Thursday, August 14, 2008

Simplifying Qualified Institutional Placements and Rights Issues

(In the following post, Shantanu Naravane examines recent changes to the SEBI DIP Guidelines made with a view to promoting qualified institutional placements and rights issues)

The concept of Qualified Institutional Placements [“QIP”] was introduced in India, with effect from May 8, 2006, by virtue of an amendment to the SEBI (Disclosure & Investor Protection [“DIP”] Guidelines, 2000. [Economic Times, May 23, 2006] The object of this amendment was to prevent the ‘export of domestic equity markets’, and encourage on-shore investment. Chapter XIIIA, which was introduced, allowed QIPs to be made for securities which could be issued as equity shares or other specified securities. The primary advantages of this introduction were saving on time, avoiding regulatory hassles, and also cost efficiency. However, one drawback of the system was the requirement that in determining the price of offering, the higher of the average previous six months’ or 15 days’ price had to be taken. In comparison to the global practice, which fixes prices as on the date of issue, this requirement resulted in a false price being used as the price of issue.

This issue became particularly important due to the recent market meltdown, which made it increasingly difficult for companies to sell their issues since the floor price was way higher than the prevailing market price. Surveys indicated that up to 35-40 QIP issues were stuck due to pricing issues. However, on Wednesday, SEBI has relaxed these norms and reduced the timeline of rights issues. As opposed to the earlier position, QIP issues can now be priced on the basis of the average price of two weeks before the issue. This serves the purpose of ensuring greater congruence between the floor price and actual market price. Among other measures related to the segregation of unlisted assets and the submission of consolidated results, SEBI has also decided to reduce the time taken to complete rights issues to 43 days against the current 109 days.

Given the numerous debates as to the propriety of recent Government measures to accommodate and address economic concerns, this amendment seems to provide another ripe issue for policy and business analysts to mull over.

While this is a welcome move in an overall sense, it still leaves some matters open for interpretation. For example, while the SEBI DIP Guidelines have now been amended, the Reserve Bank will have to amend the relevant regulations under the Foreign Exchange Management Act, 1999 to reflect the revised pricing norms for QIP transactions. Unless that is effected promptly, there may be incongruity in the norms issued by SEBI and the RBI thereby introducing uncertainty in the offering of shares to non-resident investors in a QIP, and leaving the reform process only partly accomplished. RBI would have to amend its pricing norms (for non-resident investors in QIPs) to bring it in tune with the revised SEBI Guidelines.

For a detailed discussion of the changes introduced, see the report in Business Standard, August 14, 2008 and a discussion among experts on

(Note: Some of the problems arising out of minimum pricing norms prescribed by SEBI have been discussed in a previous post on this blog)

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