SEBI changes will be useful for both the firms, investors

Primary Market Reforms: SEBI has introduced more flexibility as well as more supervision for companies. It now allows a larger percentage of capital to be raised for unspecified purposes. This is particularly useful for new-age companies that need to innovate by acquiring companies inorganically. This gives such public companies a battle chest to enhance and improve their technology offerings. More specifically, companies can raise 35% of the capital for both general corporate purposes and future acquisitions, of which 25% can be used for inorganic growth. This is in line with the requirement that funds raised for general corporate purpose are monitored by an external monitoring agency until the last Rs. Interestingly, the war chest is not subject to surveillance for future acquisitions, which may have been a conscious omission to allow the company flexibility in the timing of its spending. It is also interesting that now instead of banks, credit rating agencies will provide the role of monitoring the utilization of funds after the initial public offering (IPO).

Lock-in of Shares: Some changes have been made for the lock-in of shares after the IPO. For anchor investors, who offer both institutional support to IPOs as well as the possibility to flip them for quick gains on listing, SEBI has extended the lock-in period for a portion of the capital to 90 days. Possibly balancing the need for an anchor investor’s right to exit with their duties (without the risk of not being flipped for a quick buck), this is a useful amendment when hot IPOs abound. On the other hand, the lock-in of promoters and non-promoters after the IPO has been comprehensively eased, reducing the duration in both the cases.

Non-institutional investors in IPOs: A new category or sub-quota has been introduced within high-net-worth individuals (HNIs). Thus, IPO applicants who do not come under retail or institutional will have two separate silos. one in the middle 2-10 lakhs, and another for above 10 lakhs. This author has never been a fan of quotas and silos in IPOs, and the new changes complicate things more without any significant gains, except for a few millionaires.

Evaluation in Preferential Allotment: Some changes have been introduced with respect to valuation in the preferential allotment, which appear to be drawn directly from the SEBI’s learnings in the PNB Housing Finance case. The over-reliance on valuation certificates, committee approval of independent directors, and the mandate to comply with the Articles of Association seem to have been taken directly from the PNB Housing storybook.

Special Circumstances: The introduction of special circumstances alternative funds is a welcome move and will introduce a new class of investors to buy distressed companies. This would allow a more efficient market for dead or near-dead companies, ensuring a faster resolution for them. Certain exemptions have been provided to this category, which make it useful for both investors and those in charge of selling such companies. Given the large corpus now managed by alternative investment funds, it will be useful to the economy as it deals with zombie companies more quickly and more efficiently. This would be a public good for investors, creditors and the economy as a whole.

Closing of Mutual Fund Schemes: A significant and overdue change has been made with respect to a clear exit path for mutual fund schemes, which require a clear exit strategy. This is a welcome move to ensure orderly but premature closure of the Mutual Fund scheme with the approval of both the Trustees and the Unitholders. Much of the current litigation and misery caused by unitholders rests at the door of vague rules that were framed at a time where this idea was impossible. The law needs to provide a clear path for winding up and with the SEBI ruling the way forward is now clear.

Shareholder is not important: Managing directors and executive directors, who have lost one shareholder vote, will now find it more difficult to walk into the C-suite with only board approval. Such directors will need prior shareholder approval to come back. Similar provisions would also apply to independent directors who have previously lost shareholder votes.

Lastly, there are some significant changes with regard to the new net-worth requirements for some intermediaries and with regard to settlement rules that provide an agreed mechanism to settle enforcement proceedings without admitting or denying the offense. Both have insufficient information to judge the specifics, but it is likely that both will have a major impact on business for intermediaries and for the ease or difficulty of settling matters.

Overall, the reforms are widely welcomed and will help all stakeholders move forward with adequate checks and balances.

Sandeep Parekh is the Managing Partner of Finsec Law Advisors.