Sebi proposes allowing rights issue without merchant bankers, allotment to select investors

According to a consultation paper released on Tuesday titled 'Faster Rights Issue With Flexibility of Allotment to Selective Investors', Sebi is mulling doing away with the current requirement of filing a Draft Letter of Offer (DLoF) with the regulator for issuance of observation

As part of its attempts to expedite the overall timeline for a rights issue and making it more market friendly, the Securities and Exchange Board of India (Sebi) has proposed doing away with the requirement of filing a draft document for a rights issue and also allowing companies to do an issuance without appointing a merchant banker.

The capital market watchdog has further proposed flexibility in terms of allotment to a select set of investors in a rights issue.

According to a consultation paper released on Tuesday titled 'Faster Rights Issue With Flexibility of Allotment to Selective Investors', Sebi is mulling doing away with the current requirement of filing a Draft Letter of Offer (DLoF) with the regulator for issuance of observation.

The discussion paper stems from the fact that Sebi aims to make rights issue the preferred mode of fund raising. Sebi data shows that while a total of Rs 15,110 crore was raised through rights issue in FY24, it was significantly lower than Rs 68,972 crore raised through Qualified Institutional Placement (QIP) or even Rs 45,155 crore raised through preferential allotments.

Meanwhile, Sebi has further proposed rationalising the content of Letter of Offer (LoF) by reducing the current disclosures to contain some of the relevant information regarding the rights issue such as object of the issue, price, record date, and entitlement ratio among other things.

Also Read: Coming soon, a 'combo product' of rights and preferential issue, hints Sebi chair

In terms of the role of intermediaries -- merchant bankers and registrars -- the regulator has proposed allowing companies to proceed with a rights issue without appointing such intermediaries.

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

"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.

Further, it proposed that the role of a registrar can be handled 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," stated the Sebi paper.

More importantly, the regulator has proposed reducing the overall timeline for a rights issue to T+20, which means that the rights issue can be closed within 20 days of the board meet approving the rights issue.

This assumes significance as data from the last three years shows that, on an average, a non fast-track rights issue could take nearly 300 days while a fast-track rights issue could take around 100 days.

"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," stated the Sebi paper.

The regulator has also proposed allowing allotment to selective investors in a rights issue by allowing the promoter or promoter group to renounce their rights entitlement in favour of a select set of investors.

Also Read: Composite issue... there was one recently in the SME segment

Such selective allotment, however, would require an upfront disclosure with all the details related to such renunciation. Further, such select set of investors will not be allowed to withdraw their applications once submitted.

Further, any unsubscribed portion of a rights issue can also be allotted to select investors provided upfront disclosures are made.

Among other things, the regulator has proposed bringing all rights issue offering within the ambit of Sebi (Issue of Capital and Disclosure Requirements) Regulations. Currently, ICDR Regulations are not applicable on any rights issue of less than Rs 50 crore.

Sebi's rationale is that since many flexibilities and relaxations are being proposed, all rights issues should be in compliance with ICDR Regulations.