Why Should SEBI Take a View on Rights Issue – Examine Promoter Concept?

Highlights of the Topic:  Rights Issue

As per Companies Act 2013, the rights issue means further issue shares to the existing shareholders of the company in proportion to their holding.

The rights issue is governed under the Companies Act 2013 and SEBI (LODR) regulations 2014. The rights are offered to existing shareholders in proportionate ratio to their holdings up to the date.

The company specifies the final list of shareholders based on the actual active shareholders as on the cut-off date since the shareholders on the stock market keep changing gradually.

The company makes the right issue through an offer letter that is filed with the ROC as well as Designated Stock Exchange, where the company’s shares are listed and traded. Thus in the following articles, we are going to discuss in brief guidelines for the rights issue as per company law and SEBI, along with the latest orders passed by SEBI concerning the same.

SEBI’s Guidelines for Right Issue

Following are the guidelines for right issue applicable only on listed entities that are regulated by SEBI:

• These guidelines have to be adhered to only by the listed entities for the right issue.
• If the right issue offered is less than INR 50 Lakhs, the offer letter shall be prepared as per SEBI (LODR) guidelines and shall be filed with SEBI.
• The company has to undertake in-principal approval of all the stock exchanges on which it is willing to list its shares.
• The price for the right issue can be determined in consultation with the stock exchange before the fixation of the record date.
• The company has to execute Memorandum of Understanding with lead merchant bankers fixing their rights, obligations, liabilities, etc.
• Abridged letter of offer shall be dispatched three days before the opening of the right issue. Abridged offer letter means such an offer letter that satisfies the norms and provisions stated by SEBI in this regard.
• The company shall file the disclosure stating the shares issued under the rights issue are fully paid or will get forfeited within 12 months of allotment.
• In case the company has convertible debt instruments, it shall ensure that it has reserved equity shares of the same class in proportion to the holding before the right issue.
• The advertisement shall be given in one English daily newspaper with wide circulation, Hindi newspaper, and one vernacular newspaper giving the date of completion of dispatch of offer letter at least 3 days before the opening of an issue.
• The company cannot withdraw the right issue once the record date is announced.
• A company that withdraws the rights issue after the announcement of the record date cannot apply for a listing of securities for 12 months from the record date.
• The issue has to be remained open for fifteen to thirty days.
• The company shall finalize the allotment through the funds of the rights issue only within 15 days of closure of the issue.

Why go for Right Issue?

The company needs the fund to meet its daily requirement, working capital, and to finance its capital expansion. Sometimes the company needs to expand its capital base to comply with the regulatory obligation. Thus, there are several ways to finance, such as term loan, debenture issue, public issue, etc. which the company can resort to. Following are the main reasons companies opt for the rights issue:

• For corporate expansion through diversification, enhancement, collaboration, etc.
• To improve the overall liquidity of the company.
• For takeover of another entity
• To lower its debt-equity ratio
• To comply with the minimum capital requirement or net worth requirement.                                    

Recent Orders of Stock Market Regulator: SEBI

As per the sources, market regulator SEBI has announced this Thursday about the proposal relating to the rights issue for reducing the time taken to complete such the right issue in India. Currently, the entire process takes 50-60 days for completion of such an issue, which will be reduced to a maximum of 31 days, as per the recent proposal, which is being considered by SEBI. Regulators believe that such a reduced timeline for the rights issue will benefit the company as well as shareholders with overall enhanced efficiency.

Following changes has been proposed for under recent review of the right issue of SEBI:

• It has intended to eliminate the advertisement requirement and substituting the same with notifying the shareholders through the stock exchange, or email.
• To ease the process of the right issue, it has proposed the usage of banking or depositary infrastructure.
• Regulators to emphasize the recent proposal, supported with the latest example of the right issue of Vodafone and Airtel, was not a favored route due to the long-time process it takes to complete and listing of right issue.

Along with it, SEBI has examined, and review of the concept of “Promoters” and has made proposals to shift it to the “Controlling Shareholders”. With the pace of changes in Indian and Global Market along with gradual growth in the financial market, SEBI is examining the relevance of promoters in today’s regime.

The promoter, though not defined under the company’s act, has found its place in company law and is one of the essential business elements. Anyone can be promoters such as individual, company, firm, or association. A promoter is a person who is controlling the company and whose name is mentioned in the prospectus, however now SEBI has proposed to enhance the definition of promoters by shifting it to “Controlling Shareholder” as well.

SEBI has come up with the new rules for promoters from time to time, such as in 2018, it came with the new rule of re-classification of a promoter as a public investor stating that outgoing promoter shall relinquish its rights of the control over the company.