SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018

SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018 (Part 1)

Definition: The SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018 lay down the general conditions for capital market issuances, including public and rights issuances, eligibility requirements, and general obligations of the issuer and intermediaries.
Applicability: The ICDR Regulations apply to various types of issuances, including:
- Initial public offer by an unlisted issuer
- Rights issue by a listed issuer
- Further public offer by a listed issuer
- Preferential issue by a listed issuer
- Qualified institutions placement by a listed issuer
- Initial public offer of Indian depository receipts
- Rights issue of Indian depository receipts
- Initial public offer by a small and medium enterprise
- Listing on the innovators' growth platform through an issue or without an issue
- Bonus issue by a listed issuer

Key Concepts

Eligibility Criteria: An issuer shall not be eligible to make an initial public offer if:
- The issuer, any of its promoters, promoter group, or directors are debarred from accessing the capital market by SEBI
- Any of the promoters or directors of the issuer is a promoter or director of any other company which is debarred from accessing the capital market by SEBI
- The issuer or any of its promoters or directors is a wilful defaulter or a fraudulent borrower
- Any of its promoters or directors is a fugitive economic offender
Role of Merchant Banker: The lead merchant banker is responsible for:
- Preparing a schedule listing the activity-wise allocation of responsibilities relating to the issue
- Disclosing the same in the offer document
- Ensuring compliance with the regulations and other requirements
- Ensuring that all intermediaries fulfill their obligations and functions as specified in their agreements with the issuer
Disclosure Requirements: The offer document and letter of offer shall contain all material disclosures which are true and adequate to enable the applicants to take an informed investment decision, including:
- Disclosures as per Part B of Schedule VI of ICDR, as applicable
- Information about the process of crediting rights entitlements in the demat account and renunciation thereof
- Due diligence certificate from the debenture trustee, as per Form B of Schedule V, in case of an issue of convertible debt instruments
Pricing: The issuer shall determine the price of equity shares, and in case of convertible securities, the coupon rate and the conversion price, in consultation with the lead manager(s) or through the book-building process, as the case may be.

SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018 (Part 2)

Price Band: The cap on the price band shall be less than or equal to one hundred and twenty per cent of the floor price, and the cap of the price band shall be at least one hundred and five percent of the floor price.
Floor Price: The floor price or the final price shall not be less than the face value of the specified securities.
Pre-issue and Price Band Advertisement: The issuer shall announce the floor price or the price band at least two working days before the opening of the issue in the pre-issue and price band advertisement.

Differential Pricing

Retail Individual Investors: Retail individual investors or retail individual shareholders or employees entitled for reservation made under regulation 33 may be offered specified securities at a price not lower than by more than ten per cent of the price at which net offer is made to other categories of applicants, excluding anchor investors.
Anchor Investors: In case of a book-built issue, the price of the specified securities offered to the anchor investors shall not be lower than the price offered to other applicants.
Composite Issue: In case of a composite issue, the price of the specified securities offered in the public issue may be different from the price offered in rights issue and justification for such price difference shall be given in the offer document.
Alternate Method of Book Building: In case the issuer opts for the alternate method of book building, the issuer may offer the specified securities to its employees at a price not lower than by more than ten per cent of the floor price.

Rights Issue (Regulation 73)

Issue Price: The Issuer shall decide the issue price, before determining the record date, which shall be determined in consultation with the designated stock exchange.
Face Value: The issue price shall not be less than the face value of the specified securities.
Letter of Offer: The issuer shall disclose the issue price in the letter of offer filed with SEBI and the stock exchange(s).

Availability of Letter of Offer and Other Issue Materials

Public Issue: The issuer shall ensure availability of the offer document and other issue material including application forms to stock exchanges, syndicate members, registrar to issue, registrar and share transfer agents, depository participants, stockbrokers, underwriters, bankers to the issue, and Self Certified Syndicate Banks (SCSBs) before the opening of the issue.
Rights Issue: The issuer shall ensure availability of the letter of offer and other issue material including application forms with stock exchanges, registrar to issue, registrar and share transfer agents, depository participants, stockbrokers, underwriters, bankers to the issue, investors associations and self-certified syndicate banks before the opening of the issue.

