Sebi proposes permitting rights issues without merchant bankers and allotment shares to specific investors | Stock Market News

In an effort to streamline the timeline for rights issues and make the process more market-friendly, the Securities and Exchange Board of India (Sebi) has suggested eliminating the need to file a draft document for a rights issue.

Additionally, Sebi is considering allowing companies to carry out the issuance without the involvement of a merchant banker. The capital market regulator has also proposed offering more flexibility in the allotment process to a select group of investors in a rights issue.

In a consultation paper released on Tuesday titled ‘Faster Rights Issue With Flexibility of Allotment to Selective Investors,’ SEBI is considering eliminating the current requirement of filing a Draft Letter of Offer (DLoF) with the regulator for obtaining observations.

This discussion paper is driven by SEBI’s goal to make rights issues the preferred method of fundraising. SEBI’s data indicates that while ₹15,110 crore was raised through rights issues in FY24, this amount was significantly lower than the ₹68,972 crore raised through Qualified Institutional Placements (QIP) and the ₹45,155 crore raised through preferential allotments.

Additionally, SEBI has proposed streamlining the content of the Letter of Offer (LoF) by reducing current disclosures to include only essential information about the rights issue, such as the purpose of the issue, pricing, record date, and entitlement ratio, among other key details.

“It is proposed to dispense with the requirement of appointing a Merchant Banker by an issuer for Rights Issue,” the discussion paper said.

“Further, it is proposed to assign the activities which are presently carried out by the Merchant Banker to the Issuer, Registrar to issue and Stock Exchanges/Designated Stock Exchange (DSE),” it added.

Additionally, it suggested that the responsibilities of a registrar could be managed by the stock exchanges and depositories.

“Since, RTAs perform certain activities based on the information sought from the Stock Exchanges and Depositories such as validating the applications, finalizing the basis of allotment and refund intimation to investors, etc., these activities can be performed by Stock Exchanges and Depositories themselves,” the Sebi paper said.

The regulator has also suggested shortening the overall timeline for a rights issue to T+20, meaning that the rights issue could be completed within 20 days after the board approves it.

This is particularly important given that data from the past three years indicates that, on average, a non-fast-track rights issue takes about 300 days, whereas a fast-track rights issue takes approximately 100 days.

What’s behind the decision?

“The reason for longer period to complete the Rights Issue is that Regulations do not prescribe any specific time for various activities such as carrying out the due-diligence process, filing of DLoF after board approval, receipt of in-principle approval from the Stock Exchanges, filing of LoF etc,” the Sebi paper added.

The regulator has also suggested permitting the allocation of shares in a rights issue to specific investors by enabling the promoter or promoter group to transfer their rights entitlement to a chosen group of investors.

Such selective allotment would necessitate full upfront disclosure of all relevant details regarding the renunciation. Additionally, investors in this selective group will not be permitted to withdraw their applications once submitted.

Furthermore, any unsubscribed portion of a rights issue can be allocated to selected investors, provided that full upfront disclosures are made.

The regulator has also suggested extending the Sebi (Issue of Capital and Disclosure Requirements) Regulations to encompass all rights issue offerings. Currently, the ICDR Regulations do not apply to rights issues under ₹50 crore.

Sebi’s reasoning is that, given the proposed flexibilities and relaxations, it is essential for all rights issues to adhere to the ICDR Regulations.