KEY PROVISIONS OF THE ICDR REGULATIONS VIS-À-VIS THE DIP GUIDELINES
Consolidation of Definitions
To avoid overlap and discrepancies, words that have been defined in other acts/regulations have been removed and a blanket provision (Regulation 2(2) of the ICDR Regulations) directs the reader to refer to the provisions of the Companies Act, 1956, the Act, the Securities Contracts (Regulation) Act, 1956, the Depositories Act, 1996 and/or the rules and regulations made thereunder, ensuring consistency.
Meanings of terms like ‘convertible security’, ‘further public offer’, ‘initial public offer’, ‘key management personnel’ that were previously used in the DIP Guidelines but not defined have now been clarified. Concepts such as E-IPO and OCTEI Issues previously appearing in the DIP Guidelines have now been deleted on account of them being redundant.
The term ‘preferential issue’ has finally been defined; putting to rest much confusion caused under the DIP Guidelines especially with respect to issuances of foreign securities. The term as now defined under the ICDR Regulations excludes inter alia offers of depository receipts issued outside India and foreign securities.
The term ‘employee’ has undergone significant change. Under the DIP Guidelines, the term included permanent employees of the issuer or its subsidiaries or holding companies and a whole or part time director of the issuer and made no mention of the applicability of the definition to promoters. The definition under the new ICDR Regulations specifically excludes promoters and their immediate relatives and does not include employees and directors of a subsidiary or a holding company of the issuer.
The major repercussion of this change is that the benefit of the provisions permitting an issuer to reserve securities on a competitive basis in a public issuance of securities inter alia to employees is reserved only to employees of the issuer and employees of the promoting companies (in case of a new issuer) and not to the employees of the issuer’s holding or subsidiary companies.
Removal of the concept of Firm Allotments
The ICDR Regulations have done away with the concept of ‘firm allotments’ whereby under the DIP Guidelines an issuer could allot on a firm basis up to a maximum of 10% of the securities being issued, at a price different but higher than that offered to the public to certain categories of investors including Indian Mutual Funds, FIIs etc.
However, the ICDR Regulations has added the concept of ‘anchor investor’ defined to mean a qualified institution buyer that makes an application of at least Rs. 100,000,000 in a public issue made through the book building route. As a go-between the company and the public, the anchor investor is likely to boost the confidence of the public, thereby increasing interest in the issuer. The bidding process to select the anchor investor begins one day prior to the actual issue opening. Allocation to anchor investors is on a discretionary basis and subject to a minimum number of 2 such investors for allocation of upto Rs. 2,500,000,000 and 5 such investors for allocation of more than Rs. 2,500,000,000. Differentiated from a regular Qualified Institutional Buyer (QIB) in terms of financial commitment, SEBI has attempted to pin down the anchor investor and demand that it fulfill its financial commitment in a more stringent manner. An initial contribution of 25% of the application money as margin is to be made by an anchor investor as opposed to 10% by a QIB. Apart from the issuers, underwriters stand to gain (especially given the deletion of the concept of firm allotments). The only limitation is that only up to 30% of the portion available for allocation to qualified institutional buyers (up to 50% of the net offer to the public) shall be available to anchor investors for allocation/allotment out of which 1/3rd must be reserved for domestic mutual funds.
Preconditions to the Issue
The DIP Guidelines provided that only if the company was barred by an order from the SEBI from accessing capital was that company ineligible to conduct a public issue, but in its attempts to boost investor confidence, under ICDR Regulations it is provided that such orders, if passed against even the issuer company’s promoters, directors and/or persons in control or against a company in which they are promoters, directors and/or persons in control, would make a company ineligible to access the capital markets.
This mandates conducting a ‘diligence’ even with respect to promoters, directors and/or persons in control of the issuer company.
Amendment to the Eligibility Requirements
The provisions relating to eligibility requirements remains almost verbatim from that in the DIP Guidelines – nominal changes to ensure better clarity and consistency have been carried out. A major change is seen in Regulation 26(5) where under the DIP Guidelines only present outstanding convertible instruments and rights held by promoters and shareholders in the company entitling them to equity in the company post a public issue were required to be exercised prior to the public issue, the ICDR Regulations extends this mandatory exercise/conversion to rights and instruments held by anyone.
