Capital market regulator Sebi has amended the `rights issue’ norms that would now allow an issuer company to utilise the issue proceeds only after the basis of `allotment of rights share’ is finalised.
Earlier, the issuer company was allowed to utilise the rights issue proceeds after satisfying the designated stock exchange that its `rights offer had received minimum 90% subscription’ . The new amendment that has been brought in follows Sebi’s decision of late last year to cut short the time period for allotment of shares in rights issue to 15 days from the previous 45 days.
The Sebi circular said, “In view of this it has been decided to amend clause 8.19 of the Sebi (DIP) guidelines to provide that the issuer company can utilise the issue proceeds only after the basis of allotment is finalised.”
“The amendment has brought more sanity to the rights issue norms”, said Prithvi Haldea, managing director, Prime Database. An issue is considered `complete’ only when the final allotment of shares is done.
A company using issue proceeds before the allotment process could land in trouble as any adverse development could happen in the issuer company. Thus by amending the `rights issue’ Sebi has actually set the process right in a rights issue process, he said.
Further, Sebi has extended the facility of `application supported by blocked amount’ (ASBA) to all rights issue which enables an investor to apply for an issue without making payment.
Instead, the amount is blocked in investor’s personal account with the designated syndicate bank and only the required funds will be debited from the account upon allocation of shares.
Currently Sebi had enabled the facility for applying through ASBA only in case of an initial public offer (IPO). The amendments also include rationalizing the `disclosure norms’ during a `rights issue’.
According to the norms issuer companies are required to disclose only minimum information that will help in making the issuance process faster and also help in reducing cost.
The regulator felt the need for simplifying the norms for `rights offer’ since companies were shying away due to its cumbersome process and resorting to other modes for raising capital.
The Sebi board which met on June 18, 2009 had noted that quite often, the issuers choose `preferential offers’ or `qualified institutional placements (QIP)’ or even `American or global depository receipt ADR/GDR’ issuances over rights offers, as these other modes require less time, cost and efforts.
While alternate modes of issuances help entities to achieve their `capital raising needs’, they dilute the `existing shareholders stake’ in the entity.