India's Securities and Exchange Board amends norms to boost IPO market
Juris Corp, Mumbai
Juris Corp, Mumbai
After the Indian equity capital markets plunged in 2020 due to the pandemic, the year 2021 has seen an upward curve. The market regulator, the Securities and Exchange Board of India (SEBI), has made significant regulatory changes to support the financial market. It has provided for a number of relaxations and amendments under the regulatory framework to boost the equity capital markets such as:
- allowing promoters to acquire up to ten per cent equity (as against five per cent earlier) in a single financial year without triggering open offer requirements through preferential issue of equity;
- introducing the innovator’s growth platform;
- making the delisting process more transparent and efficient; and
- enhancing eligibility criteria for ‘fast track’ rights issues.
To further boost the equity capital markets, on 11 May 2021, SEBI rolled out a consultation paper entitled ‘Review of the regulatory framework of promoter, promoter group and group companies as per Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018’ (‘Consultation Paper’). Considering some of the propositions made in the Consultation Paper, SEBI has now introduced changes to the SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018 (‘ICDR Regulations’) vide notification dated 13 August 2021 (‘Amendment’). These changes were mainly introduced to dispose of certain redundant and cumbersome procedures under the ICDR Regulations, and to ease the process for new companies proposing to hit the stock markets.
This article provides an overview of the key changes introduced in the Amendment. Certain additional changes, which were proposed under the Consultation Paper and approved by SEBI in its board meeting held on 6 August 2021 (‘Board Meeting’) but which have not yet been notified, are also discussed below.
Reduction in lock-in requirements post initial public offer (IPO) and further public offer (FPO) for promoters and other investors
Historically, companies were more closely held by promoters and were primarily family-run, whereas the private equity and institutional investors were akin to lenders of the company. Now, with India moving towards global standards, companies are more and more being held and controlled by institutional investors, venture capitalists and private equities. There has been a paradigm shift in the ownership structure.
With the previous structural set up of companies being mainly promoter driven, the SEBI had prescribed a longer lock-in period for the pre-IPO and pre-FPO. This was provided keeping in mind:
- instances of issues for project finance wherein the lenders required the promoters to demonstrate their ‘skin in the game’ to be assured of their money; and
- to tackle the then phase of vanishing companies (where the companies disappeared suddenly without leaving any footprint) prevalent during the late 90s.
In the present times, the companies are not mainly held by the promoters only, but one can observe a broad-based shareholding pattern where the companies are more professionally managed. Acknowledging this drastic change in the practices in the capital market, SEBI has introduced the following changes in the Amendment:
Promoters’ lock-in requirements in case of IPO/FPO:
(1) the minimum promoters’ contribution (MPC) of 20 per cent of the post-issue capital shall be locked-in for 18 months now as against the previous requirement of three years; and
(2) the post-issue shareholding over and above MPC shall be locked-in for six months now as against the previous requirement of one year.
However, where the majority of the IPO/FPO issue proceeds (excluding the portion of offer for sale) are utilised for capital expenditure, these relaxations shall not be applicable and the previously applicable lock-in period requirements shall apply.
Non-promoters lock-in requirements in case of IPO:
(1) the entire pre-issue shareholding of the persons other than the promoters shall be locked-in for a period of six months now as against the previous requirements of one year; and
(2) the shareholding of: (i) venture capital funds; (ii) category I or category II alternative investment fund; or (iii) foreign venture capital investors shall be locked in for a period of six months now as against the previous lock-in requirement of one year. The above lock-in shall be from the date of purchase of the above-mentioned investors.
SEBI is of the view that today the companies are much more stable and established with mature businesses before they apply for listing and their promoters have demonstrated ‘skin in the game’ for several years before proposing listing. Additionally, with the current regulatory framework for listing, there are adequate checks and balances under the SEBI regulations (including corporate governance requirements, monitoring requirements by third parties for utilisation of issue proceeds, penal provisions for non-compliances and misstatements in prospectus) and thus the reduction in lock-in requirements is a forward move towards ease of doing business.
This amendment incentivises the promoters of the companies to avail pre-IPO funding from private equities, alternative investment funds and such other institutional investors. Typically, such investors are not in favour of long lock-in periods and, accordingly, the amendment is a welcome move.
Reconceptualising promoters group, disclosures required by group companies and the concept of promoters
(1) Promoter Group:
In cases where there is an investor – being an individual, body corporate, group of individuals and/or companies or combinations thereof (acting in concert) – that has invested in multiple companies and holds more than 20 per cent of the equity share capital of such companies (‘Investee Companies’), then such Investee Companies are said to be a part of the promoter group by the virtue of 2(1)(pp)(iii)(c) of the ICDR Regulations. The regulation 2(1)(pp)(iii)(c) now stands deleted as per the Amendment.
The SEBI regulations cast obligations on the issuing company to make disclosures in its offer document relating to the Investee Companies forming a part of the promoter group. Primarily, such Investee Company may be totally unrelated to the issuing company. This increases the burden on the issuer to make detailed disclosures in the offer document of unrelated companies on account of having a common investor without adding any benefit to the investor. The narrower definition reduces the disclosure requirements of non-material entities on the issuer and ensures that the investors are provided with requisite material information.
(2) Group Companies:
If an issuing company has entered into related party transactions with other companies during the period for which the financials are disclosed in the offer documents, then such other companies are considered to be as 'group companies' of the issuing company as per the ICDR Regulations. Further, any other company may also be designated as a group company if its considered material by the board of issuer company.
