Sebi Proposes Breather For Primary Market Offers

SEBI, at its Board Meeting held on 19th June 2014 discussed and announced various relaxed norms for fund raising by the Company. On one hand, it attempted to ease the fund raising and on the other, with the intent to align the working of Employee Welfare Trusts in Listed Companies with the internationally&nbsp accepted practice, it proposed to allow secondary market acquisitions pursuant to the Employee Benefit Schemes. Given below is the gist of proposals & decisions approved by the Board:

Ms. Anjali Aggrawal
Vice President
+919971673336
anjali@indiacp.com

1. Reforms proposed in the Primary Market: 

In order to align the regulatory requirements with the changing market realities on one hand and to rejuvenate the capital market on the other, the following reforms have been proposed:

• For companies with post IPO market capitalisation of less than Rs 4000 Cr, the companies are required to either dilute 25% or Rs. 400 crore, whichever is lower, to the public. As per Rule 19 (2) of SCR Rules, 1957, for Companies with post IPO market capitalisation of more than Rs 4000 Cr, a dilution of only 10% is needed.
• If the dilution is less than 25%, minimum public shareholding of 25% shall be achieved within 3 years of listing. 
• As against earlier provisions of only 30% of the reservations for Anchor Investors, the regulator has decided to amend the said reservation and increase it to 60%. This will attract more serious and dedicated investors to invest in the equity shares of the companies and such investment by Anchor Investors who generally invest after conducting intensive due-diligence, will also indirectly help the Retail Investors to take well-informed decision thereby posing confidence not in the Company only but in the capital market as well.
• Bonus shares have been permitted to be offered in the Offer for Sale mechanism subject to the condition that such bonus shares should have been issued in last one year prior to the filing of the draft offer document and such shares were issued out of free reserves or share premium.

2. Minimum public shareholding for Public Sector Undertakings (“PSUs”) under Securities Contracts (Regulation) Rules, 1957

• To bring uniformity among all the companies and for the market to be promoter neutral, it has been proposed by SEBI that even the PSUs shall also be required to have minimum 25% of public shareholding as against earlier provisions that mandated for only 10% of public stake in the PSUs. These PSUs are needed to increase the stake within a period of 3 years.

3. Provisions governing the Preferential Issue Norms:

• With regard to the pricing norms for Preferential Allotments as mandated in Regulation 76 of SEBI (ICDR) Regulation, 2009, it has been decided that the term “Closing Price” be replaced with the “Volume weighted Average Price” in line with the pricing mechanism prescribed for Qualified Institutional Placements with the sole objective of ensuring that the fair value duly depicts the impact of all Corporate Actions , i.e. stock split, bonus etc..

With the intent to plug all the grey areas in pricing guidelines, it has been decided to extend similar treatment as provided under SEBI (SAST) Regulations for pricing in the event of “Infrequently Traded Shares” which is not currently prescribed in the extant Regulations on Preferential Allotment

4. Review of SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 2009 (hereinafter referred as Guidelines

• SEBI has proposed to review the existing Guidelines with the primary objective of framing a comprehensive set of regulations not only governing the ESOS & ESPS of listed entities but also bringing all the employee benefit schemes involving shares of the Company under the ambit of said Regulations.
• To align the working of Employee Welfare Trusts in Listed Companies with the internationally accepted practice on one hand and to ensure transparency in the operations of the said Trusts on the other, the Capital Market Regulator has proposed to permit the Schemes involving acquisition from the secondary market under certain conditions so as to avoid forced dilution of capital.
• To improve the governance and transparency of the schemes framed for the welfare of the Employees and at the same time, addressing the concerns related to the Employee Welfare Trusts which were being used as a portfolio managers for Promoters under the cloak of the ESOP Schemes, the following safeguards have been proposed by SEBI:
a) To facilitate acquisitions through secondary market, prior approval of shareholders via special resolution is required 
b) Certain limits as may be prescribed by SEBI from time to time, to regulate acquisitions through secondary market 
c) Trusts have been authorised to undertake only delivery based transactions and restrictions have been imposed on the trusts to deal in derivatives
d) Restriction have been imposed on trusts to sell shares
e) A minimum of six months holding period has been prescribed for shares acquired through secondary market
f) Formation of a separate category for the trusts as different from “Public” and “Promoter”
g) Imposing other regulatory obligations, as may be prescribed and maintaining transparency by regulating strict disclosures
h) A limit of 10% of the assets held by general employee benefit schemes other than ESOS type of schemes on owning shares of the company / listed holding company

5. Expanding the framework of Offer for Sale (OFS) of shares through Stock Exchange Mechanism

SEBI in a need to encourage participation of the retail investors and to include the non-promoter shareholders in the OFS mechanism has prescribed certain modifications to the existing OFS mechanism which provides for OFS mechanism to only Top 100 companies. The modifications as approved by SEBI are summed up as under:

• Minimum 10% of the issue size for the Retail Investors and in case bidding is less than the aforesaid prescribed stipulation then such portion may be offered to other investors. 
• The non-promoter shareholders have now been included to offer their shares under Offer for Sale mechanism provided at least 10% of the capital of the company is held by such non-promoters shareholders.
• Such offer for sale shall be available to shareholders of Top 200 companies by market capitalization, instead of the earlier mandate of Top 100 companies.

6. Other discussions and their simultaneous approval which formed part of the SEBI Board Meeting held on June 19, 2014 are outlined as follows:

A. SEBI has also discussed the KYC regulations and has duly approved the proposal to amend the SEBI {KYC (Know Your Client) Registration Agency} Regulations, 2011 which in-turn would help the facilitation of the KYC process in the entire financial sector.

B. Draft SEBI (Research Analyst) Regulations, 2014 have been duly approved by the capital market regulator. These regulations specify restrictions on trading and on compensation of the persons who make comments or recommendations concerning securities or public offer through public media.

CP Viewpoint: 

In our view, the approved reforms will surely promise to strengthen the dynamics of Primary Market on one hand and in re-building the investor’s confidence in the Capital Market on the other and will open avenues for the listed companies to reward their Employees by allowing the purchase of shares from the open market through the mechanism of Employee Welfare Trust.