Key aspects of SEBI’s circular re relaxations relating to procedural matters in issues and listings
Introduction
In
light of the recent developments relating to the COVID-19 pandemic (and its ongoing
consequent impact on the Indian and global economy), the Securities and
Exchange Board of India (“SEBI”), had recently, vide its two circulars,
each dated April 21, 2020 (“April Circulars”), granted (a) temporary relaxations from compliance with certain
provisions of the Securities and Exchange Board of India (Issue of Capital and
Disclosure Requirements) Regulations, 2018, as amended (“SEBI ICDR
Regulations”), and (b) one-time relaxation with respect to validity of SEBI
observations, in respect of rights issues, with an intent to improve fund
raising access to listed corporate entities as well as revive investor
confidence in the securities market. With the aforesaid intention in mind, SEBI
has issued another circular dated May 6, 2020 (Circular No.
SEBI/HO/CFD/CIR/CFD/DIL/67/2020) (“Circular”), for granting relaxation
relation to (a) certain procedural matters in relation to rights issues, and (b)
authentication of offer documents and inspection of documents electronically
for all capital markets issues.
The
Circular shall be applicable for all rights issues (including fast track rights
issues) opening before July 31, 2020, and for all offer documents filed until
July 31, 2020.
Key
aspects of the Circular
A.
Relaxation
in respect of rights issues
i.
Availability
of letter of offer and other issue materials
Regulation
77(2) of the SEBI ICDR Regulations prescribes that the abridged letter of offer
(along with application form), can be despatched either through registered post,
speed post, courier service or by electronic transmission to all existing
shareholders of the issuer company, prior to the opening of the issue.
However,
keeping in mind the various practical challenges that may arise in the COVID-19
era, particularly in relation to engaging courier or postal services, SEBI has
now specifically clarified that failure to dispatch the aforesaid offering
material through registered post or speed post or courier services, due to
prevailing COVID-19 related conditions, will not be treated as non-compliance, for
rights issues opening up to July 31, 2020. To supplement the aforesaid
relaxation, the following additional steps are required to be undertaken:
- issuers are required to publish the letter of offer, abridged letter of offer and application forms on its website as well as on the websites of the lead manager(s) to the issue, registrar to the issue and stock exchanges; and
- issuers as well as the lead manager(s) to the issue are required to undertake adequate steps to reach out to the shareholders through other means, including through SMS, ordinary post, audio-visual advertisements on television, as well as digital advertisements.
These
measures help issuers negate the difficulties they may face in respect of
physical distribution of offering material. The availability of offering
material on the internet would ensure that potential investors get access to the
same through virtual means. Having said that, digital modes of communication
may not be preferred by a select set of investors, who are either not
accustomed to such platforms, or may face challenges in receiving uninterrupted
internet network connectivity.
Thus,
the aforesaid clarification showcases SEBI’s positive intent towards making the
Indian capital markets regime a technologically driven and an environment
friendly one, and we may hope for increased usage of electronic transmission
systems for dispatch of the aforesaid offering materials, not only during the
next couple of months, but also in the coming years in the post COVID-19 era.
Further, in light of the Circular and other representations received re provision of clarification on mode of issue of notice (referred to in Sections 62(1)(a)(i) of the Companies Act, 2013 (“Companies Act”) for rights issues by listed companies, in view of difficulties faced by such companies in sending notices through postal/courier services on account of the threat posed by the COVID-19 situation, the Ministry of Corporate Affairs, Government of India, issued a clarificatory circular dated May 11, 2020 (General Circular No. 21/2020) (the “MCA Circular”). The MCA Circular clarified that the inability to dispatch the notice (referred to hereinabove) by listed companies (which comply with the Circular) to their shareholders through registered post, speed post or courier would not be viewed as a violation of Section 62(2) of the Companies Act. The MCA Circular shall be applicable in case of rights issues opening up to July 31, 2020.
Further, in light of the Circular and other representations received re provision of clarification on mode of issue of notice (referred to in Sections 62(1)(a)(i) of the Companies Act, 2013 (“Companies Act”) for rights issues by listed companies, in view of difficulties faced by such companies in sending notices through postal/courier services on account of the threat posed by the COVID-19 situation, the Ministry of Corporate Affairs, Government of India, issued a clarificatory circular dated May 11, 2020 (General Circular No. 21/2020) (the “MCA Circular”). The MCA Circular clarified that the inability to dispatch the notice (referred to hereinabove) by listed companies (which comply with the Circular) to their shareholders through registered post, speed post or courier would not be viewed as a violation of Section 62(2) of the Companies Act. The MCA Circular shall be applicable in case of rights issues opening up to July 31, 2020.
ii.