Under the ICDR Regulations, a company applying for listing is required to disclose the following details:
(i) name of the group companies;
(ii) details of registered address;
(iii) business description;
(iv) financial statements of such group companies for the previous three years; and
(v) details pertaining to outstanding litigations.
The issues arising with the definition of ‘group companies’ are:
(i) private equity and institutional investors may get classified as group companies. Accordingly, their disclosures would have to be disclosed in the offer document;
(ii) details of related party transactions are included in the offer document; and
(iii) such disclosures as currently required to be made by the group companies are not applicable subsequent to listing as a requirement either in SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (‘LODR Regulations’) or in SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 and thus prove to be unproductive for the investors.
Changes introduced under the Amendment
Understanding that many of the details required are irrelevant for the investors to make an informed decision regarding making investments into the company and in view of the above, the following changes have been introduced under the Amendment:
- the refusal by any stock exchange for listing any of the securities of the group companies of the issuer is no longer required to be disclosed in the offer document;
- failure of the group company of the issuer to meet listing requirements prescribed by the stock exchange and details of penalties (if any) and suspension of trading imposed by the stock exchange is no longer required to be disclosed in the offer document;
- the list of pending investor grievances of the top five listed group companies by market capitalisation of the issuer is no longer required to be disclosed in the offer document; and
- the financial details required to be given of the top five group companies in the offer document have been reduced and it now requires providing a reference to the website of such companies where the financials of such group companies are available.
The concept of promoters in the Indian capital markets is peerless. The Indian company law and securities law identifies the concept of promoters and is defined under the ICDR Regulations as such person(s):
(i) designated as promoters in the offer document or the annual return of the company;
(ii) who directly or indirectly have control over the affairs of the company as a shareholder, director or otherwise; or
(iii) on whose advice, direction or instructions, the board of directors of the company is accustomed to act subject to such other conditions as detailed therein.
The implication of the definition is that a person may be classified as a promoter irrespective of the holding in the company based on certain veto powers it may have. Further, the trend in India has been that various companies are initially funded by institutional investors until their listing, subsequent to which an exit is provided to such investors. With a paradigm shift in the ownership structure of the company, the current definition of promoter fails to target only such persons who are in actual control of the company but continues to widely consider persons beyond the control of the company. Further, if a person had to be reclassified to a non-promoter, then the process envisaged under the LODR Regulations for reclassification of promoters is quite cumbersome to encourage promoters to undergo the same.
Additionally, with India aligning with international standards, companies are now becoming more professionally managed, thereby the concept of promoter becoming redundant.
Proposal under the Consultation Paper
In view of the above it is proposed under the Consultation Paper to replace the concept of ‘promoters’ with ‘persons in control’.
The above proposal received mixed reaction from the market. While some believe the proposal may reduce the current vigilance that is on promoters, others believe it is a step forward, aligning towards international standards. Needless to say, the proposal may have a ripple effect on other SEBI regulations.
This proposal was accepted by SEBI with a view that this will improve the focus on better corporate governance and is yet to be effectuated. Since the other SEBI regulations recognise the concept of promoters and casts duties and obligations on them pertaining to periodic disclosures, holding persons responsible in case of any breach and non-compliance, this will require changes, not only in SEBI regulations but also other norms under the Companies Act and Insurance Regulatory and Development Authority of India, inter alia. Thus, the views of all the concerned regulatory bodies will have to be considered. Accordingly, it was decided in the Board Meeting that SEBI will deliberate over the proposals, with other regulators and the Primary Market Advisory Committee, to prepare draft regulations and to bring about the changes.
The year 2021, until mid-August, has witnessed more than 36 companies hitting the stock markets for an IPO, and more waiting to come out with an IPO. While some of the changes proposed in the Consultation Paper have come into effect by the Amendment, the proposal of replacing the concept of ‘promoter’ with ‘person in-control’ is still awaited. Thus, while attempting to substitute the concept of promoters with that of ‘persons in control’, this new definition needs to be worded cautiously to include only such persons who are in actual control of the company and not beyond, to reflect the essence of the proposed objective.
Further, considering the shortened life span of business and investments, the lock-in requirement changes will help in recycling of capital for productive uses if the early exit opportunities are envisaged.
The changes introduced under the Amendment with respect to disclosures of the group company shall not only reduce the disclosure burden on the companies, but it will also help investors make informed decisions with relevant information. Overall, the changes made in the Amendments are a welcome move and are expected to boost the equity capital markets and pre-IPO funding, bringing India closer with international standards.
* Disclaimer: The information provided in this article is intended for informational purposes only and does not constitute legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein. This article is not intended to address the circumstances of any particular individual or corporate body. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.
 The copy of the consultation paper can be accessed at: www.sebi.gov.in/sebi_data/attachdocs/may-2021/1620799119170.pdf#page=1&zoom=page-width,-15,842.
 The notification copy of the amendment can be accessed http://jclex.com/uploads/pdf/Amendments%20to%20ICDR%20Regs.pdf.
 The ‘capital expenditure’ has been defined in the amendments to include civil work, miscellaneous fixed assets, purchase of land, building, plant and machinery, etc.
 Source: Mainboard IPO in India 2021 (BSE, NSE), chittorgarh.com, available at: www.chittorgarh.com/report/mainboard-ipo-list-in-india-bse-nse/83/.