Divyansh Nayar, 4th year, National Law University, Odisha
The industrial undertakings are in dire need of funds for various purposes during the period of this economic collapse at the heels of COVID- 19 Pandemic. In order to attenuate the capital adequacy requirement, the Securities and Exchange Board of India (‘SEBI’) allowed relaxations in the rights issue process that seem to ease out the stringent requirements that debilitate the facility of raising funds by companies. Through a series of circulars, SEBI streamlined the process in order to cater to the need of the market and promote the influx of capital in the market. This article lays down the scheme of relaxations proffered and emphasizes on the capital requirement of the market
What is Rights Issue ?
Rights issue deals with a preemptive right of the shareholders and it is a tool to offer additional shares to the existing shareholders of the company at a discounted price. “Preemptive-rights” mean a right to be offered any additional shares issued by the company before it is offered to any external individual. A rights issue also ensures that the shareholding pattern does not change as the shareholder continues to hold the same percentage even with the increase in capital. Therefore, by offering a rights issue investors and founders can ensure that they do not dilute their holding in the company.
Section 62 of the Companies Act, 2013 deals with rights issue as it contains provisions on further issue of capital.These additional shares are directly offered by the company rather than the secondary market and the additional shares that can be bought by the shareholders depends on their existing shareholding in the company.
Apart from the Companies Act, the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR) also govern rights by a listed company. The manner of issue and the required disclosures are provided for under the ICDR. The Securities and Exchange Board of India (ICDR Regulations) defines a rights issue as “an offer of specified securities by a listed issuer to the shareholders of the issuer as on the record date fixed for the said purpose”.
Analysis of the temporary relaxations provided by SEBI under the ICDR Regulations shows that these are positive steps towards streamlining the rights issue process and making it more attractive and efficient. The relaxations shall not only benefit the stressed entities but to companies who are capital-strapped now but have viable business models to flourish. Making the process expedient and smooth, would enable companies to have working capital or to pursue expansion activities.
Relaxations for “Rights Issue” amid Covid-19
21st April Circular
The SEBI, through a circular dated 21st April 2020, granted temporary relief amid the global pandemic. Relaxations have been provided under certain provisions of the SEBI (ICDR) Regulations, 2018 in respect of Rights Issue. The rights issues opening on or before March 31, 2021 would get benefited from the said Circular. The impact of these temporary relaxations has been analyzed to evaluate the procedural benefits that the companies have been bestowed to companies
- Regulation 99(a) required the equity shares to be listed on any stock exchange for at least 3 years immediately preceding the reference date. This requirement regarding listing of shares have been reduced from 3 years to 18 months.
- Under regulation 99(c), the issuer was required to have at least INR 250 crores as the average market capitalization of public shareholding, which has been reduced to INR 100 crores. This will attract companies with smaller market size to raise capital by entering into fast track issue.
- Earlier, under regulation 99(f) of the SEBI (ICDR) Regulations, the requirement of compliance with the listing agreement and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, was for a period of at least 3 years immediately preceding the reference date which has been reduced to 18 months.
- Earlier under regulation 99(h), a company was restricted to make fast track rights issue if there had been any show-cause notices or prosecution issued/initiated against the company/ its promoters/ whole-time directors. Pursuant to relaxations ensued in SEBI Circular; it has allowed the companies to be eligible for rights issue where adjudication proceedings or prosecution proceedings in respect of the above as well as the group companies are concerned. However, the company has to make the required disclosures in this regard along with its adverse impact in the letter of offer.
- Regulation 99(i) makes the issuer ineligible on account of any violation in the securities regulations by issuer, promoters, promoter group or directors. Now, these violators can offer rights issue if they have fulfilled the settlement terms or followed the directions under the settlement orders. Similarly, as per regulation 99(m) if there was any qualification in the audit report that led to ineligibility. This condition has also been changed and the companies, which provide restated financial statements adjusting for the impact of the audit qualifications, are now eligible for fast track rights issue.
- Another important relaxation provided by SEBI is with respect to minimum subscription. Regulation 86(1) required minimum subscription in the issue to be at least 90% which has been relaxed to 75%. However, a restriction has been put into place on the utilization of at least 75% of the funds for the objects of the issue other than general corporate purpose if the actual subscription goes beyond 75% but within 90% of the offer.
