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Business News/ Opinion / Columns/  Sebi changes will be useful to both firms, investors
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Sebi changes will be useful to both firms, investors

The reforms are broadly welcome and will help all stakeholders in moving forward

Photo: MintPremium
Photo: Mint

The Securities and Exchange Board of India (Sebi) has made several important changes to primary market regulations and a few other areas, which will broadly be useful, progressive and help both companies and investors. Some of the significant decisions are discussed here.

Primary market reforms: Sebi has introduced increased flexibility along with greater supervision for companies. It now allows a larger percentage of capital-raising for unspecified purposes. This is particularly useful for new-age companies which need to innovate by acquiring companies inorganically. It gives such public companies a war chest, to scale up and improve technological offerings. More specifically, companies can raise 35% of capital for both general corporate purposes and for future acquisitions, of which 25% can be used for inorganic growth. This is tempered with the requirement that the money raised for general corporate purpose is monitored by an external monitoring agency till the last rupee is used. Interestingly, the war chest for future acquisitions is not subject to monitoring, which may be a conscious omission to allow flexibility to the company in the timing of its spending. Also interesting is the fact that now instead of banks, credit rating agencies will provide the role of monitoring fund usage post the initial public offering (IPO).

Lock-in of shares: There have been certain changes for lock-in of shares after an IPO. For anchor investors who provide both faith of institutional backing to the IPO along with the possibility of flipping for a quick gain on listing, Sebi has extended the lock-in period for a part of the capital to 90 days. Probably balancing the need of an anchor investor’s right to exit with its duties (of not flipping for a quick buck without any risk), it is a useful amendment when hot IPOs abound. On the other hand, promoters’ and non-promoters’ lock-in has broadly been eased after the IPO, reducing the period, in both cases.

Non-institutional investors in IPOs: A new category or sub-quota has been introduced within high-net-worth individuals (HNIs). Thus, IPO applicants who don’t fall within retail or institutional, will have two different silos. One between 2-10 lakh, and another for above 10 lakh. This author has never been a fan of the quotas and silos in IPOs, and the new changes just make things more complex without any specific benefit, except to certain lakhpatis.

Valuation in preferential allotments: Certain changes have been introduced with respect to valuation in preferential allotment, which seem to be drawn directly from Sebi’s learning in the PNB Housing Finance matter. A higher dependence on valuation certificate, approval of committee of independent directors, and the mandate to comply with articles of association seem like taken directly out of the PNB Housing storybook.

Special situations: The introduction of a special situations alternative fund is a welcome step and will introduce a new class of investors to buy distressed companies. It would also allow a more efficient market for dead or near-dead companies, ensuring a faster resolution for them. Certain exemptions have been provided to this category, making it useful both to investors and to those in charge of selling such companies. Given the rather large corpus now managed by alternative investment funds, this will be useful to the economy as it deals more efficiently with zombie companies more rapidly. It will be a public good for investors, creditors and the economy overall.

Winding up of mutual fund schemes: An important and overdue change has been with respect to a clear exit path for mutual fund schemes which need a clear exit strategy. This is a welcome step in ensuring an orderly but premature winding-up of a mutual fund scheme with approval of both trustees and unitholders. Much of the current litigation and grief caused to unitholders rests at the door of the rather unclear regulations, which were drafted at a time where the idea was rather improbable. The law needs to provide a clear path to winding-up and the way forward looks clear now with the Sebi decision.

Shareholder nay is important: Managing directors and executive directors who have lost a shareholder vote will now find it more difficult to walk into the C-suite with merely a board approval. A prior shareholder approval will be required for such directors to come back. Similar provisions will also apply to independent directors who have lost the shareholder vote previously.

Finally, there are some substantial changes with respect to new net-worth requirements for certain intermediaries and with respect to the settlement regulations which provide for a consent mechanism of settling enforcement proceedings without admitting or denying guilt. Both have inadequate information to judge the specifics, but likely both will have a major impact on business for intermediaries and for ease or difficulty in settling cases.

In total, the reforms are broadly very welcome and will help all stakeholders in moving forward with adequate checks and balances.

Sandeep Parekh is managing partner of Finsec Law Advisors.

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Published: 28 Dec 2021, 11:50 PM IST
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