eligible for MPC. However, recent amendments will now allow CCS
that are held for more than a year before the DRHP filing to count towards MPC,
provided that the DRHP fully discloses the conversion terms and the conversion
into equity shares occurs before filing the RHP. This change aligns the
eligibility of shares for an offer for sale (OFS) with those required for MPC.[5]
II.
EXPANDING THE AMBIT OF MINIMUM PROMOTER
CONTRIBUTION:
Prior to the 2024 amendment, in cases where eligible equity shares for
Minimum Promoter Contribution (MPC) fell short, only alternative investment
funds (AIFs), foreign venture capital investors, scheduled commercial banks,
public financial institutions, and insurance companies could contribute to
cover this shortfall up to a maximum of 10% of post-issue share capital without
being classified as "promoters".[6]
Following the amendment, SEBI now allows other members of the promoter group
(individual or corporate) and non-individual shareholders holding at least 5%
of the post-issue capital to contribute towards MPC in case of a shortfall.[7]
A 5% threshold was set for non-individual shareholders to ensure that
significant investors remain committed to the company after its listing. This
measure aims to assure public investors
that these shareholders will continue to have a stake in the company
post-listing. The proposal also allows promoter group entities to fulfil any
Minimum Promoters' Contribution (MPC) shortfall without being classified as
promoters. This provision offers flexibility to companies where identifiable
promoters may lack sufficient equity share capital to meet MPC requirements.[8]
III.
THRESHOLD FOR FRESH FILING OF DRAFT OFFER DOCUMENT:
The existing regulation under the ICDR Regulations outlines conditions requiring a fresh
filing of a draft offer document after its initial submission. For fresh
issues, any adjustment exceeding a 20% increase or decrease from the
estimated issue size necessitates a new draft offer document.
Similarly, for offer for sale (OFS) scenarios, changes exceeding a 50% increase
or decrease in either the number of shares offered or the estimated
issue size trigger
the requirement for a fresh filing. In cases where an issue
combines both fresh issue and offer for sale components, the respective
thresholds mentioned above apply accordingly. These provisions aim to ensure
transparency and regulatory compliance in the process of public offerings.[9]
However, the proposed amendment clarified that any increase or decrease
in the estimated issue size
by more than 20% for a fresh issue would necessitate the refiling of the draft
red herring prospectus. In contrast, for an offer for sale, changes are
assessed based on the unit value, allowing a 50% variation without requiring
refiling. This change aims to provide clarity and predictability for both
issuers and selling shareholders. It is also recommended that adjustments to
the estimated issue size be quantified in rupee value, given its impact on the
purpose of the issue.[10]
Additionally, the amendment removed
regulations where the company was required to set aside a
refundable security deposit amounting to 1 per cent of the offer size and
revised the minimum extension period for bidding in case of force majeure
events, banking strikes, or similar circumstances from "three working
days" to "one working day." These updates are designed to
streamline regulations and enhance flexibility in the issuance process.[11]
IV.
CONCLUSION:
The recent amendments proposed by SEBI to the ICDR and LODR Regulations
mark a significant step towards enhancing the ease of doing business
for companies seeking
to go public in India. These amendments, driven by the
recommendations of public, regulated entities along with the expertise of the
Expert Committee, aim to streamline regulatory
requirements, increase
flexibility, and reduce compliance costs, thereby fostering a more conducive
environment for capital markets.
One of the pivotal changes introduced is the inclusion of equity shares
obtained from the conversion of fully paid-up Compulsory Convertible Securities
(CCS) towards Minimum Promoters’ Contribution (MPC). This amendment aligns with
market practices and provides greater flexibility to promoters in structuring
their contributions. By allowing CCS held for over a year before the filing of the draft
offer document to count towards MPC, SEBI has recognised
the evolving nature of corporate finance structures and sought to incentivise
long-term capital commitment from promoters.
Moreover, the expansion of MPC contributors beyond traditional promoters
to include other members of the promoter group and significant non-individual
shareholders holding at least 5%
post-issue capital is a progressive move. It addresses practical challenges
faced by companies where equity ownership might be dispersed among various
entities within the promoter group
or held by substantial institutional investors. This change not only broadens
the pool of contributors
but also ensures that there is a continued stake in the company post-listing,
reassuring public investors. Moreover, the amendment also includes
rationalising thresholds for fresh issues and offers for sale size changes to
balance oversight with flexibility, enhancing transparency.
In conclusion, while these amendments represent a positive step towards
enhancing India’s regulatory framework for capital markets, their successful
implementation will depend on effective communication, robust enforcement, and
continued dialogue between regulators, industry stakeholders, and investors.
It's crucial for SEBI to maintain transparency in its regulatory processes and
ensure robust enforcement to uphold investor confidence. Moreover, continuous
monitoring and periodic review of these reforms will be essential to address
any emerging challenges and refine regulations further. By fostering
an environment that encourages
capital formation and innovation while prioritising investor protection, SEBI
can strengthen India’s position as a dynamic hub for global investments in the
long term."
Moving forward, it will be crucial for SEBI to monitor the impact of
these reforms closely, ensuring they achieve the intended objectives of
promoting investor confidence, facilitating capital formation, and sustaining
the competitiveness of India’s capital markets on the global stage.
*******
[2] Id.
[3] SEBI (ICDR) Regulations, 2018.
[4] Id.
[5] supra note 01.
[6] Yash J Ashar and Gokul Rajan, “Recommendations on Changes to SEBI ICDR Regulations for Ease of Doing
Business – Missing the Point”, Cyril Amarchand Mangaldas, 18.01.2024
[7] supra note 01.
[8] Id.
[9] supra note
03.
[10] Ravi Dubey Arjun Dabola,
“Summary of Key Amendments to the SEBI ICDR Regulations”, Infolex Newsalert, May
2024
[11] Id.
Article Information
AN ANALYSIS OF SEBI’S AMENDMENT ON ADVANCING MARKET ACCESSIBILITY: EMPOWERING ENTITIES THROUGH EXPANDED PROMOTER CONTRIBUTIONS AND CCS INCLUSION
Authors: GOURI MAHABALSHETTI
- Journal IJLRA
- ISSN 2582-6433
- Published 2024/06/27
- Issue 7
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International Journal for Legal Research and Analysis
- Abbreviation IJLRA
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