Disclosure gains

Sebi's proposals on listing norms would aid transparency

The Securities and Exchange Board of India (Sebi) has released a consultation paper that proposes to tweak disclosure norms to improve transparency and streamline processes. The changes — Amendments to Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements, or ICDR) Regulations 2018 — pertain to underwriting public issues, the preconditions for announcing a bonus, the eligibility of pension funds to participate as anchor investors, and providing material documents and contracts for inspection in the case of a public issue. The proposed changes should give investors easier access to pertinent information.

In terms of underwriting, the current ICDR allows appointing underwriters without specifically mentioning if such an exercise is “soft” or “hard” — that is, if the underwriter is covering only technical rejections (soft) or is committed to picking up a stake in the company (hard) in the case of under-subscription. A hard commitment indicates the underwriter has “skin in the game” and believes the share price valuations are fair. The paper proposes to change the relevant clauses in the ICDR to ensure that any agreement with the underwriters to cover under-subscription should be mentioned in the red herring prospectus (RHP) along with the maximum commitment (in number of shares) at a minimum consideration of the specified issue price. This would also cover situations where the underwriter doesn’t pick up the shortfall itself but arranges to find other subscribers. The paper asks if there is also a need to specify a minimum commitment (in the number of shares) for a hard underwriting agreement. Adding these details to the RHP would give investors a sense of the underwriters’ commitment and fair valuation.
 

The regulator states all bonus issues henceforth must be in demat form only, doing away with the current practice where a shareholder may ask for physical bonus shares. If there are shareholders without demat accounts, bonus shares will be held in escrow in a separate demat account operated by the company until such time as shareholders have opened them.

Bonus issues involve capitalisation of reserves but the regulator says there have sometimes been instances of mismatch in prior issues, or some regulatory reason why a bonus should not be issued. For example, the company may have outstanding employee stock options or convertible debentures, and the equity and reserves situation in the balance sheet therefore needs to be clarified. This can result in confusion and obstacles to the listing of bonus shares. Hence, the paper proposes a company will be eligible to issue a bonus only if it has received in-principle approval for all prior issues, including employee stock options and convertible debentures/warrants.

Under the current ICDR, pension funds that are associates of the lead manager (LM) or sponsored by an associate of the LM may not participate as anchor investors. The paper proposes to allow their participation as anchor investors if they hold a minimum corpus of Rs 25 crore.

Currently, material documents and industry reports are made available for physical inspection only at the issuer’s registered office. The paper proposes such documents should also be made available for online inspection on the issuer’s website. Moreover, it also proposes that complete industry reports and the draft offer document (rather than extracts, as is the current practice) should be placed online.

These are unexceptionable suggestions that would improve access to information for potential investors. Issuing bonuses in demat form only after receiving the green signal would also smooth the process of listing and selling such shares.