Public/Rights Offerings: Observation Letter
When a draft offer document is filed with SEBI, either in a public offering (initial public offering (IPO) or follow-on public offering (FPO)) or in a rights offering, SEBI reviews the draft offer document and issue its comments in an observation letter. In the past, this observation letter was valid for a period of three months. If the issuer did not undertake the offering within the three-month period, a fresh filing process had to be commenced. In its recent decision, SEBI has increased the three-month validity period for its observation to one year.
Clearly, this decision is another in the series of moves by SEBI to boost the sagging capital markets in India, particularly the primary markets. As the Economic Times notes, in the recent downturn, several companies that had filed draft documents and received observation letters from SEBI had to let them lapse because the market conditions were not conducive to accessing the public capital markets. The extension of the time period is expected to provide more flexibility to companies to time the launch of their offerings.
However, some practical difficulties could still persist in fully utilising this facility. Rahul Guptan, an experienced Indian capital markets lawyer and now a partner with Clifford Chance in Singapore, notes in his email to me:
“While this is an interesting development from SEBI, it raises issues from a disclosure perspective. Any company issuing a prospectus one year after the original was filed and cleared with SEBI would require the financials to be updated. This would be a material change. Further, the Book Running Lead Managers and the lawyers would obviously have to undertake further diligence to check whether there have been updates and changes in the business. There will definitely be a need for the auditors as well to review the financial position of the company. Therefore, all companies would necessarily have to file a document with material changes. What the SEBI announcement does not clarify is how it will treat such an updated document? Would it be subject to review once again? If it is subject to review then in how much time will the review be completed? SEBI should review all documents that are filed with it after such a prolonged period from the issue of the original observations. What perhaps the SEBI move really addresses is a waiver for issuers from having to pay the filing fees once again. Whilst this is a welcome gesture, I do not think the requirement to re-file and also the SEBI powers to review should be curtailed in any manner.”There is still opportunity for SEBI to consider these issues and address them while amending to Disclosure and Investor Protection Guidelines to reflect this change.
Transparency in the SEBI Process
SEBI’s press release states:
In order to bring transparency in the working of the Board it was decided that the agenda papers submitted to the Board on all policy issues will be made available in the public domain by putting them up on the SEBI website after the Board has taken a decision on the issue. The minutes of the meeting relating to such items will also be made available on the SEBI website after the Board has approved the minutes. Accordingly the agenda papers for today’s Board meeting will be made available on the SEBI website by December 15, 2008.SEBI has, over the years, been introducing transparency in its regulatory process. For instance, it has been following the practice of issuing policy papers on key changes to regulations and seeking comments before the actual regulations are enacted. This current measure is a further step in that direction, and has received a favourable response generally (Ajay Shah and Sandeep Parekh). Perhaps this may also provide a suitable model for other Indian regulators to emulate.
Another related decision (on stock exchanges and the use of RTI to seek information) bolsters the element of transparency. The Economic Times reports:
Gaining access to information relating to the securities market will now be easier, with the Securities and Exchange Board of India (Sebi) taking the view that it has the authority to seek information from stock exchanges for providing it to the public under the Right to Information Act (RTI).
India’s main stock exchanges such as the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) were reluctant to provide information saying they are not a public authority under RTI. A recent ruling by the appellate authority of the market regulator has stated that stock exchanges are bound to furnish information sought by the regulator even if it is for the RTI purpose.