Blog

This consultation paper seeks comments/views/suggestions from the public on the following proposals relating to amendments to the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations). Last date for submitting comments is March 8, 2023:

a) Underwriting for public issue (IPO and FPO)

b) Precondition for announcing Bonus Issue by a listed entity and issuance of Bonus Issues in dematerialized form.

c) Inclusion of “Pension funds sponsored by entities which are associate of the lead manager”, to participate in Anchor Investor category in a public issue.

d) Inclusion of following requirements in respect to disclosures made in the offer document:

1. Providing access to list of material contracts and material documents for inspection through online means apart from inspection at the registered office.
2. Providing complete industry report in the list of material documents for inspection.
3. Hosting draft offer document and offer document(s) on website of Issuer Company.

1. Underwriting in Public Issue:

• Background: Regulation 40 (‘For IPO) and Regulation 136 (‘for FPO’) of SEBI ICDR provide for underwriting. Underwriting under Fixed Price public issue mostly prevalent in period prior to 1999 was considered as ‘Hard Underwriting’. Under this form of ‘Underwriting’ in case of under-subscription in public issue underwriting was invoked to the extent of the shortfall. They would subscribe to the issue and would get commission for that. This form of underwriting was based on fixed price. But in case of book built issue challenges were faced wherein pricing was determined on closure of the issue and based on demand received at various price points within the price band. In the process through the book building route, the pricing is finalized based on demand received. So in case of book built issue underwriters will underwrite the issue after pricing but prior to filing the Prospectus. This underwriting is invoked in case of shortfall in funds against demand received through valid bids, either on account of technical rejections or any other reason. So this underwriting is not for shortfall in subscription but in case of shortfall in payment due to technical reason.

• Issue: Presently, ICDR regulations specifically does not differentiate between underwriting for technical rejections and underwriting for shortfall in demand. It has been observed that in certain IPOs due to non-receipt of lack of subscription the date of public issue was revised and finally the issue was cancelled as it still failed to garner enough subscription. Further underwriter subscribing to IPO or FPO is a positive sign that an entity is making a firm commitment or insuring the issue. It also positive sentiment about the company and would help the company win support of retail investors. Even though in case of book-built issue, opening of portion of anchor investors for subscription before retail investors was meant for that purpose only but it is felt that with underwriting this would further give impetus to public issue. With this in mind SEBI is now proposing that ‘underwriting’ option shall be expressly mentioned under provisions of LODR. Also current underwriting provision mandates BRLMs / syndicate members and does not give option to procure subscription.

• Proposal: So, it is proposed to elaborate the provision of SEBI ICDR to expressly highlight that provision of underwriting, provisions relating to disclosure of company having done underwriting and giving an option to underwriters to procure subscription.

2. Precondition for announcing Bonus Issue by a listed entity and issuance of Bonus Issues in dematerialized form:

• Background: Provision relating to issue of Bonus shares are governed by Companies Act and SEBI ICDR. There are certain pre-conditions/restrictions relating to issue of bonus shares under ICDR and Companies Act, 2013.

• Issue: SEBI has observed that in some cases issuer companies have announced bonus issue while it has not received in–principle approval for listing and trading approval from stock exchange(s) for its previous issuances and such previous issuances has certain non-compliances such as issuing shares without taking in-principle approval from stock exchanges or failure to follow pricing guidelines / non-compliance with regulatory provisions etc. In such scenarios, issuer may have issued shares but would fail to get in-principle approval for listing and trading approval for such issued shares. This also creates confusion with stock exchange while granting in-principle approval as there is a mismatch between the listed capital and issued capital of the issuer.  So, it is felt that listed entity will not be able to announce bonus issue unless the mismatch between listed and issued capital is resolved.

• Issue of Bonus shares in demat form:
  • Background: Bonus shares to shareholders holding physical securities are allotted in physical mode.
  • Issue: If these physical securities are not claimed by security holders, then Issuer companies are required to open a separate demat account for dealing with unclaimed securities.
  • Proposal: Issuer may urge investors (not having demat account) to open a demat account for enabling transfer of such bonus shares in their demat account. Hence it is proposed that bonus shares shall be issued in demat form only.

3. Inclusion of “Pension funds sponsored by entities which are associate of the lead manager”, to participate in Anchor Investor category:

• Background: Currently under SEBI ICDR, Lead Manager(s) and its associates are restricted from applying under Anchor Investor Category. Exception has been provided to mutual funds, AIFs and Insurance companies sponsored or promoted by entities that are associate of lead managers or foreign portfolio investor other than individuals, corporate bodies and family offices, sponsored by entities which are associate of the lead manager. However, Pension funds sponsored by entities which are associate of the lead manager, do not fall under the exception available under clause 10(k) of Schedule XIII of ICDR Regulations.

• Issue: SEBI has stated that similar exception is available for pension funds which are associates of lead managers and registered with PFRDA for becoming anchor investors in REIT public issue.

• Proposal: Hence it is proposed to allow pension funds promoted by entities which are associate of the lead manager for participation as an Anchor Investor in a public issue by amending clause 10 (k) of Schedule XIII. Further it is also proposed to amend definition of Qualified Institutional Buyer (QIB) under ICDR to allow pension funds registered with PFRDA as QIB.

4. Inclusion of requirements w.r.t. disclosure made in the offer document:

Disclaimer: This article provides general information existing at the time of preparation and we take no responsibility to update it with the subsequent changes in the law. The article is intended as a news update and Affluence Advisory neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this article. It is recommended that professional advice be taken based on specific facts and circumstances. This article does not substitute the need to refer to the original pronouncement.