Additionally, there are no companies which are exempt from the eligibility criteria. The DIP Guidelines exempted certain banking companies, certain new banks and certain infrastructure companies from inter alia eligibility requirements for issuing capital. Since there are a plethora of ways with adequate safeguards for a company to access the markets, these exemptions were felt unnecessary.
Removal of exceptions regarding compliance with Pricing Requirements
The differentiation in pricing between companies in different sectors such as banking and infrastructure as was evident in the DIP Guidelines has been done away with to bring companies in all sectors at par within the ICDR Regulations.
With respect to finalizing the price for the issue, the issuer is permitted to determine the same at a date before registering the prospectus with the Registrar of Companies. This applies to both a fixed price (in a fixed price issue) and a price band (in a book building issue).
Issuers have more flexibility in determining the issue price and are protected against market risk.
Amendment of provisions regarding Promoters Contribution
As per the ICDR Regulations, the securities ineligible for minimum contribution means and includes ‘specified securities’ and not just equity shares as specified in Clause 4.6 of the DIP Guidelines. For computing the promoters’ contribution, the minimum contribution of Rs. 25,000 per each individual and Rs.100,000 from each firm or body corporate has been deleted.
The promoters of the issuer company cannot subscribe to convertible instruments of such issuer company preceding the public issue to fulfill their obligations under the minimum promoter’s contribution.
Restriction on transferability (lock-in) of promoters’ contribution
Under Regulation 39 of the ICDR Regulations, the promoters are permitted to pledge their securities with any scheduled commercial bank or public financial institution. The generic term of banks and financial institutions as a whole has been deleted to specifically mean and include only scheduled commercial bank and public financial institutions.
Promoters of companies have undertaken public issues will no longer be able to pledge their securities with banks other than scheduled commercial banks and public financial institutions whilst taking a loan.
Amendment to provisions regarding the Book Building Process and Reservations
Book Building Process: The DIP Guidelines provided that an issuer company may make an issue of securities through book building process to the public through a prospectus either by issuing 100% of the net offer to the public through book building process, or through 75% of the net offer to the public through book building process and 25% at the price determined through book building. The DIP Guidelines provided for different conditions to be complied with, in the event, when 75% of the securities are issued to public by book building process and certain conditions to be adhered to in case the book building is for 100% of the net offer to public. The ICDR Regulations do not provide for different types of issuances through book building process unlike the erstwhile DIP Guidelines. Book building can be undertaken only for 100% of the net offer to public.
Reservation on a competitive basis: There have been changes to the option of the issuer to make reservation on competitive basis. Firstly, on account of the change in the definition of the term ‘employee’, a promoter that was a full time employee in the company is not entitled to such a reservation. Further, the issuer now cannot make reservation on competitive basis for the following categories of entities: (i) Indian and Multilateral development Institutions; (ii) Mutual Funds registered with the Board; (iii) Foreign Institutional Investors and subaccounts registered with the Board; (iv) Scheduled Banks, since all these entities are covered under the QIB category that have other avenues to access the capital market.
Amendment to the provisions regarding the Disclosures to be made by the Issuer
In furtherance of its objective to regulate the markets, provide more transparency and thereby boost investor confidence, the ICDR Regulations specifically enumerate the risk factors that are to be disclosed including criminal charges under the Indian Penal Code and violations of securities law, statutory clearances and approvals that are yet to be received by the issuer, failure of the issuer or any of its subsidiaries or group companies to meet the listing requirements of any recognized stock exchange(s) in India or abroad, default in repayment of deposits or payment of interest thereon, etc. Higher disclosure of outstanding litigations against directors and promoters is also demanded. Further, the disclosures pertaining to the investor grievances against the issuer company have also been made more stringent.
Amendment of the provisions regarding Advertisement of the Issues
To facilitate the issue process, the ICDR Regulations seek to remove unnecessary requirements with respect to advertisement. Whereas under the DIP Guidelines, any issue advertisements in newspapers, magazines, brochures and pamphlets containing highlights relating to the issue had to include the risk factors, under the ICDR Regulations, only if such advertisement contains information other than the details specified in the format for issue advertisement contained in Schedule XIII of the ICDR Regulations does such advertisement need to contain risk factors. Adequate precautions have been provided in the various formats to ensure investor protection.
