Friday, February 7, 2014

SEBI ICDR (Amendment) Regulations, 2014

[The following post is contributed by Shampita Das of Vinod Kothari & Co. She can be contacted at]

On 4 February 2014, SEBI issued a Notification amending the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (‘ICDR Regulations’) to make grading of an initial public offer (‘IPO’) by one or more credit rating agencies voluntary by companies. In addition to such amendment, SEBI also altered the format of the Statement of Assets and Liabilities that needs to be disclosed by issuing companies in their offer document.

The amendment will come into force from 5 February 2014.

Overview of the Amendments

(a)       IPO Grading made voluntary

Chapter III of the ICDR Regulations lists out the eligibility requirements applicable to a public issue. Regulation 26 of Chapter III enumerates the requirements in case of an IPO. Sub-regulation of Regulation 26 provides the following:

“(7) No issuer shall make an initial public offer, unless as on the date of registering prospectus or red herring prospectus with the Registrar of Companies, the issuer has obtained grading for the initial public offer from at least one credit rating agency registered with the Board.”

Such mandatory grading had to be disclosed by companies in the prospectus / red herring prospectus of the IPO.

This sub-regulation has been substituted with the following:

"(7) An issuer making an initial public offer may obtain grading for such offer from one or more credit rating agencies registered with the Board."

As can be seen from the above, the mandatory requirement of obtaining grading for an IPO before issuing the prospectus / red herring prospectus with the Registrar of Companies has been now made recommendatory/voluntary by companies coming out with an IPO.

Rationale for the Amendment

The amendment has been introduced in the wake of the slowdown that has been surrounding the primary market since January 2010. The necessity of IPO grading had kept out many companies from gaining access to the primary market. The BSE IPO index, which tracks the value of companies for two years after they list, fell over 37% to 1,300 between 4 January 2010 and 31 December 2011. 82 out of the 112 companies which came out with IPOs in the year 2010 and 2011 are trading below their issue price. However, the BSE IPO index has risen by 28% to 1679 in the year 2012, with just 2 out of 17 companies listed were trading below their issue price[1]. The major IPO that came out in 2013 was from Just Dial Limited which is currently witnessing a gain % of 151.19[2].

Such a move may undermine the interest of the investors and can act as a deterrent to informed investment decision by investors. Credit rating acts as a benchmark based on which investments are made. Credit rating agencies used various parameters to determine the grading of a company. A higher grade meant that the company had strong fundamentals. Such an assessment would now not be possible, as companies with weaker fundamentals would prefer to avoid such a process altogether leading to misguided investment.

We believe that this voluntary option could have been prescribed for certain class or scale of companies, for instance, companies with a certain net worth or capital or volume and quantum of the proposed issue.

(b)       Amendment to Statement of Assets and Liabilities

The format of the Statement of Assets and Liabilities was provided in sub-para IX in para 2 of Part A to Schedule VIII of the ICDR Regulations. The Statement was divided under 5 heads, namely (1) Fixed Assets, (2) Current assets, loans and advances, (3) Liabilities and Provisions, (4) Net Worth, (5) Represented by (based on net worth).

The present amendment revised such format to similar lines with the format of Balance Sheet under Part I Schedule III of the Companies Act, 2013. As per the amendment, the heads have been divided into 5 categories namely, (1) Equity & Liabilities, (2) Non Current Liabilities, (3) Current Liabilities, (4) Non Current Assets, and (5) Current Assets. The calculation of ‘net worth’, as shown in the previous Statement, has been done away with.

- Shampita Das


Maulik Sanghvi said...

The rationale for change in grading given is not correct. IPO grading has not been achieving its purpose as it completely ignoring price. A company with 5/5 grade may not be worth investing if its priced too high and a company 1/5 may be worth investing at very low value. Further, as you have pointed out that IPO Index feel down inspite of Sensex moving up clearly demonstrates that IPO Grading was of no use.

Anonymous said...

how icdr is related to sebi?