- INTRODUCTION
The impact of COVID-19 on commerce, businesses and markets has been unprecedented. Rapid nose-dives in domestic capital markets coupled with lockdown restrictions have proven to be the "hot gates" for fund raising. IPO-bound issuers and listed companies tapping capital markets have therefore, been forced into limbo.
The Securities Exchange Board of India ("SEBI") has been proactive in relaxing compliance obligations of listed companies scourged by COVID-19.1 On April 21, 2020, in a very welcome first, SEBI looked to the primary markets as well. Through two circulars issued on April 21, 2020 (the "Circulars"),2 SEBI has offered temporary amnesty from certain crucial regulations governing public offerings (initial and follow-on) and rights offerings in India.
- KEY DISPENSATIONS GRANTED
The key dispensations granted by SEBI through the Circulars for initial public offerings ("IPOs"), further public offerings ("FPOs") and rights issues (collectively, the "Stipulated Offerings") are set forth below.
- SEBI observations valid for six more months
SEBI's clearance (through 'final observations') of a draft offer document is ordinarily valid for 12 months (i.e., a Stipulated Offering must be launched by such time). The Circulars grant a temporary extension to this deadline – SEBI clearances that expire between March 01, 2020 and September 30, 2020 will be valid for 6 additional months from the date of their respective expirations, i.e., between August 31, 2020 and March 31, 2021. Accordingly, issuers within this timeline have 6 more months to launch their Stipulated Offerings.
- Fresh Issue size can be altered by 50% without fresh clearance
If an issuer seeks to increase or reduce the size of the primary component of a Stipulated Offering ("Fresh Issue")3 by more than 20%, it must re-file its draft offer document with SEBI for clearance4. The Circulars increase the re-filing threshold significantly. For Stipulated Offerings opening before December 31, 2020, issuers may change the size of their Fresh Issues by up to 50%. This relaxation is subject to certain conditions, including the objects of the issue remaining unchanged and adequate disclosures through a public notice (as well as in the updated draft offer document).
The stipulation that the objects of the issue must be unchanged will require an issuer who decreases the size of its Fresh Issue to reduce the amounts that it deploys towards its existing objects. In case any of the objects involve funding of a specific project, such issuer would also have to show higher amounts of tie-up of firm commitment towards at least 75% of the balance amount required for the project.
- Eligibility for fast-track rights offerings eased
In order to encourage fast-track rights offerings, the Circulars provide temporary relief from numerous stringent eligibility norms for the fast-track route. These apply to rights issues of equity shares and convertible securities (but not warrants) that open by March 31, 2021 ("Eligible Rights Issue"), and include the following:
- Audit qualifications. An issuer having audit qualifications in the financial statements included in the letter of offer ("LOF") is debarred from undertaking a fast-track rights issue. However, the Circulars allow an issuer with audit qualifications to proceed by either (a) restating its financial statements to give effect to the qualifications, or (b) including appropriate qualitative disclosures in case the impact is unquantifiable.
- Settlement of securities laws violations. If the issuer or its promoters, promoter group or directors have, in the last three years, settled violations of securities laws through SEBI's consent mechanism (such issuer, a "Settling Issuer"), it is debarred from undertaking a fast-track rights issue. The Circulars relax compliance with this condition by allowing Settling Issuers to proceed with a fast-track issue if the terms of the settlement have been duly complied with.
- Certain compliance periods reduced from 3 years to 18 months. The Circulars reduce the compliance periods for certain eligibility conditions for a fast-track issuer from 3 years to 18 months. These are:
- the period for which the issuer's shares have been listed on a recognized stock exchange;
- the period for which the issuer has been compliant with the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended ("LODR Regulations"); and
- the period for which the issuer's shares have not been suspended from trading as a disciplinary measure.
- Show cause notices. An issuer with any outstanding show-cause notices ("SCNs") or prosecution proceedings from SEBI against the issuer, its promoters or its whole-time directors, is debarred from undertaking a fast-track rights issue. The Circulars tapers this requirement by allowing issuers who have outstanding SCNs for adjudication proceedings (i.e., in respect of certain categories of offences under the Securities and Exchange Board of India Act, 1992 (the "SEBI Act")5) or pending SEBI prosecution proceedings to avail of the fast-track route, subject to adequate disclosures of such matters in the LOF.
- Minimum subscription for rights issue reduced to 75%; no requirement for draft letter of offer for issues below INR 25 Crores
The Circulars reduce the minimum subscription threshold for an Eligible Rights Issue (fast track or regular route) from 90% to 75% of the issue size. Further, if the issue is subscribed between 75% and 90%, then at least 75% of subscribed issue size must be deployed towards identified objects of the issue (other than general corporate purposes). Also, for Eligible Rights Issues of value below INR 25 Crores, no draft letter of offer ("DLOF") is required to be filed with SEBI.
Please see Annexure A for a detailed description of the existing regulations and the dispensations to them granted through the Circulars.
- INDUSLAW VIEW
The relaxations granted by SEBI through the Circulars are a lease of life. They will provide a much-needed breather to issuers involved in on-going and prospective IPOs, FPOs and rights issues.
