Introduction

The Securities and Exchange Board of India (“SEBI”), in its Board meeting on 23rd June, 2015, has brought about some important changes. The changes brought about include relaxation of the listing norms for start-ups to encourage them to tap the local market and open up dramatic growth opportunities for the investors. SEBI, in its meeting, also decided to streamline the process of Public issues through ASBA mechanism, reduce the market capitalization requirement for companies to use fast-track Follow on Public Offerings (FPOs) and Rights issues , given situations and conditions subject to which promoters may be reclassified as public, instructions of interim use of funds by issuer, etc. This article is aimed to provide a more detailed understanding of each of the above changes, based on the press release no. 167/2015 by SEBI.

Streamlining the process of Public Issues – ASBA Mechanism

1. It will be mandatory for all investors to make ASBA applications.
2. Advantages of the change:
   • This change shall reduce time period for listing of issues from T+12 days to T+6 days (‘T’ being the date on which the issue closes), increase reach of retail investors to access the IPO and reduce the cost of public issues.
   • Also, ASBA enables investors to give the mandate for payment of application money in the application form itself without suffering loss of interest for the intervening period.
   • It also obviates the hassle of refund of money by the issuer as per the difference in application amount and the amount for which shares are finally allotted.
3. Besides stock brokers and banks, where such facilities are available, now, Registrar and Share Transfer Agents (RTAs) and Depository Participants (DPs) shall also be allowed to accept application forms (both physical as well as online) and make bids on the stock exchange platform.
4. SEBI shall help intermediaries and banks to modify their existing systems and train their staff and also enable the investors to adapt to the new system.
   • The phase-in period shall be of 6 months.
   • Hence, a public issue which opens on or after January 01, 2016 will have to follow the new system.

Simplified Framework for capital raising by start-up companies

1. Startups will now be able to list on the alternative Institutional Trading Platform (“ITP”).
2. ITP shall be made accessible to
   • Technology companies (includes companies which use technology, information technology, intellectual property, data analytics, bio-technology, nano-technology) with substantial value addition where at least 25% of the pre-issue capital is held by Qualified Institutional Buyers (“QIBs”), or
   • any other company in which at least 50% of the pre-issue capital is held by QIBs.
3. No person, individually or collectively with persons acting in concert (“PAC”), in such a company shall hold 25% or more of the post-issue share capital.
4. Companies have been allowed to disclose just the broad objects of the issue.
5. Currently in capital raising, ‘General Corporate Purposes’ as an object of the issue would not exceed 25% of the issue size. SEBI has relaxed this requirement and hence now there is no cap on amount raised for general corporate purposes.
6. Lock in of the entire pre-issue capital shall be for a period of 6 months from the date of allotment uniformly for all shareholders.
7. Since various valuation parameters such as PE/ EPS would not be relevant in many cases, the basis of issue price may include other disclosures as deemed fit by the issuers. Such disclosures need not include projections.
8. Only the following two categories of investors shall be able to access the proposed ITP
   • Institutional Investors (QIBs, family trusts, systematically important NBFCs and the intermediaries registered with SEBI, all with net-worth > Rs. 500 crore) and
   • Non-Institutional Investors (“NIIs”) other than retail individual investors.
9. In case of public offer,
   • Allotment to institutional investors
     • Allotment to institutional investor may be on a discretionary basis,
     • It may be upto 75% of the total allotment,
     • In case of discretionary allotment, no institutional investor shall be allotted more than 10% of the issue size,
     • All shares allotted on discretionary basis shall be locked-in in line with requirements for lock-in by Anchor Investors i.e. 30 days at present
   • Allotment to NIIs
     • Allotment to NIIs shall be on proportionate basis.
     • It may be upto 25% of the total allotment.

10. Minimum application size – Rs 10 lakh.
11. Minimum trading lot – Rs 10 lakh.
12. Number of allottees in case of public offer – 200 or more.
13. The company will have the option to migrate to main board after 3 years subject to compliance with eligibility requirements of the stock exchanges.
14. For Category I and II AIFs, which are required under the SEBI (Alternative Investment Funds) Regulations, 2012 to invest a certain minimum amount in unlisted securities, investment in shares of companies listed on ITP will be treated as investment in ‘unlisted securities’ for the purpose of calculation of the investment limits.

