Thursday, March 19, 2009

SEBI’s Proposal to Revitalise Rights Issues

Rights issues offer an important avenue for companies to raise capital, especially when bank financing may be difficult owing to a credit crunch as we are currently witnessing. However, in the Indian context, the procedure for carrying out a rights issue has been as onerous as it is for a full-blown public issue. This is because the disclosure requirements and the timing involved in a rights issue have been fairly extensive. In order to encourage companies to undertake rights issues, SEBI earlier announced a reduction in the time period for the entire process, and has now announced less detailed disclosure requirements.


In a Discussion Paper on Rationalisation of Disclosure Norms for Rights Issues, SEBI detailed the rationale for this change:


A listed entity can raise further issue of capital by way of preferential offers, Qualified Institutional Placements (QIPs), Rights Issues (RIs), Further Public Offers (FPOs), American Depository Receipts (ADRs) / Global Depository Receipts (GDRs), etc. Apart from ADRs / GDRs, all other issuances are domestic. While making an issue of capital, several factors guide the issuers in the choice of mode of issuance. These include time, cost, labour involved and disclosure requirements. From our interaction with market participants, it was gathered that quite often, the issuers choose preferential offers or QIP or even ADR / GDR issuances, as these modes require less time, cost and efforts. Such alternate modes of issuances while helping the entities to achieve their capital raising needs, dilute the existing shareholders’ stake in the entity.

“[Rights issues (RIs)] are further issuances of capital made by listed entities to its existing shareholders. Certain information about the entities that are listed and traded on the exchanges is available in the public domain for investors. Hence, for further issuances of capital by such entities, it may not be necessary to mandate exhaustive disclosure requirements. In such cases, it may suffice to have a more restricted set of disclosures about the issue and the entity. Further, rationalization of disclosure norms for RIs would not only make the issuance process faster but also contribute to savings in paper, printing and distribution costs, thereby reducing overall cost of issuances.”


While simplification is a welcome move, there may be practical difficulties in its implementation owing to the wide chasm between primary market disclosures (for public offerings and rights offerings) which are fairly extensive in nature, and secondary market disclosures (i.e. continuing disclosures by companies which are already listed on a stock exchange) which are quite slender. SEBI’s proposal for a revised rights issue regime proceeds on the assumption that information about the company is generally available in the market, which assumption is open for question, as Sandeep Parekh has validly argued on his blog. For a previous discussion of the disparity in the disclosure regime between primary and secondary markets on this Blog, please see here and here.


Furthermore, if the issue of integrated disclosures is addressed, not only will that enable simplified rights offerings, but also simplified follow-on public offerings by public listed companies on the basis of availability of information about the offering company in the markets generally.

1 comment:

Mandar Kagade said...

Very well said indeed.

The truth is that the operation of Efficient Market Hypothesis (which presumably is the underlying rationale of SEBI's move to bring in a diluted Rights Issue disclosure regime)is questionable in EMs.

At best, we have a weak EMH operating here.

Unless therefore, we widen that channel of disclosures in the secondary market,so that the market can factor those bits of information in the price of security, it is useless to place reliance on EMH.

Again- and here I draw from Umakant Varottil's insights on legal transplants- the regulator seems to be merely adopting EMH as a transplant and then trying to amend the law of disclosures here. This (misplaced) eclecticism masks a reluctance to learn and operate a customised Securities regulation framework for India.