SEBI had on April 21, 2020 temporarily relaxed certain criteria, in the wake of the COVID-19 pandemic, for rights issues that open on or before March 31, 2021 (our Client Alert dated May 11, 2020 covering such relaxations can be accessed here). SEBI has now amended the ICDR Regulations to rationalize certain criteria and disclosures for rights issues, with effect from October 1, 2020. A summary of the key amendments is set out below:

1.     Applicability of ICDR Regulations based on Size of the Rights Issue

By way of the Circular dated April 21, 2020 (‘April Circular’), the threshold for applicability of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (‘ICDR Regulations’) to listed issuers undertaking a rights issue was liberalized to ₹ 250 million (approx. USD 3.4 million).

The applicability of the ICDR Regulations to rights issues below a certain monetary size has been further liberalised. The ICDR Regulations are now not applicable to listed issuers undertaking a rights issue aggregating to less than ₹ 500 million (approx. USD 6.8 million). However, such an issuer has to prepare a letter of offer (‘LoF’) as per the ICDR Regulations and file it with SEBI for information and dissemination on SEBI’s website.

2.     Credit of Rights Entitlements to Holders of Compulsorily Convertible Debt Instruments 

The ICDR Regulations mandate that rights entitlements should be credited to the demat accounts of eligible shareholders before the date of opening of a rights issue. Separately, the ICDR Regulations also mandate that equity shares should be reserved in favour of holders of compulsorily convertible debt instruments (‘CCDs’), and such reserved equity shares are to be issued at the time of conversion of CCDs. SEBI has now clarified that the issuer is not required to credit rights entitlements to the demat accounts of the holders of CCDs before the issue opening date.

3.     Minimum Subscription

The minimum subscription criteria of 90% of the rights issue is no longer applicable to a rights issue if the issue proceeds are to be utilised towards any financing (other than financing of capital expenditure for a project), and if the issuer’s promoters and promoter group undertake to fully subscribe to their rights entitlements and not renounce their rights, except for renunciation within the promoter group.

4.     Fast Track Rights Issues

The April Circular had liberalized certain eligibility criteria for fast track rights issues. Now, the following criteria have been liberalized:

•     No show cause notices (excluding proceedings for imposition of penalty) should have been issued by SEBI and pending against the issuer, its promoters or its whole-time directors. Further, an issuer will need to disclose details of SEBI show cause notices for imposition of penalty or prosecution proceedings, along with the potential adverse impact on the issuer; and

•     In the event of any audit qualifications in the financial statements disclosed in the LoF, an issuer will be required to disclose restated financial statements adjusting for the impact of such audit qualifications. Further, an issuer will need to disclose that the impact of audit qualifications is unascertainable, if such impact is unascertainable.

5.     Truncated Disclosures

An issuer can now make truncated disclosures in a draft letter of offer (‘DLoF’) / LoF in terms of Part-B of Schedule VI of the ICDR Regulations (‘Part-B’), in the event that, amongst other things, the issuer has been filing periodic reports or statements in compliance with the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘Listing Regulations’) for the preceding one year.

Additionally, the disclosures in Part-B have been rationalized to avoid duplication of information already available in public domain and disclosed by the companies in terms of the Listing Regulations. A brief overview of such rationalization of the disclosures in Part-B can be accessed here.

6.     New Disclosures under Part-B1

An issuer that fails to meet the eligibility criteria for Part-B is required to make disclosures in terms of a new set of disclosures (‘Part-B1’) in the DLoF / LoF. While the disclosures under Part-B1 are more detailed than Part-B, these disclosures are less detailed than Part-A, which was previously applicable to rights issues. A brief overview of the key differences in disclosure requirements of Part-B1 as compared to Part-A can be accessed here.

Additionally, an issuer is required to comply with the disclosure regime under Part B-1 in the event of (a) a change of control or listing consequent to a relaxation granted by SEBI under the Securities Contracts (Regulation) Rules, 1957 pursuant to a scheme of arrangement under the Companies Act, 2013; and (b) such an issuer is undertaking a rights issue for the first time pursuant to such change of control / listing; and (c) a period of three years has not elapsed since such change of control / listing.

Way forward

These amendments are a welcome move and encourage utilization of rights issues as a viable mode of fund raising, specifically in the current environment. Further, the rationalization of compliance and disclosure requirements is expected to help reduce the compliance burden for issuers, and avoid duplication of information already available in the public domain.