Comparison between SEBI ICDR Regulations, 2009 & SEBI DIP Guidelines, 2000

TG Team 13 Sep 2009 9,269 Views 0 comment Print SEBI | Articles

A comparison between Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 vis-à-vis the SEBI (Disclosure and Investor Protection) Guidelines, 2000

The Securities and Exchange Board of India is turning a stricter eye on company promoters who have been issued preferential warrants, saying that they will have to forfeit the upfront payment made on unexercisedwarrants.This is contained in its recently notified Issue of Capital and Disclosure Requirements (ICDR) Regulations 2009, which SEBI made public on Thursday 3rd September 2009.

These regulations replace the Disclosure and Investor Protection (DIP) Guidelines 2000 that now stand rescinded.

In the matter of preferential warrants, SEBI’s new norms are probably meant to contain the situation following January 2008, when the stock market crash brought the price of several shares below the warrant exercise price for promoters, several of whom decided not to exercise their warrants in full. Promoters will now have to be more careful, as their upfront payment made only against exercised warrants will now be adjusted, said an expert familiar with regulatory matters.

The ICDR Regulations have been primarily created by conversion of the SEBI (Disclosure and Investor Protection) Guidelines 2000, a SEBI circular said.

The main highlights / significant changes incorporated in the new Regulations as compared to the old Guidelines are herein given below along with proposed implications of the suggested changes:

Sr. No.	Subject Matter	Changes brought about by the new regulations vis-à-vis the old Guidelines.	Remarks/ Rationale behind the Change