Fast Track Issuances for Follow on Public Offer (FPO) and Rights Issue

1. In order to enable more listed companies to raise further capital using fast-track route, SEBI has approved the proposal to reduce the minimum public holding requirement
   • from Rs. 3000 crore to Rs. 1000 crore in case of FPO and
   • to Rs. 250 crore in case of rights issue.
2. A company can take advantage of the above relaxation only on compliance of the following additional conditions:
   • In case of rights issue, promoters shall not renounce their rights, except
     • to the extent of renunciations within the promoter group, or,
     • for the purposes of complying with minimum public shareholding norms;
   • Annualized delivery based trading turnover requirement – 10% of the total paid up capital;
   • No conflict of interest between the lead manager and the issuer or its group or associate company in accordance with applicable SEBI Regulations;
   • Shares of the company should not have been suspended from trading as a disciplinary measure in past 3 years; and
   • Issuer, promoter group and directors of the issuer should not have settled any alleged violation of securities laws through the consent mechanism with the Board in last 3 years.
   • No show-cause notices should have been issued or prosecution proceedings initiated by SEBI or pending against the issuer or its promoters or whole time directors.

Changes in the mechanism of Offer for Sale (OFS) of shares through Stock Exchange

The following changes, suggested on the discussion paper floated on the review of OFS through Stock Exchange mechanism, have been approved by SEBI:

1. To ensure increased retail participation in the OFS process, OFS notice shall be continued as per present practice i.e. latest by T-2 days, however, T-2 days shall be reckoned from banking day instead of trading day.
2. To simplify the bidding process for retail investors, it would be mandatory for the seller to provide the option to retail investors to place their bids at cut off price (default option) in addition to placing price bids.

Reclassification of Promoters as Public

SEBI has approved the framework to re-classify the existing promoter of a listed company as public. The following conditions need to be fulfilled for such reclassification:

1. Pursuant to change in promoter:
   • When: When a new promoter replaces the previous promoter subsequent to an open offer or due to any other reason, reclassification of the previous promoter as public will be allowed
   • Conditions:
     • Shareholder’s approval in general meeting required.
     • Shareholder’s permission is required for the previous promoter to hold any key managerial position (“KMP”) in the company. In any case, the previous/ outgoing promoter cannot act as KMP for more than 3 years from the date of shareholder’s resolution.
     • The outgoing promoter cannot hold more than 10% shares of the company.

2. Inheritance:

When: In case of transmission/succession/inheritance, the inheritor shall be classified as promoter.

3. Company not having any identifiable promoter:
   • When: Existing promoters may be re-classified as public in case the company becomes professionally managed and does not have any identifiable promoter. A company will be considered as professionally managed if:
     • No person or group along with PACs hold more than 1% shares of the company (incl. convertibles/ outstanding warrants/ ADR/ GDR Holding)
     • Mutual Funds/Banks/Insurance Companies/Financial Institutions/FPIs hold not more than 10% shares of the company (incl. convertibles/ outstanding warrants/ ADR/ GDR Holding)
     • Erstwhile promoters and their relatives may hold KMP position in the company
       • subject to shareholders’ approval and
       • for a period not exceeding 3 years from the date of shareholders’ approval.
     • Conditions:
       • The outgoing promoter shall not have any special rights through any formal or informal arrangements.
       • The outgoing promoter shall not, directly or indirectly, exercise control over the affairs of the company.
       • Increase in public shareholding pursuant to re-classification of promoters may not be counted towards achieving compliance with minimum public shareholding (MPS) requirement under clause 40A of equity listing agreement.
       • If any public shareholder seeks to re-classify itself as promoter, it shall be required to make an open offer to the shareholders and would not be eligible for exemption from the said obligation.
       • The event of re-classification may be disclosed as a material event in accordance with the listing agreement/regulations

Interim use of funds by Issuer

1. In order to prevent misuse of funds during the interim period pending utilization by the issuer, for funds raised through public / rights issue, SEBI has decided that net issue proceeds pending utilization (for the stated objects) shall be deposited only in the Scheduled Commercial Banks included in the Second Schedule of Reserve Bank of India Act, 1934.
2. In case of public / rights issue of Indian Depository Receipts, the issuer shall keep the funds in a bank having a credit rating of ‘A’ or above by an international credit rating agency.