Friday, January 9, 2015

SEBI Discussion Paper on “Revising the Capital Raising Process”

There is a concern that issuers have resorted to private placements and qualified institutional placements (QIPs) to raise capital from specified investors rather than to public offerings of shares. This is due to the excessive burden and costs associated with a public offering of shares. Being cognizant of this tendency, SEBI has proposed measures to nudge issuers to move away from private raising of capital and into the public markets. This also enables public investors to have access to investment opportunities created by capital raising efforts of issuers. Towards this end, SEBI yesterday issued a Discussion Paper on “Revising the capital raising process” for public consultation (comments are due by January 30, 2015). The discussion paper addresses two specific aspects, viz. (i) the use of secondary market infrastructure for making applications in a public offering (e-IPO), and (ii) fast tracking issuances by listed companies.


SEBI’s proposal involves the use of secondary markets infrastructure for carrying out IPOs, which are essentially primary market transactions. Under this system, investors will be able to submit their applications to IPOs by placing orders through their SEBI-registered intermediaries. To begin with, this process is available only through Application Supported by Blocked Account (ASBA), and not other payment processes. The investors may submit their application electronically, and need not physically sign the forms. This is consistent with the recognition of electronic documentation in the Companies Act, 2013.

This process is intended to reduce the overall timeline for IPOs. While this effort is understandable, it is focused largely on the procedural and mechanical aspects of the issue process. Other matters such as disclosures and the responsibility for information contained in the offer documents remain the same. In other words, the proposed changes are procedural rather than substantive.

Follow-on Offerings

Conceptually, offerings of securities by existing listed companies can do with less stringent regulation given that such companies are required to comply with securities regulation and secondary market disclosure norms under the listing agreement. In this behalf, SEBI had previously allowed existing listed companies, subject to certain conditions, to access the markets through rights issues and follow-on public offerings (FPOs) without the requirement of filing an offer document with SEBI. This liberalised procedure was hardly utilised by companies given the onerous nature of the conditions imposed to quality for such offerings. Just by way of example, one of the conditions is that “the average market capitalisation of public shareholding of the issuer is at least Rs. three thousand crore”. By this yardstick, according to SEBI, only 183 companies in India qualify. Now, SEBI has proposed to relax some of these conditions so that they universe of companies that can qualify to partake the liberalised procedures is enlarged. For instance, the market capitalisation requirement above is proposed to be reduced to Rs. 250 crores. Such a market capitalisation requirement is sought to be done away with altogether for offerings by Central Public Sector Enterprises (CPSEs) so long as other conditions are satisfied. This might be a frontrunner to the massive disinvestment programme of the government that is on the anvil.

All of these measures from SEBI indicate its zeal towards boosting the primary markets, and to provide issuers and investors with greater option for capital raising and investments. However, while these changes are facilitative in nature, it is not clear whether they by themselves would bring about visible change in the attitude of the issuers towards capital raising.

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