Sebi's rights issue revamp may require tightrope walk

Legal experts say reduced timeline welcome but some proposals may compromise quality of issuances

The Securities and Exchange Board of India (Sebi) has set an ambitious target of reducing the rights issue timeline to less than a month from over four months at present, which has drawn praise from market experts, but also raised concerns.

The proposal to eliminate the need for appointing an investment bank may open up risks of improper and poor-quality disclosures and potential conflicts of interest, warn legal experts.

In a bid to increase its appeal vis-à-vis other fund-raising avenues available for listed companies, Sebi on Tuesday proposed a slew of changes to the rights issue framework. They will be formalised once the regulator gathers feedback and will not alter the near-term capital-raising plans of companies.

 

“These steps, while would reduce the timelines envisaged in completing the process, may impact the quality of the disclosures being done and increase the risk of misleading or inaccurate information,” said Sangeeta Jhunjhunwala, Partner, Khaitan Legal Associates.

 “The move is aimed at providing liquidity to issuers timely and without any regulatory hurdles, however, the interests of investors need to be also safeguarded while moving from an ‘approval-based’ to ‘intimation-based’ process,” she added.

At present, merchant bankers are tasked with conducting due diligence, preparing draft letters of offer, and documentation for filing with exchanges and Sebi. The market regulator plans doing away with some of these steps or shifting the roles to stock exchanges, and thus reducing the responsibilities. 

“Investor risks may rise in the event that merchant bankers do not conduct independent due diligence since they provide crucial experience and objectivity to the process. Moreover, issuers might not have the know-how to carry out exhaustive due diligence on their own, which could result in mistakes or oversights,” said Kunal Sharma, Partner, Singhania & Co.

Sharma added that conflict of interest may arise during validation of applications and finalisation of the basis of allotment by stock exchanges and depositories.

“If these entities are involved in both validation and allotment, they may prioritise their own or issuers interests ahead of that of investors’,” he said.

However, eliminating the appointment of merchant bankers is key for crunching the timelines.

According to the consultation paper by Sebi, merchant bankers take around 50 to 60 days to conduct due-diligence and prepare detailed offer documents. 

Sebi has proposed doing away with the requirement of due diligence certificate and filing of draft documents with the regulator.

“The responsibility for ensuring the accuracy of relevant disclosures would shift to the issuer, registrar to the issue and stock exchanges, warranting close attention to maintain the integrity of the disclosure process,” said Ketan Mukhija, Senior Partner, Burgeon Law.

To offer flexibility, Sebi has also proposed to allow renunciations of rights entitlement by shareholders to investors of their choice.

"Sebi has also proposed a very interesting framework for allotment to selective investors through renunciation by promoters or an allotment in case of under-subscription. This may potentially lead to some cannibalising of the preferential issue product, but some questions will need answering, including pricing aspects for such a transaction," said Madhurima Mukherjee Saha, Partner, JSA Advocates & Solicitors.

Some legal players also pointed out that allowing allotment to specific investors may lead to opportunities for preferential treatment, which could diminish the rights of current shareholders.