1.	Preferential Warrants	Promoters now will have to forfeit the upfront payment made on unexercised warrants.	Promoters will now have to be more careful, as their upfront payment made only against exercised warrants will now be adjusted, said an expert familiar with regulatory matters. Provision modified in the ICDR Regulations provide that in preferential issue of warrants, where the warrant holder exercises his option to convert only some of the warrants held by him, margin money paid against only such warrants can be adjusted. The balance amount against the remaining warrants/ margin money payable against the unexercised warrants shall be forfeited. Also, taking note of the fact that due to lack of clarity, there have been different interpretations. It is therefore decided to provide the same clearly in ICDR regulations, that Warrant holder is allowed to adjust payment only against that many warrants on which he decides to exercise the option to get equity shares and not against all the warrants which were initially allotted to him.
2.	Group Companies	Under the new Regulations, if the promoter of a debarred company is also a promoter, director or person in control of any other company, even that company would now be barred from accessing the capital markets.	SEBI has made some alterations in the matter of group companies and also explained the term in order to avoid confusions that had surfaced under the old Guidelines. The new norms also ban firm allotment to privileged people, who generally used to be relatives, associates or friends of promoters or promoters’ group. Even these categories have to apply through the regular process. Promoters with majority shareholding in a listed company can offer shares to the public straightaway. This would help the Government, as it is keen on dis-investment opportunities.
3.	Public Issues	Mandatory provisions for inclusion of the option of offer for sale by listed companies, and omissions of provisions pertaining to OCTEI issues, E-IPO, reservation on competitive basis in public issues for institutions, MFs, FIIs and scheduled banks and firm allotment of public issues.	By adopting the new inclusions the new Regulations have gone a long way to ensure a credible and stable framework for disclosure and investor protection, which would go a long way in streamlining the process of issue of capital.
		Compulsory conversion of all outstanding convertible instruments held by any person, as compared to promoters and shareholders (according to DIP Guidelines).	By mandating compulsory conversion the new Regulations, have broadened the scope of scrutiny and also ensured that all investors and holders of instruments be treated at par. SEBI has also sought to ensure that there are no additional equity shares after IPO irrespective of who is holding the outstanding convertible instruments.
		The allotment/refund period in public issues has been reduced to 15 days for both fixed-price and book-built issues.	This is a welcome change in comparison to the old Guidelines wherein the time limit was fixed at 30 days for fixed price issue and 15 days for book-built issues, thereby making it more time taking and cumbersome a process. Moreover, there was no valid reason for giving extra 15 days to complete the process in case of a fixed price issue.
		Removal exemption available to banking companies for IPOs.	These companies had until now enjoyed exemptions on norms such as track record, minimum tangible assets, distributable profits, etc and hence now with the new Regulations in force, they will be subject to stricter scrutiny. However, this is a welcome change especially in the present Market scenario, with many weak companies seeking to utilize the exemptions for brining out IPO much to the suffering of shareholders.
		The issue period for infrastructure companies has now been brought on a par with that for other companies, and is now down to 10 days from 21, including any revision in price band.	SEBI has noted that is no apparent reason for giving more period for subscription to only issuers of one sector more so when most of the subscription come at the fag end of the issuer period irrespective of the length of issue period. Longer issue period is not desirable for issuer as well as for investors. Hence, in the proposed ICDR Regulations, the existing provision of DIP Guidelines has not been retained and the issue period provisions have been made applicable uniformly to all issuers. Also by stipulating the total issue period not to exceed 10 days, including any revision in price band, SEBI has clarified its stand on issue period in case of Public issues, which under the old Guidelines was not clear in case of revision of Price band in book-built public issues.
		As institutional and mutual funds have a separate window for allotment through QIPs now, SEBI has removed mandatory firm allotment to them as it has become redundant. However, a shareholder of a listed company whose group/sister concern is coming out with IPO will have a special reservation window.	Currently, the features of firm allotment are contained in pre-IPO placement, wherein shares can be allotted on firm basis during the period from filing of draft offer document with SEBI till filing of offer document with ROC, except that such pre- IPO placement is subject to lock-in. The issuers are not using this facility of firm allotment and therefore in the new market design, the same has become redundant. The ICDR Regulations would therefore, empower the regulator to deal with non-compliance with appropriate enforcement actions, which would be legally sustainable.
		In the case of follow-on offers SEBI has introduced a sub-clause to Clause 19 in the equity listing agreement, saying minimum 48-hour intimation should be given to the bourses of any proposed Board meeting for determination of issue price. Earlier Clause 19 was about prior notification to the stock exchanges, while it directed companies to give 7 days’ prior notification to stock exchanges in case of buyback of securities, declaration/recommending of Dividends, Rights Issue, Issue of Convertible Debentures.	By including provisions under the earlier DIP guidelines (now rescinded) into the equity listing agreement, SEBI has tried to ensure coherent working amongst all streams of working affecting public issues and thereby mandated that all Guidelines are in sync. It has also noted the important fact that the equity listing agreement entered into by them is much more comprehensive than the listing agreement signed for listing other instruments such as debt.
		As per the new norms, the requirement pertaining to the issue of Disclosure of Price or Price band of public issues has been done away with and the same is not required to be disclosed in draft prospectus.	SEBI has taken note of all redundant provisions of the draft prospectus, which were not providing any futility, and hence these exemptions will go a long way in making draft prospectuses crisp and valuable. This has also been done with the view allow the issuer to announce the price of any type of the issue as close as possible to the issue opening date to contain the market risk.
		The extent of underwriting obligations have been clarified under the new Regulations, to include that where 100% of the offer through offer document is underwritten, the underwriting obligations shall be for the entire amount underwritten.	By ensuring that the obligation of underwriters must be for the entire net offer to public and must not be limited to the extent of minimum subscription an issuer may agree to have the issue underwritten with an understanding to get the full amount of funds.
		Pre-issue advertisement now to be made after registering of prospectus/ red herring prospectus with Registrar of Companies before opening of the issue, as compared to the old Guidelines which mandated that Pre-issue advertisement be made immediately after receipt of observations from the Board	By mandating such a change, SEBI has ensured that advertisements be made only once the prospectus/ red herring prospectus is finalized and thereby the prospective shareholders are intimated about the correct position of the proposed IPO of the company, before the issue opens.
4.	Book Building Issue	The option of a 75% book building and 25% fixed price issue — which was rarely exercised — has been done away with. It has to be either a fixed price issue or a book-built one.	SEBI has observed that, though 75% book building option has been provided in the DIP Guidelines since inception of book building guidelines, there has not been any issue for last 10 years using 75% BB route. Further, 75% BB route has been found to be very inefficient in terms of time and other operational problems. Hence, the same has been removed from the ICDR Regulations.
5.	Disclosure Norms	a) SEBI has directed stock exchanges to disclose details of complaints lodged by investors against trading members and companies listed on the exchange, on their website. These disclosures would also include details pertaining to arbitration and penal action against trading members.	This is a welcome change and an important move to bring in more transparency in the grievance redress mechanism.
		b) Further, with respect to the issue of disclosure of currency of financial statements disclosed in the offer document, the old Guidelines mandated that particulars as per audited financial statements not to be more than 6 months old from the issue opening date for all issuers, except Government companies. Also, the new Regulations mandate that disclosure of pledge of shares by promoters – a feature that was not provided in the old Guidelines.	Presently there are different provisions for Government companies and non-government companies. The provision enables a government companies to access the market with audited financials, which can be as old as nine months whereas for non- government companies this period is 6 months. A need is felt to bring uniformity so that all issuers access market with audited accounts not older than 6 months at the time of issue opening. Hence, the new Regulations, with a view to ensure smooth working of both various Government agencies and private bodies have mandated that Government and non-government issuers be treated at par.
		c) New norms pertaining to Minimum promoters’ contribution to mandate that the same shall be brought in only by promoters whose identity photograph, etc are disclosed in the offer document.	Apart fro ensuring stricter disclosure norms this also gels with the objective of showing continued commitment to the company or project by the main promoters.
6.	Monetary Control	The new regulations also gives SEBI the control of the surplus money in green shoe option bank account, as this money would have to be transferred to SEBI’s Investor Protection and Education Fund (IPEF). Earlier, this surplus money was transferred to the Investor Protection Fund of stock exchanges.	Transferring surplus funds to IPEF of SEBI instead of stock Exchanges will augment the IEPF of SEBI.
7.	Other Highlights	a) The new guidelines have also clarified the definition of employees, key management personnel, restrictions on advertisements, and the documents that have to be attached with the due diligence certificate.	These changes have been brought to bring about more clarity as compared to the rescinded Guidelines and also to harmonize the definition with the definition provided under the SEBI (PIT) Regulations, 1992.
		b) The term “Financial Institution” is no longer open to interpretation and has been replaced under the new Regulations by “public financial institution or a scheduled commercial bank”.	The word “financial institution” is not defined anywhere. Hence the term “public financial institution” is used, which is defined in section 4A of the Companies Act. Also, SEBI is of the view that since the entity is expected to monitor the issue proceeds, it is felt that banks can also do this job more effectively.
		c) Under the new Regulations, a company making a public offer can allot shares only to its own employees and not to employees of its parent organization or subsidiary under the employee quota.	In the new ICDR Regulations, the term “employee” is used mainly for reservation for employees of the issuer and to give benefit of no-lock-in on options allotted to employees of the issuer before an IPO. Therefore, it was felt that, this benefit should be confined to only employees of the issuer company. Hence, employees and directors of subsidiary or holding company of the issuer have been excluded from the definition of the term.