The 6 months' extension in the validity of SEBI observations, coupled with the flexibility to change the Fresh Issue size will provide reprieve to issuers that have passed the rigors of SEBI review. Based on public records, there are as many as 14 issuers looking to raise capital through IPOs or rights issues whose SEBI observations have expired or will expire between March 01, 2020 and September 30, 2020. With the sands no longer running out, these issuers can re-evaluate business plans, funding requirements, the impact on valuations, calibrate the size of their offerings and look for opportune windows to launch.
In COVID-19 markets, time is of the essence – to this end, fast-track rights issues can be a very useful tool for issuers to recapitalize, with assistance from their promoters/ promoter group. The reduction in the period for compliance with LODR Regulations, average market capitalization and period of listing under the Circulars will allow more companies to avail the fast-track route which were previously unable to fulfill the eligibility requirements. However, while the fast-track route exists for FPOs as well, the exemptions granted under the Circulars have not also been extended to FPOs.
The relaxations on fast-track rights issues under the Circulars apply only to Eligible Rights Issues of equity shares and convertibles. Warrants may also be offered, along with equity shares and/or convertibles, through a rights issue and, in volatile markets, be preferred instruments by investors seeking to cash-in on a pricing upside in post-COVID-19 times. SEBI may accordingly consider piloting these exemptions towards Eligible Rights Issues of warrants as well. Further, SEBI should consider allowing IPOs to also be subject to minimum subscription levels of 75% in the exempted period, similar to Eligible Rights Issues.
While the exemptions granted under the Circulars are temporary, SEBI would be well placed to consider if some of them should be find permanent place in the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018, as amended ("SEBI ICDR Regulations"). These include: (a) allowing issuers to restate audit qualifications in their letters of offer, or include full details if the qualification is unquantifiable, and (b) allowing issuers who have settled securities law violations and duly complied with the settlement terms to undertake fast-track rights issues.
As COVID-19 intensifies, peoples, nations, governments and regulators of the world must reorient themselves to new normals. As SEBI re-orients itself thus, issuers, merchant bankers, intermediaries and market participants will have an interesting space to watch, and even more interesting trades to structure and execute.
ANNEXURE A
|
Item |
Existing Requirement |
Relaxations granted by the Circulars |
Key Implications/ Comments |
|
Dispensations towards all Stipulated Offerings (i.e. IPO, FPO, Rights Issues) |
|||
|
Validity of SEBI Observations |
A Stipulated Offering must open within 12 months from the date of issuance of SEBI's final observations.6 |
For issuers whose observations have expired or will expire between March 01, 2020 and September 30, 2020: validity of SEBI's final observations extended by 6 months. The lead manager of the Stipulated Offering must submit an undertaking confirming the compliance of the offering with the issue size requirements (discussed below) under the SEBI ICDR Regulations while submitting the updated offer document to SEBI. |
Issuers whose SEBI final observations expired/ were going to expire within March 01, 2020 and September 30, 2020 can launch their Stipulated Offerings between August 31, 2020 and March 31, 2021. |
|
Change in Fresh Issue size |
If an issuer seeks to change the size of the Fresh Issue by more than 20%, it must re-file its draft offer document.7 |
For Stipulated Offerings opening before December 31, 2020, issuers may change (i.e., decrease or increase) the size of their Fresh Issues size by up to 50%, subject to:
|
|
|
Dispensations towards eligibility conditions for a fast-track rights issues (of equity shares and convertibles) launched before March 31, 2021 |
|||
|
Period of listing |
Issuer must be listed on a recognised stock exchange for 3 years. |
Reduced to 18 months. |
Note that the SEBI ICDR Regulations allow issuers to undertake rights issues with an abridged set of disclosures (than that required for an IPO)8 if it satisfies certain eligibility conditions. One of them requires the issuer to be compliant with periodic filing requirements under the LODR for at least 3 years. Accordingly, an issuer who avails of these timing relaxations will be unable to undertake an Eligible Rights Issue utilizing the abridged disclosure framework under Part B, Schedule VI of the SEBI ICDR Regulations. |
|
Compliance with LODR |
Issuer must be in compliance with then LODR Regulations for the last 3 years. |
Reduced to 18 months. |
|
|
Average market capitalization |
Average market capitalization of public shareholding to be at least INR 250 Crores. |
Reduced to INR 100 Crores. |
This will help smaller-cap companies to go fast-track as well. |
|
Audit qualifications |
An issuer cannot undertake a fast-track rights issue if it has any audit qualifications in any of the years in respect of which financial statements are disclosed in its DLOF. |
If an issuer has audit qualifications, it can restate its underlying financial statements in its LOF after adjusting the impact of the qualifications9. Further, even if the impact of the qualifications cannot be ascertained, the issuer may proceed with a fast-track rights issue after making appropriate disclosures in the LOF. |
