SEBI strengthens governance of capital issues

The Securities and Exchange Board of India (SEBI) has replaced the SEBI (Disclosure and Investor Protection) Guidelines, 2000 (the DIP guidelines) with the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (the ICDR regulations), in its efforts to consolidate and modernize the laws governing the issue of capital. The introduction of regulations gives SEBI legal teeth to control the market and its participants in a more stringent manner than was possible under the guidelines. Although not large, the changes brought about by the ICDR regulations suggest that the regulators have tried to remove redundant provisions and close the loopholes that existed under the DIP guidelines.

The most prominent changes are as follows:

• Levelled playing fields: Banking companies, new banks and infrastructure companies that were previously granted exemptions under the eligibility norms from making an initial public offer have now been brought on par with other companies. The ICDR regulations remove such exemptions.
• Anchor investors replace firm allotments: The ICDR regulations have done away with the DIP guidelines’ concept of “firm allotments” whereby an issuer could allot up to 10% of its issued securities to certain categories of investors (including Indian Mutual Funds and FIIs), on a firm basis and at a higher price than that offered to the public. The ICDR regulations replace this with the concept of an “anchor investor”, defined as a qualified institutional buyer that makes an application of at least Rs100 million (US$2.09 million) in a public issue, through the book-building route. The bidding process to select the anchor investor begins one day prior to the actual issue opening. Allocation to anchor investors is on a discretionary basis, and there must be at least two such investors for allocations of up to Rs2.5 billion, and five for allocations of more than Rs2.5 billion.

The legislative and regulatory update is compiled by Nishith Desai Associates, a Mumbai-based law firm. The authors can be contacted at nishith@nishithdesai.com. Readers should not act on the basis of this information without seeking professional legal advice.