6th May Circular
SEBI through a circular dated 6th May 2020 has also provided one-time relaxations pertaining to rights issue opening up to 31st July 2020. Some of the procedural relaxations provided by SEBI are as under:
- Application for rights issue has to be made only through the ASBA facility (Applications Supported by Blocked Amount) as per regulation 76 of the ICDR Regulations.
- Abridged letter of offer and the application form can be served through electronic transmission as per Regulation 77(2) of the ICDR Regulations and even if registered post or courier services are not used it will not lead to non-compliance.
- SEBI through this circular have also asked the issuers to ensure that they take adequate steps to reach out to its shareholders through SMS, digital advertisement or audio-video advertisement.
Further, the Ministry of Corporate Affairs through a circular dated 11th May 2020, announced that listed companies that come out with rights issue before 31st July 2020 would not be required to inform the shareholders about the rights issue through courier or postal services. This step by the MCA would decrease the procedural burden on the companies but at the same time the shareholders whose e-mail addresses are not registered with the company may miss out on the opportunity to invest. This might lead to an increase in the unsubscribed portion of a rights issue, which would allow the promoters to invest in the unsubscribed portion of the issue to increase their stake in the company.
These relaxations have made the cumbersome process of rights issue a little smoother for the Indian companies and show the intention of the regulator towards having relatively flexible eligibility criteria for a fast track rights issue. Therefore, in the present COVID-19 wrecked economy, where companies are in dire need of funds and living with the fear of hostile takeovers, these relaxations will attract more companies to raise capital and infuse funds by way of offering rights issues to the existing shareholders. Further, this circular may lend help in economic restructuring.
In 2019 “rights issue” gained traction and 12 listed companies raised about Rs. 52,000 crores which is considerably higher compared to Rs.18,826 crores raised in the year 2018. In the current scenario, rights issue has been used as a tool by listed companies to raise capital as the stock markets are sluggish and it attracts investors who are looking for fresh investments.
Recently on May 20th 2020, Reliance Industries announced the biggest ever rights issue worth Rs 53,125 crores with price at Rs 1,257 per rights share and this was a part of the company’s capital raising programme. The company offered 42,26,26,894 equity shares through its rights issue. Similarly, companies like Vodafone and Airtel also garnered good response as their rights issue offering saw more demand than the number of shares on offer. Both Vodafone and Airtel conducted their largest fundraising exercise by offering rights issue worth Rs.25,000 crores and Rs. 24,939 crore respectively. Therefore, as more listed companies are raising funds through rights issue, amendments and procedural relaxations were required for making the entire process more efficient.
Further, many companies have restricted themselves to go for IPOs even after the SEBI approval owing to current market disruptions, the relaxation in rights issues will surely leverage those companies who otherwise would have to redraft the prospectus and get the approval.
Therefore, the temporary relaxations provided by SEBI amid the global pandemic will surely bring relief for the stakeholders involved including the companies who intent to raise funds through rights issue. This is a positive step by the government to ease out the procedural and legal requirements, which will reduce the burden on companies and stabilise the financial markets.
Companies Act, 2013, No. 01 , Acts of Parliament, 2013 § Sec. 62.
Relaxations from certain provisions of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 in respect of Rights Issue, 21st April 2020, [Circular No.: SEBI/HO/CFD/CIR/CFD/DIL/67/2020].
Relaxations relating to procedural matters – Issues and Listing, 6th May 2020, [Circular No.: SEBI/HO/CFD/DIL2/CIR/P/2020/78].
Clarification on dispatch of notice under section 62(2) of Companies Act, 2013 by Ministry of Corporate Affairs, Circular dated 11th May 2020, [General Circular No. 21/2020].
India Today, “Reliance Industries rights issue opens today: All you need to know”, 20th May 2020, [https://www.indiatoday.in/business/story/reliance-industries-rights-issue-shareholders-zero-debt-target-march-21-mukesh-ambani-1679877-2020-05-20]
Livemint, “Vodafone Idea’s ₹25,000 crore rights issue oversubscribed nearly 1.08 times”, 5th May 2019, [https://www.livemint.com/companies/news/vodafone-idea-s-25-000-crore-rights-issue-oversubscribed-nearly-1-08-times-1557053325590.html]