Issue-related
advertisements
Prior
to the opening of the rights issue, the issuer is required to publish
advertisement(s) in certain specific newspapers (“Statutory Newspapers”),
containing the disclosures mandated under Regulation 84(1) of the SEBI ICDR
Regulations (“Statutory Advertisement(s)”). However, given the difficulties
in publishing physical advertisements (i.e. in newspapers, hoardings, banners,
etc.) and the potential inefficacies with respect to their outreach in the
COVID-19 era, SEBI has provided a few additional mechanisms for publication of
Statutory Advertisements and other issue-related advertisements:
(a) issuers
have the flexibility to publish the Statutory Advertisement confirming dispatch
of abridged letter of offer and application form in newspapers other than the
Statutory Newspapers;
(b) all
such advertisements must also be made available on the websites of the issuer, lead
manager(s) to the issue, registrar to the issue, and the stock exchanges; and
(c) issuers
are also required to make use of advertisements through other electronic media
such as television channels, radio and the internet for disseminating
information relating to the application process. Further, for the first time,
SEBI has permitted such advertisements to be made in the form of crawlers or
tickers as well.
The
Circular also requires issuers to disclose additional details in Statutory
Advertisement(s), specifically in relation to the application process for
shareholders who have not been served notice via electronic modes.
iii.
Application
by physical shareholders
In
2008, SEBI, while acknowledging the market practice of trading of rights
entitlements in physical form, envisaged the establishment of a uniform and
exchange driven mode of trading of rights entitlements, and released a paper for receiving
public comments on
the proposed electronic rights issue process and e-trading of rights
entitlements. While the proposal for establishing an e-trading platform for
rights entitlements did not see the light of the day, SEBI had issued a circular for streamlining certain
aspects of the rights issue process
on January 22, 2020 (“January Circular”), with the intention of, among
other things, reducing issue timelines and permitting trading of rights
entitlements in dematerialized form. Pursuant to the January Circular, rights
entitlements would have to be mandatorily credited to the demat account of
eligible shareholders in dematerialized form, and physical shareholders were
required to provide their demat account details to issuer or the registrar to
the issue for credit of rights entitlements (within a period of two working
days prior to the issue closing date). However, given certain impossibilities
during the COVID-19 era, investors (especially those holding securities in
physical form) may face several hurdles while undertaking the process of
opening a demat account or communicating their demat account details to the
issuer or registrar, prior to the issue closing date. While the January
Circular was introduced with an intention of establishing an efficient process
of credit of rights entitlements to respective demat accounts (which in turn
would facilitate the existence of a robust rights entitlements trading platform),
the onset of the COVID-19 pandemic has forced SEBI to offer certain relaxations
to shareholders.
Keeping
in mind the aforesaid challenges, SEBI has, vide the Circular, allowed
physical shareholders to submit their applications re the rights issue, irrespective
of whether they are able to open demat accounts or communicate details of the
demat accounts in accordance with the requirements prescribed in the January
Circular. However, the submission of applications by such physical shareholders
would be allowed, subject to (a) the institution of a mechanism by the issuer, lead
manager(s) to the issue and other intermediaries for allowing such shareholders
to apply in the rights issue, and (b) adequate steps being taken by the issuer
and lead manager(s) to the issue for communicating the mechanism described in
(a) hereinabove to the aforesaid shareholders prior to opening of the issue.
Further, such physical shareholders availing of the aforesaid relaxation shall
not be eligible to renounce their rights entitlements, and shall receive shares
in dematerialized form only.
In
light of the aforesaid, we believe that issuers and intermediaries may need to consider
utilizing the issuer’s suspense accounts (including the one opened in
accordance with Regulation 39 of the Securities and Exchange Board of India
(Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended
(“SEBI Listing Regulations”)) where such rights entitlements and shares
(to be credited to the physical shareholders who have applied for allotment of
equity shares), will be kept in abeyance in electronic mode by issuers, until
the aforesaid shareholders provide details of their demat account particulars
to the issuer or registrar, in accordance with the procedure as prescribed
under Regulation 39 of the SEBI Listing Regulations.
iv.
