Discussion paper on rationalisation of disclosure norms for Rights Issues

Background

A listed entity can raise further issue of capital by way of preferential offers, Qualified Institutional Placements (QIPs), Rights Issues (RIs), Further Public Offers (FPOs), American Depository Receipts (ADRs) / Global Depository Receipts (GDRs), etc. Apart from ADRs / GDRs, all other issuances are domestic. While making an issue of capital, several factors guide the issuers in the choice of mode of issuance. These include time, cost, labour involved and disclosure requirements. From our interaction with market participants, it was gathered that quite often, the issuers choose preferential offers or QIP or even ADR / GDR issuances, as these modes require less time, cost and efforts. Such alternate modes of issuances while helping the entities to achieve their capital raising needs, dilute the existing shareholders’ stake in the entity.

In order to encourage entities to look at RIs as a viable form of capital raising, SEBI had taken up a comprehensive review of various provisions of its guidelines relating to RIs. As part of this exercise, SEBI recently amended the guidelines relating to timelines for RIs which has resulted in an overall reduction of more than 2 months in the rights issue process. Use of Applications Supported by Blocked Amount (ASBA) in RIs is another measure. In furtherance of the overall objective, other measures that are under consideration relate to electronic trading of Rights Entitlements and rationalization of disclosures for RIs. This concept paper relates to rationalisation of disclosures in Rights Issue documents.

Current disclosure requirements

Section III of Chapter VI of SEBI (Disclosure and Investor Protection) Guidelines, 2000 specifies the disclosure requirements for RIs by listed entities. The disclosure requirements for RIs are currently more or less as exhaustive as for public issues.

Need for review

RIs are further issuances of capital made by listed entities to its existing shareholders. Certain information about the entities that are listed and traded on the exchanges is available in the public domain for investors. Hence, for further issuances of capital by such entities, it may not be necessary to mandate exhaustive disclosure requirements. In such cases, it may suffice to have a more restricted set of disclosures about the issue and the entity. Further, rationalization of disclosure norms for RIs would not only make the issuance process faster but also contribute to savings in paper, printing and distribution costs, thereby reducing overall cost of issuances.

Discussions in the SEBI Committee on Disclosures and Accounting Standards (SCODA)

The suggestion to rationalise disclosure requirements for RIs was deliberated by SCODA. A Sub-Group was constituted for examining the issue in detail.

This sub-group of SCODA extensively deliberated on the extant requirement of disclosures in terms of Chapter VI of SEBI (DIP) Guidelines and has drawn out a set of revised disclosures that would be applicable for RIs. These were considered by SCODA.

The SCODA has recommended that listed entities be permitted to opt for a separate set of disclosures for RIs, subject to compliance with the following conditions:

· The issuer entity has been filing periodical statements and information in compliance with the listing agreement for the last three years.

· Such information is available on the websites of any stock exchange with nation wide trading terminals / on a common e-filing platform.

· The issuer entity has in place an investor grievance handling mechanism with regard to share transfer and clearly laid out systems and procedures for timely and satisfactory redressal of investor grievances.

Public comments

As part of the consultative decision making process followed by SEBI in policy formulation, the proposed disclosure requirements for RIs is placed on SEBI website for public comments. A comparative statement indicating the existing disclosure norms for RIs and the proposed amendments thereto has been tabulated and placed on the SEBI website for ready reference.

Comments, if any, on the same may be e-mailed on or before March 28, 2009 to disclosures@sebi.gov.in.

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Discussion paper on rationalisation of disclosure norms for Rights Issues Background A listed entity can raise further issue of capital by way of preferential offers, Qualified Institutional Placements (QIPs), Rights Issues (RIs), Further Public Offers (FPOs), American Depository Receipts (ADRs) / Global Depository Receipts (GDRs), etc. Apart from ADRs / GDRs, all other issuances are domestic. While making an issue of capital, several factors guide the issuers in the choice of mode of issuance. These include time, cost, labour involved and disclosure requirements. From our interaction with market participants, it was gathered that quite often, the issuers choose preferential offers or QIP or even ADR / GDR issuances, as these modes require less time, cost and efforts. Such alternate modes of issuances while helping the entities to achieve their capital raising needs, dilute the existing shareholders’ stake in the entity. In order to encourage entities to look at RIs as a viable form of capital raising, SEBI had taken up a comprehensive review of various provisions of its guidelines relating to RIs. As part of this exercise, SEBI recently amended the guidelines relating to timelines for RIs which has resulted in an overall reduction of more than 2 months in the rights issue process. Use of Applications Supported by Blocked Amount (ASBA) in RIs is another measure. In furtherance of the overall objective, other measures that are under consideration relate to electronic trading of Rights Entitlements and rationalization of disclosures for RIs. This concept paper relates to rationalisation of disclosures in Rights Issue documents. Current disclosure requirements Section III of Chapter VI of SEBI (Disclosure and Investor Protection) Guidelines, 2000 specifies the disclosure requirements for RIs by listed entities. The disclosure requirements for RIs are currently more or less as exhaustive as for public issues. Need for review RIs are further issuances of capital made by listed entities to its existing shareholders. Certain information about the entities that are listed and traded on the exchanges is available in the public domain for investors. Hence, for further issuances of capital by such entities, it may not be necessary to mandate exhaustive disclosure requirements. In such cases, it may suffice to have a more restricted set of disclosures about the issue and the entity. Further, rationalization of disclosure norms for RIs would not only make the issuance process faster but also contribute to savings in paper, printing and distribution costs, thereby reducing overall cost of issuances. Discussions in the SEBI Committee on Disclosures and Accounting Standards (SCODA) The suggestion to rationalise disclosure requirements for RIs was deliberated by SCODA. A Sub-Group was constituted for examining the issue in detail. This sub-group of SCODA extensively deliberated on the extant requirement of disclosures in terms of Chapter VI of SEBI (DIP) Guidelines and has drawn out a set of revised disclosures that would be applicable for RIs. These were considered by SCODA. The SCODA has recommended that listed entities be permitted to opt for a separate set of disclosures for RIs, subject to compliance with the following conditions: · The issuer entity has been filing periodical statements and information in compliance with the listing agreement for the last three years. · Such information is available on the websites of any stock exchange with nation wide trading terminals / on a common e-filing platform. · The issuer entity has in place an investor grievance handling mechanism with regard to share transfer and clearly laid out systems and procedures for timely and satisfactory redressal of investor grievances. Public comments As part of the consultative decision making process followed by SEBI in policy formulation, the proposed disclosure requirements for RIs is placed on SEBI website for public comments. A comparative statement indicating the existing disclosure norms for RIs and the proposed amendments thereto has been tabulated and placed on the SEBI website for ready reference. Comments, if any, on the same may be e-mailed on or before March 28, 2009 to disclosures@sebi.gov.in.