This requirement will facilitate the advertisement of the issue.
Amendment of the provisions regarding Preferential Allotment
The key terms of the chapter pertaining to pricing and transferability in relation to preferential issue remain the same as were provided in the DIP Guidelines. However, the ICDR Regulations have introduced some new exceptions to the applicability of the chapter. The ICDR Regulations have now provided an exemption for a preferential issue which takes place by virtue of conversion of a loan or pursuant to an option attached to convertible debt instruments to either convert such instrument into shares or to subscribe to shares in the company.
Moreover, the DIP Guidelines provided that in case of a preferential allotment to promoters, their relatives, associates and related entities for consideration other than cash, the valuation of assets shall be done by an independent qualified valuer, and the valuation report to be submitted to the stock exchanges. A new proviso has now been inserted in respect of this section in the ICDR Regulations, which empowers the stock exchange to get the valuation re-computed by another valuer, and to obtain information necessary for the purpose.
Amendment to the provisions regarding QIPs
Although the provisions of the earlier Chapter XIII-A of the DIP Guidelines have been shuffled around from a better drafting perspective, the crux of the provisions of the DIP Guidelines pertaining to qualified institutions placements (“QIPs”) is retained in the ICDR Regulations.
The ICDR Regulations include, within the securities eligible to be issued by a company under this route (as previously required under the DIP Guidelines), non-convertible debt instruments along with warrants. Now it is clarified that full consideration must be paid in connection with the warrants and the equity shares allotted on the exercise of the warrants must be fully paid up. Issuance of warrants alone remains excluded.
Companies having proposed an issuance of non-convertible debt instruments along with warrants under the DIP Guidelines may have to amend the terms of the issuance to ensure that full consideration for the warrants is also paid. There have been no clarifications from the SEBI with respect to resolutions passed and agreements entered into prior to the ICDR Regulations coming into force.
Amendment to the provisions regarding Bonus Issues
The prohibition on an issuer making a bonus issue when it has outstanding convertible securities has now been extended to all convertible debt instruments as opposed to only fully convertible and partly convertible debentures under the DIP Guidelines. Further, the company no longer needs to provide a compliance certificate duly signed by it and counter signed by statutory auditor or by company secretary to the SEBI confirming that the provisions of this chapter have been complied with as required under the DIP Guidelines. This omission is a procedural relaxation for the issuer.
CONSEQUENTIAL CHANGES MADE IN OTHER LEGISLATIONS
Securities Contracts (Regulation) Rules, 1957 (“SCRR”)
Provisions relating to the consideration of applications by (i) unlisted companies for listing of equity shares pursuant to a scheme sanctioned by the High Court, (ii) listed companies for listing equity shares with differential rights and (iii) listed companies for listing of warrants offered along with non-convertible debentures under the QIP route, under Rule 19(7) of the SCRR previously found mention in the DIP Guidelines. SEBI has been consistent in its efforts to include only provisions relating to the issuance of capital in the ICDR Regulations and consequently thought necessary not to include these provisions under the ICDR Regulations but to issue these provisions vide a circular in purview of its powers under Section 11 of the Act and Rule 19(7) of the SCRR.
SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 (“ESOP Regulations”)
Provisions previously included in the ESOP Regulations that a company required to satisfy at the time of making a public issue have been incorporated in the ICDR Regulations and consequently deleted from the ESOP Regulations consistent with SEBI’s efforts to consolidate all regulations governing the issuance of capital into one piece of legislation. These include provisions such as those pertaining to the non-applicability of the restrictions on having outstanding options/convertible instruments at the time of making a public issue to outstanding employee stock options, disclosures pertaining to such employee stock option existing pre-IPO, etc. This change has no significant effect on issuers.
Equity Listing Agreement
The SEBI has directed the stock exchanges to add a sub-clause to Clause 19 of the existing listing agreement (dealing with notifications to be made to the stock exchanges by a listed company in various scenarios), requiring a company proposing to undertake a further public offer through the fixed price route, to notify the stock exchange, at least 48 hours in advance, of the proposed meeting of its Board of Directors convened for determination of issue price. This amendment does not change a company’s obligations as previously existing under the DIP Guidelines. This amendment is only in furtherance of SEBI’s efforts to group obligations of a company in a more organized manner.
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