This is a well-thought out stipulation, making the disclosure standard for an Eligible Rights Issue similar to that of an IPO. An audit qualification in the issuer's financial statements should trigger restatement of its financial statements, and not debarment from the offering per se. |
|
Show cause notices |
An issuer cannot undertake a fast-track rights issue if there are any show cause notices ("SCN") issued or prosecution proceeding initiated by SEBI against it, or its promoters or whole-time directors.10 |
SCNs issued under adjudication proceedings are not included in this condition. Accordingly, issuers who have received SCNs from SEBI under adjudication proceedings (i.e., in respect of certain categories of offences under the SEBI Act11) or have prosecution proceedings initiated against them by SEBI, or whose directors, promoters or promoter group have outstanding SCNs for adjudication proceedings or have prosecution proceedings initiated against them by SEBI, are not barred from undertaking a fast-track Eligible Rights Issue, subject to adequate disclosures of the notices in the LOF. |
Reasonable disclosure-based stipulation, giving flexibility if adjudication related SCNs are suitably disclosed. The main body of Regulation 99(h) (as revised by the Circulars) only carves out SCNs for adjudication proceedings. However, in the following line, the Circular suggests that even matters where prosecution proceedings are initiated by SEBI will not disqualify the issuer from fast-track eligibility. While the general tone of the Circulars is to ease eligibility and compliance requirements, it adds the requirement to disclose SCNs for adjudication proceedings involving group companies as well. Issuers looking to raise capital through fast track rights issue with abridged disclosures12, were till now not required to consider outstanding SCNs involving group companies as relevant for either eligibility or disclosure purposes. |
|
Suspension from trading |
The equity shares of an eligible issuer should not be suspended for trading as a disciplinary measure in the last 3 years. |
Compliance period reduced to 18 months. |
- |
|
Settlement of securities laws violations |
If an issuer or its promoter, promoter group or directors had settled any violation of securities laws in the last 3 years, it is prohibited from undertaking a fast track rights issue. |
If an issuer, its promoter, promoter group or any director has settled any securities laws violations, it can still undertake a fast-track Eligible Rights Issue if the settlement terms and other directions have been fulfilled. |
- |
|
Other dispensations in respect of Eligible Rights Issues |
|||
|
Minimum subscription |
The minimum subscription for a rights issue is 90% of the issue size. |
For Eligible Rights Issue, reduced to is 75% of the issue size. If the Eligible Rights Issue is subscribed between 75% to 90%, at least 75% of the issue size should be utilized for the objects other than general corporate purposes. |
This relaxation has only been granted in respect of Eligible Rights Issues. Similar dispensations in minimum subscription conditions for IPOs and FPOs would also have been welcome. Since IPOs and FPOs are significantly market driven (as opposed to rights issues, which are subscribed primarily by promoters/ promoter group), pegging minimum subscription to 75% would have significantly buoyed such offerings. |
|
Threshold limits for filing draft letters of offer |
A listed company raising over INR 10 Crores through a rights issue is required to file a DLOF with SEBI. |
Threshold increased to INR 25 Crores. |
The SEBI review period has been dispensed with for lower value offerings. |
Footnotes
1 Please refer to our earlier alerts on relaxations of compliance norms by SEBI at https://induslaw.com/app/webroot/publications/pdf/alerts-2020/InfoAlert-COVID-19-SEBI-eases-LODR-compliance-norms-March-2020.pdf; https://induslaw.com/app/webroot/publications/pdf/alerts-2020/InfoAlert-COVID-19-SEBI-further-eases-compliance-norms-March-2020.pdf; and https://induslaw.com/app/webroot/publications/pdf/alerts-2020/Infolex-Newsalert-COVID-19-Outbreak-SEBI-further-eases-LODR-compliance-norms-for-listed-entities-March27-2020.pdf
2 SEBI Circular No. SEBI/HO/CFD/DIL1/CIR/P/2020/66 available at https://www.sebi.gov.in/legal/circulars/apr-2020/one-time-relaxation-with-respect-to-validity-of-sebi-observations_46536.html and SEBI Circular No. SEBI/HO/CFD/CIR/CFD/DIL/67/2020 available at https://www.sebi.gov.in/legal/circulars/apr-2020/relaxations-from-certain-provisions-of-the-sebi-issue-of-capital-and-disclosure-requirements-regulations-2018-in-respect-of-rights-issue_46537.html.
3 Please note that rights issues only involve a Fresh Issue component.
4 Para (1)(f)(i) of Schedule XVI of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.
5 Such categories include contraventions under Sections 15A, 15B, 15C, 15D, 15E, 15F, 15G, 15HA and 15HB of the SEBI Act.
6 Regulation 44(1), 85 and 140 of SEBI ICDR Regulations.
7 Para (1)(f)(i) of Schedule XVI of SEBI ICDR Regulations.
8 Part B of Schedule VI of the SEBI ICDR Regulations.
9 Regulation 99(m) of SEBI ICDR Regulations.
10 Regulation 99(h) of SEBI ICDR Regulations.
11 Such categories include contraventions under Sections 15A, 15B, 15C, 15D, 15E, 15F, 15G, 15HA and 15HB of the SEBI Act.
12 Part B of Schedule VI of the SEBI ICDR Regulations.
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