Sebi seeks to streamline QIP disclosures but experts flag legal hurdles
Summary
Concerns include the materiality thresholds for legal disclosures and the increased due diligence burden. Experts emphasize the need for alignment between regulations to avoid ambiguity.
Securities and Exchange Board of India's (Sebi) recent proposal to revamp regulations governing qualified institutions placement (QIP)—a key route for listed companies to raise capital—could accelerate the process but may also introduce new complexities, experts said.
The consultation paper, released on 2 May, suggests streamlining the placement document by focusing on relevant information. This includes updates to disclosures about risk factors, the use of proceeds, capitalization statements, and financial details.
The objective, Sebi said, is to eliminate redundant information and enhance the clarity and relevance of disclosures for qualified institutional buyers (QIBs), who are considered knowledgeable investors. Sebi has invited public feedback on these proposals by 23 May.
QIBs typically include mutual funds, insurance companies, pension funds, foreign institutional investors, and other large financial institutions. Experts said the revised disclosure requirements are sufficient for these QIBs, but warn of challenges ahead.
Overlap concerns
Legal experts anticipate complications, notably with the suggested "materiality" thresholds for revealing legal actions and a potential rise in the onus for comprehensive due diligence. Materiality threshold refers to the level at which a legal matter becomes important enough to warrant disclosure.
Sebi's assessment indicates that existing detailed disclosure norms for listed companies often overlap with QIP requirements, causing unnecessary delays and procedural inefficiencies.
Legal experts pointed out that while the proposals aim to align QIP disclosures with rights issues, issuers will still need to comply with additional requirements under the Companies Act. This creates a dual regulatory framework that affects due diligence and document preparation, they said.
Abhiroop Lahiri, partner at Cyril Amarchand Mangaldas said that while the discussion paper proposes some welcome changes, companies should keep in mind that QIP offer documents are still ‘private placement offer letters’ and therefore must continue to comply with the disclosure requirements (Form PAS 4) under the Companies Act, 2013.
“Form PAS 4 prescribes numerous additional disclosures that are not covered by Sebi’s regulations or the discussion paper. For instance, it requires a detailed breakup of the issuer’s share capital history since incorporation—something the discussion paper suggests is irrelevant for QIP investors," said Lahiri.
Until Sebi’s regulations and the Companies Act are fully aligned, QIPs will necessitate additional information beyond the discussion paper's proposals, impacting the due diligence and preparatory process, he added.
About the difference in the discussion paper between QIPs and rights issues, Lahiri said, “QIPs are marketed to new investors, not existing shareholders. Therefore, issuers may include extra disclosures in QIP offer documents, ensuring new investors have all the necessary information before committing."
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Capital and disclosure requirements
Legal experts also emphasized the need to amend the current Sebi (Issue of Capital and Disclosure Requirements) regulations to avoid conflicts with the proposed changes.
Pranav Bhaskar, partner and head of corporate practice at SKV Law Offices explained that the ICDR (Issue of Capital and Disclosure Requirements) regulations currently mandate detailed disclosures in the QIP placement document, including financials, risk factors, and corporate details.
He said that if Sebi concluded these disclosures largely duplicate information already disseminated by listed companies under the Listing Obligations and Disclosure Requirements (LODR) Regulations, reducing redundant content would align with the objectives of both ICDR and LODR.
“Sebi’s rationale, that LODR filings cover much of the same ground, is consistent with the continuing disclosure regime, but the ICDR itself would have to be revised before the new placement document format becomes legally binding," Bhaskar stated.
Experts raised concerns regarding potential legal challenges, particularly concerning the new materiality thresholds for disclosing legal proceedings.
Currently, ICDR requires the disclosure of “material" lawsuits without specific numeric limits. The draft proposal suggests listing only cases exceeding 2% of turnover or net worth, or 5% of average profit/loss after tax.
“What if a significant case falls just below the threshold? Will different companies’ materiality policies (permitted as an alternative) lead to inconsistent disclosures? Ambiguity may arise in aligning this with LODR’s concept of material events (which trigger mandatory exchange filings)," said Bhaskar.
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Welcome step
Some financial experts welcomed Sebi’s move, anticipating increased efficiency and reduced costs.
Jyoti Prakash Gadia, managing director at Sebi-registered merchant banker Resurgent India, stated that the revised process would entail lower costs and reduced time.
Currently, the time taken for the QIP documentation is typically 3-4 weeks, which could vary depending on various factors such as the company's preparedness, the complexity of the issue, and the responsiveness of involved parties (merchant bankers, legal counsel, etc).
“The revised set of information now proposed to be prescribed for being made available to QIBs is considered to be adequate, taking into account the fact that the QIPs are professionally run entities having adequate capabilities to assess the strengths and weaknesses of each offer of private placement of equity shares," he said.
Others said this reflected Sebi’s broader shift toward deregulation and enhancing the ease of doing business in capital markets.
However, Narinder Wadhwa, managing director and chief executive officer of stockbroker and merchant banker SKI Capital Services Ltd, cautioned against aligning QIP disclosures too closely with those of IPOs or rights issues.
“IPO disclosures are designed for a broader investor base, including retail participants, and applying the same standards to QIPs could risk overburdening issuers with unnecessary requirements. If not carefully calibrated, it might reintroduce the very complexity and costs that the rationalization aims to eliminate," he said.
