India: Get It "Right" Says SEBI: Further Relaxes Rights Issue Norms

1. INTRODUCTION

In our earlier news alert¹, we had discussed the dispensations granted by the Securities and Exchange Board of India ("SEBI") from certain crucial regulatory compliances applicable to public offerings and rights issues in India, in an effort to hot-wire fund raising activity during the COVID-19 pandemic. With lockdown 3.0 being implemented, the capital markets regulator continues to address compliance issues and ease practical challenges. Through a circular dated May 06, 2020 (the "Circular")², the SEBI has granted temporary relaxations from certain procedural requirements related to rights issues and public issues under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, as amended (the "SEBI ICDR Regulations").

We analyse below the key allowances granted by SEBI through the Circular.

2. KEY DISPENSATIONS GRANTED TO RIGHTS ISSUES

The Circular grants certain relaxations in the procedures that apply to rights offerings opening on or prior to July 31, 2020 (the "Eligible Rights Issues").

2.1 Dematerialization of Rights Entitlements

As a part of its efforts towards reducing the timelines for rights issues, SEBI issued a circular on January 22, 2020, streamlining the process of offering process, which introduced a framework for trading of dematerialized rights entitlements ("REs").³ In order to receive REs, physical shareholders are required to provide their demat account details to the issuer/registrar before 2 working days of issue closure.

To address concerns of physical shareholders (of issuers undertaking Eligible Rights Issues) who may not able to open demat account or communicate details of such accounts within the requisite timeline, the Circular allows such shareholders to apply in the rights issue process subject to: (a) formulation of additional mechanisms by the issuer, the lead managers to the issue ("LMs") and other intermediaries by which physical shareholders can apply in the issue, and communication of such mechanism to the physical shareholders before the issue opening; (b) such physical shareholders being ineligible to renounce their REs; and (c) allotment and receipt of the shares in the Eligible Rights Issue to be made only in demat form.

While this dispensation addresses the issue of opening and communicating details of demat accounts during the issue period, such shareholders will still be required to open demat accounts before allotment to comply with item (c) above. This may have practical implications in case such shareholders are unable to open demat accounts or communicate details of such accounts prior to even allotment in an Eligible Rights Issue.

2.2 Mechanism in addition to Application Supported by Blocked Amount facility ("ASBA")

Applications in rights issue are allowed only through the ASBA facility (whereby bidders provide instructions to specified ASBA banks to block amounts equivalent to the bid amount in their ASBA accounts).⁴ The Circular relaxes this condition for Eligible Rights Issues by allowing the issuer, along with the LMs, registrar and other intermediaries, to formulate an additional non-cash mechanism to accept applications from shareholders. However, no third party payments will be allowed in respect of any application under such additional mechanism. In this respect, while SEBI has provided this relaxation to applications made by shareholders of the issuer, it is not specifically clarified whether such dispensation will also be extended to applications made by persons/ entities to whom shareholders renounce their rights entitlements.

In relation to additional mechanisms mentioned in Para 2.1 and Para 2.2 above, as a word of caution, SEBI has clarified that issuers and LMs to Eligible Rights Issues must ensure that: (a) the additional mechanisms are optional and not a replacement for the existing framework; (b) the additional mechanisms are transparent, have adequate checks and balances and impose no additional costs on the shareholders; (c) FAQs, online dedicated helpdesks and helplines are created to increase the familiarity of the shareholders with the application process; and (d) the issuer along with the LMs, the registrar and other intermediaries remain responsible for all investor complaints.

2.3 Availability of abridged letter of offer and other issue materials

An issuer is required to dispatch the abridged letter of offer along with the application form and other rights issue related material ("Issue Related Material") to its existing shareholders through registered post or speed post or by courier service or by electronic transmission at least 3 days before the opening of rights issue.⁵ The Circular clarifies that for Eligible Rights Issues, Issue Related Material can be dispatched by electronic means alone - failure to dispatch Issue Related Material through registered post or speed post or courier services will not be deemed to be a non-compliance.

However, the issuer, registrar, stock exchanges and LMs are required to publish the Issue Related Material on their respective websites. In addition, the Circular also requires the issuer, along with the LMs to explore other means of communication such as ordinary post, SMS and advertisements (through audio-visual, television or digital modes) to approach shareholders in connection with an Eligible Rights Issue.

2.4 Publication of issue-related advertisements

The SEBI ICDR Regulations requires an issuer to publish certain categories of issue related information, including the date of completion of dispatch of Issue Related Material in certain stipulated newspapers, with wide circulation, at least 2 days before the opening of the rights issue.⁶ The Circular allows the issuer to publish such advertisement in additional newspapers (over and above the stipulated newspapers) and requires issuers to also disseminate information relating to application process through television, radio, internet, etc., including through crawlers and tickers.

Further, the Circular also requires such advertisements: (a) to contain additional details regarding application procedure for shareholders to whom Issue Related Material have not been served electronically; and (b) to be published on the website of the issuer, registrar, stock exchanges and LMs.

3. DIGITAL AUTHENTICATION AND INSPECTION

The Circular allows authentication/certification of offer documents (for both public offerings and rights issues) filed until July 31, 2020 through digital signatures. It should be noted herein that the term 'offer documents' is defined⁷ to mean a red herring prospectus, prospectus or shelf prospectus, as applicable in case of a public issue, and a letter of offer in case of a rights issue. Accordingly, the Circular does not appear to extend this benefit to authentication of draft offer documents filed, or any due diligence certifications submitted to SEBI by the LMs for filing of draft offer documents in the relevant period.

In addition, issuers and LMs to public issues or rights issues must also provide procedures for inspection of material contracts and documents in relation to the such issues by electronic modes.

4. INDUSLAW VIEW

The temporary relaxations granted by SEBI are a welcome measure and will significantly aid issuers to raise capital through rights issues in the near term. With the introduction of additional mechanisms for applications in rights issue and dematerialization for REs, SEBI has sought to target maximum participation by eligible shareholders in the right offerings, with the overarching aim of assisting companies raise capital in these extremely challenging markets.

Footnotes

1. Available at https://induslaw.com/app/webroot/publications/pdf/alerts-2020/InfoAlert-Tipping-The-Hourglass-SEBI-stalls-rapidly-running-out-sands-for-fund-raising-companies-April-25-2020.pdf.

2. SEBI Circular no. SEBI/HO/CFD/DIL2/CIR/P/2020/78 dated May 06, 2020 available at https://www.sebi.gov.in/legal/circulars/may-2020/relaxations-relating-to-procedural-matters-issues-and-listing_46652.html.

3. SEBI Circular no. SEBI/HO/CFD/DIL2/CIR/P/2020/13 dated January 22, 2020 available at https://www.sebi.gov.in/legal/circulars/jan-2020/streamlining-the-process-of-rights-issue_45753.html.

4. Regulation 76 of SEBI ICDR Regulations.

5. Regulation 77(2) of SEBI ICDR Regulations.

6. Regulation 84(2) of SEBI ICDR Regulations.

7. Regulation 2(1)(kk) of SEBI ICDR Regulations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.