Sebi seeks to reset clock on rights issue

The Securities and Exchange Board of India (Sebi) has proposed sweeping changes to the rights issue framework to enhance its attractiveness, aiming to make it the preferred route for additional fundraising by listed companies.

Among the changes proposed by the market regulator are reducing the timeline to first 20 days and then to just three days, allowing shareholders to renounce their rights entitlement to investors of their choice, and eliminating the requirement to appoint an investment banker or file a draft letter of offer.

In addition to rights issues, listed companies can raise funds through preferential allotments and qualified institutional placements (QIPs).

The data analysed by Sebi show that rights issues are currently the least preferred option among the three.

A rights issue involves the issuance of new shares to existing shareholders in proportion to their shareholding in the company.

Through the preferential issue route, typically, promoters inject capital into the company, while QIPs target a select group of investors.

Despite existing shareholders having the first right to participate in fundraising activity of the issuer, listed entities have preferred to raise funds through preferential issues by offering shares to a select few investors, including promoters, Sebi said in its consultation paper released on Tuesday, inviting public feedback until September 10.

Market experts suggest that the QIP and preferential allotment routes are more popular due to their relatively lower compliance burdens.

To level the playing field, Sebi has proposed several measures, including easing disclosure requirements to focus on relevant information, such as the purpose of the issue, pricing, and record date, in a simplified letter of offer.

Moreover, Sebi aims to address regulatory gaps regarding the allotment of unsubscribed shares to non-rights entitlement holders.

Current norms restrict promoters from renouncing their rights if a minimum subscription is not achieved.

Relaxing the restrictions on the renouncement of rights entitlements by promoters/promoter groups will provide greater flexibility, allowing issuers and promoters to bring in selective investors as shareholders of the company, Sebi observed.

The watchdog has also proposed allowing the allotment of unsubscribed portions to selective investors.

According to Sebi, this measure would safeguard against the failure of the issue, reduce the need for underwriting, and help issuers better price the rights issue.

Sebi has, however, mandated upfront disclosures by promoters regarding any such renouncements and established timelines for applications from selective investors.

According to Sebi data, there were 67 rights issues in 2023-24, raising Rs 15,110 crore, compared to Rs 45,155 crore raised through 689 preferential allotments.

QIPs remained the preferred fundraising method, generating Rs 69,972 crore through 61 issues.

Currently, for non-fast-track rights issues, it takes 317 days on average from the date of board approval until the date of trading, whereas for fast-track rights issues, it takes 126 days on average.

The average time for completing a non-fast track rights issue over the past three years has been 317 days.

Sebi noted that one reason for the preference of preferential issues is the shorter timeline.

It pointed out, however, that  while the preferential issue process involves shorter timelines, prioritising selective investors over existing public shareholders deprives them of participation in quick fundraising and results in dilution of their shareholding.

Experts suggest that Sebi may consider phasing out the preferential allotment route due to its opacity.

Sebi is not in favour of preferential pricing as promoters wield larger sway.

It wants all public shareholders to participate in the fundraising instead.

With modern technology, timelines can be compressed, allowing for a much faster process,  an industry executive said.

Sebi has also proposed certain checks and balances to prevent the misuse of the new framework.

These include not allowing companies whose shares are suspended from trading from making rights issues and requiring the appointment of a monitoring agency for all rights issues to ensure the funds raised are used for their intended purpose.