Non-cash
based application process
Pursuant
to the January Circular, all eligible shareholders are mandatorily required to use
the application supported by blocked amount (“ASBA”) mechanism while
applying for shares in a rights issue. However, the onset of the COVID-19
pandemic may have created certain practical roadblocks with respect to the transition
to an ASBA only mechanism.
Shareholders
who have not transitioned to using an ASBA account may face hurdles while trying
to do so in the COVID-19 era, especially in light of the existence of a nation-wide
lockdown. Further, an SCSB, a critical intermediary at the forefront of the
ASBA process, may find it difficult to function optimally with reduced staff strength,
given the remote working landscape that is now prevalent across industries.
In
light of the practical difficulties and systemic challenges faced by both
investors as well as intermediaries, SEBI has permitted issuers (along
with the lead manager(s), the registrar, and other intermediaries) to institute
optional mechanisms (non-cash mode only) to accept the application money from
the shareholders. In view of the aforesaid, issuers and other intermediaries
may look to establish mechanisms whereby application monies can be paid by way
of online transfers into designated accounts. However, the Circular clarifies
that no third party payments shall be allowed in respect of any application.
In
order to ensure that relaxations provided hereinabove are utilised by the
issuer and intermediaries towards achieving investor protection, SEBI has, vide
the Circular, imposed a duty on the issuer and the lead manager(s) to the issue
to ensure, in respect of the mechanisms referred in points (iii) and (iv) above,
that:
(a) the
mechanisms shall serve as an additional option, and would not be a replacement
of the existing process, and efforts are made to adhere to the existing
prescribed framework;
(b) the
mechanisms function in a transparent and robust manner (with adequate checks
and balances), and the transparency, fairness and integrity of such mechanisms
are to the satisfaction of the lead managers and registrar to the issue, without
imposing additional costs on investors;
(c) FAQs,
a dedicated online investor helpdesk and helpline are created to guide
investors through the application process, and to resolve difficulties faced on
a priority basis; and
(d) the
issuer, lead manager(s), registrar and other intermediaries are responsible for
all investor complaints.
B.
Relaxations
in respect of all offer documents
i.
Relaxations
in relation to digital signatures and electronic inspection of material
documents
In
respect of all offer documents filed until July 31, 2020, SEBI has now
permitted:
(a)
usage
of digital signature certifications for authenticating and certifying offer
documents; and
(b)
the
issuer and lead manager(s) to establish a procedure for electronic inspection
of material documents.
While
the former is an option that may be used by the issuer, the latter appears to
be a mandatory requirement. In light of the aforesaid, issuers may now be
required to look for cost-effective ways of providing access to these
documents, which may be through secured mechanisms, such as password-protected dedicated portal on the issuer’s website (wherein
entry may be permitted via communications sent by way of SMS, emails,
etc.).
Moreover, on a plain reading of the
Circular, it appears that this part of the Circular shall be applicable for ‘all
offer documents filed until July 31, 2020’ (and not just limited to
rights issues alone), which may mean that inspection of material documents shall
only be done electronically in case of all issues wherein the respective offer
document (i.e. red herring prospectus, prospectus, shelf prospectus and letter
of offer, as the case may be) is filed until July 31, 2020.
Conclusion
In
these turbulent times of the COVID-19 pandemic, SEBI is trying to leave no
stone unturned to revive Indian capital markets. With the issuance of the April
Circulars and the Circular, it is quite evident that SEBI is looking to improve
access to real-time fund raising options, with a specific focus on making the
rights issue process technology friendly. While SEBI has tried to restore
issuers’ and investors’ confidence in Indian capital markets with a slew of
relaxations, it has kept in mind investor protection ideals and traditions
while offering the same.
However,
it must be borne in mind that issuers, lead manager(s), registrars and other
market intermediaries may face increased costs in the process of setting up the
mechanisms discussed hereinabove. Moreover, it must not be forgotten that advertisements
and other publicity materials issued pursuant to these relaxations would still
have to pass the rigours of publicity restrictions prescribed under the SEBI
ICDR Regulations. Regardless of the aforesaid, the efficacy of these
relaxations can be completely examined only after the completion of few rights
issues and interaction with market intermediaries.
Please
refer to the SEBI circular dated May 6, 2020 (circular no.
SEBI/HO/CFD/DIL2/CIR/P/2020/78) for more details.