Sebi proposes permitting rights issues without merchant bankers and allotment shares to specific investors

The capital markets regulator has proposed multiple changes in existing rules to make it easier and faster to raise funds through rights issues.

Securities and Exchange Board of India (Sebi) proposed to eliminate the need for a draft document, do away with merchant bankers and grant flexibility by allowing allotment to selective investors in a rights issue, according to a consultation paper.

The discussion paper is driven by Sebi's goal to make rights issues to existing shareholders the preferred method of fundraising. Sebi's data indicates that while ₹15,110 crore was raised through rights issues in FY24, this amount was significantly lower than ₹68,972 crore mopped up via qualified institutional placements (QIP) and ₹45,155 crore through preferential allotments.

Even though the existing shareholders have the first right to participate in fund-raising activity, listed entities preferred to raise funds though the preferential issue by offering it to a select few investors, including promoters, Sebi said. To redress this, it proposed to allow promoters to renounce their rights issue entitlement in favour of any selective investor on fulfilling certain conditions.

Elimination of draft filings and merchant bankers

As of now, detailed disclosure is required while filing a draft letter of offer (DLoF). However, the regulator proposes to discontinue this exercise to reduce the time involved in the process. Sebi proposed streamlining the content of the letter of offer by reducing disclosures to include only essential information about the rights issue, such as the purpose, pricing, record date, and entitlement ratio, among other details.

Sebi proposed to dispense with the requirement of a merchant banker by the issuer. Instead, the consultation paper said the activities a merchant banker carried could be assigned to the issuer, registrar to the issue and stock exchanges.

According to the regulator, a rights issue process taking the fast-track route takes on an average 126 days; otherwise it takes an average 317 days. This includes an average 18 days from the day the issue opens to its closure, and 7-8 days for listing.

The regulator proposed to reduce the current indicative timelines of a rights issue to 20 working days (T+20) of the board approval, and listing time after the issue closes to 3 days (T+3).

The new framework could make rights issues more efficient and attractive as a primary method for companies to raise capital,” said Nilesh Tribhuvann from White & Brief, Advocates & Solicitors. However, he said, the change could impact the business of merchant bankers as their role in rights issues could diminish significantly.

“While this may raise concerns within the merchant banking sector, it could also prompt them to pivot towards more value-added services in corporate finance,” Tribhuvann said. “The ability to selectively allot shares in a rights issue is also a game changer, giving companies more flexibility to target strategic investors, potentially boosting market confidence and investment.”

According to Anjali Aggarwal, partner at Capital Market Services, Corporate Professionals Capital (P) Ltd, said that doing away with the regulatory approvals and requirement of appointing intermediaries may impact the quality of the disclosures and there may be risk of misleading or incomplete information being given in the offer documents.

“A rights issue, although may not entail raising of money from the public at large, but it does involve raising the money from the listed entity’s existing shareholders-from whom funds were raised by the entity, anytime in the past,” she said. “This makes the company accountable and answerable for the funds so raised.”

The absence of merchant banker, a third party, might reduce the level of scrutiny applied to the offer documents and may give rise to half-baked information being served to the public shareholders, the Sebi registered merchant banker said.

However, Aggarwal said, the proposal may not impact the business of top tier merchant bankers’ because corporate houses may strive for complete disclosures irrespective of the relaxations provided.