Underwriting

Public Issue: If the issuer makes a public issue through the book building process, the issue shall be underwritten by lead manager(s) and syndicate member(s).
Rights Issue: If the issuer desires to have the issue underwritten, it shall appoint merchant bankers or stock brokers, registered with the Board, to act as underwriters.

Post Issue Advertisement

Advertisement: The lead manager(s) shall ensure that an advertisement giving details relating to subscription, basis of allotment, number, value and percentage of all applications including ASBA, number, value and percentage of successful allottees for all applications including ASBA, date of completion of dispatch of refund orders, as applicable, or instructions to self-certified syndicate banks by the Registrar, date of dispatch of certificates or date of credit of specified securities, as applicable, and date of filing of listing application, etc. is released within ten days from the date of completion of the various activities.

Post-issue Responsibilities of the Lead Manager(s)

Responsibility: The responsibility of the lead manager(s) shall continue until completion of the issue process and for any issue related matter thereafter.
Redressal of Investor Grievances: The lead manager(s) shall regularly monitor redressal of investor grievances arising from any issue related activities.

Post-issue Reports

Public Issues: The lead manager(s) shall submit a final post-issue report as per the specified format, along with a due diligence certificate as per the format specified, within seven days of the date of finalization of basis of allotment or seven days of refund of money in case of failure of issue.
Rights Issue: The issuer shall submit post-issue reports as follows: initial post-issue report within three working days of closure of the issue, and final post-issue report within fifteen days of the date of finalization of basis of allotment or within fifteen days of refund of money in case of failure of the issue.

Role as Advisors

Merchant Banker: The merchant banker(s) advises the Issuer Company on all matters related to the public issue, including but not limited to the activities mentioned in the inter-se allocation of responsibilities.
Drafting of the Offer Document: The merchant banker is responsible for carrying out due diligence on the issuer company and ensure that the disclosures made in the offer document are true, fair, accurate and complete.

SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018 (Part 3)

Due Diligence: The process to confirm that due diligence has been carried out by the merchant banker(s) on the issuer company, its promoters, directors, group entities, and relates to all aspects including business, legal, and financial diligence.
Key Activities: Some of the key activities where the merchant banker has to exercise its due diligence are:
- Provide the Issuer Company with a detailed due diligence checklist based on ICDR requirements and information that is important for investors to receive through the prospectus.
- Keep a tab on public communications, publicity materials, advertisements, and any research report by the issuer company.
- Meet with the auditors of the issuer company and discuss information required to be disclosed in the offer document.
- Conduct a site visit, if relevant, to get an appreciation of the business of the company, the manufacturing process, machinery and equipment, plant layout, environment issues, etc.
- Draft the Draft Prospectus based on the documents compiled by the Issuer and perusal of key documents.
Due Diligence Certificates: The formats of the due diligence certificates at each stage are given as Forms in the regulations.
Track Record: The merchant banker shall disclose the track record of the performance of the public issues managed by them for a period of three financial years from the date of listing for each public issue managed by the merchant banker.
Drafting of Letter of Offer: The draft letter of offer and letter of offer shall contain all material disclosures which are true and adequate to enable the applicants to take an informed investment decision.
Compliance: The issuer shall ensure that the information contained in the draft letter of offer and letter of offer and the particulars as per audited financial statements in the letter of offer are not more than six months old from the issue opening date.
Documents to be Submitted: The lead merchant banker shall submit documents regarding the issue process and the issuer's financial health to SEBI before the opening of the issue.
Post-Issue Activities: The post-issue merchant banker shall be responsible for the post-issue activities till the subscribers have received the securities certificates, credit to their Demat account / refund of the application money, and till the listing agreement is entered into by the issuer with the stock exchange and the listing / trading permission is obtained.
Compliance Officer: The issuer is required to appoint a compliance officer, who shall be responsible for monitoring the compliance of the securities law and investor grievances redressal.

SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018 (Part 4)

Underwriting: An agreement with or without conditions to subscribe to the securities of an issuer when the existing shareholders of such issuer or the public do not subscribe to the securities offered to them.
Underwriters: Persons who engage in the business of underwriting of an issue of securities of a body corporate.
Key aspects of underwriting:
- The issuer must appoint merchant bankers or stock brokers, registered with the Board, to act as underwriters for public issues (other than through the book-building process) or rights issues.
- For public issues through the book-building process, the lead manager(s) and syndicate members must underwrite the issue.
- The underwriting agreement must be entered into prior to filing the prospectus, indicating the number of specified securities to be subscribed to at a predetermined price in case of under-subscription.
- The lead manager(s) and syndicate members must not subscribe to the issue except for fulfilling their underwriting obligations.

Minimum Subscription

Minimum Subscription Limits: SEBI ICDR has specified minimum subscription limits for every issue to prevent wrongdoing and safeguard investor interests.
Key aspects of minimum subscription:
- The minimum subscription to be received in an issue must be at least 90% of the offer through the offer document, except in cases of an offer for sale of specified securities.
- If the minimum subscription is not received, all application moneys must be refunded to applicants within four days of the issue closure.
- Regulation 86(1) of ICDR Regulations requires a minimum subscription of at least 90% of the offer in a rights issue.

SEBI Circular on Rights Issue

Streamlining the Rights Issue Process: SEBI has issued a circular to streamline the rights issue process, including changes to the advance notice period, issuance of newspaper advertisements, and dematerialization of rights entitlements.
Key aspects of the circular:
- Reduction of the advance notice period to at least 3 working days (excluding the date of intimation and the record date).
- Issuance of newspaper advertisements disclosing the date of completion of dispatch and intimation to stock exchanges at least 2 days before the issue opening date.
- Dematerialization of rights entitlements, including credit of REs in dematerialized form, trading of REs on stock exchange platforms, and renunciation process.

Procedures on the Rights Issue Process

Application Form: The issuer must dispatch a common application form to shareholders, which can be used by shareholders or renouncees.
Credit of Rights Entitlements (REs): REs must be credited to the dematerialized account of eligible shareholders, with a separate ISIN obtained by the issuer.
Renunciation Process and Trading of REs: REs can be renounced either by sale on the stock exchange platform or off-market transfer, with trading of REs on the secondary market platform of stock exchanges.
Submission of Application Form: Investors must submit application forms using the ASBA facility through the Self Certified Syndicate Banks (SCSB) network during the issue period.
Allotment Process: The registrar must finalize the allocation of securities offered through a rights offering after reconciliation of valid ASBA applications, funds blocked, and REs Demat holding list.

SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018 (Part 5)

General Obligations of Merchant Bankers: The ICDR Regulations prescribe general obligations of Issuers and other intermediaries related to the process of issue management.
Prohibition on Payment of Incentives: No person connected with the issue shall offer any incentive, whether direct or indirect, to any person for making an application in the rights issue, except for fees or commission for services rendered in relation to the issue.
Public Communications / Research Reports: All public communication, publicity materials, advertisements, and research reports shall comply with the provisions of Schedule IX of ICDR and shall:
- Be truthful, fair, and not manipulative or deceptive
- Reproduce information from the draft offer document or offer document in full and disclose all relevant facts
- Be set forth in a clear, concise, and understandable language
- Not include issue slogans or brand names for the issue except the normal commercial name of the issuer or commercial brand names of its products
- Not contain slogans, expletives, or non-factual and unsubstantiated titles
- Include financial data for the past three years, along with particulars relating to revenue, net profit, share capital, reserves, earnings per share, dividends, and book values
Publicly Available Documents: The lead merchant banker and the issuer shall ensure that the contents of offer documents hosted on websites are the same as those of the printed copies filed with the RoC, SEBI, and stock exchanges.
Investor Grievances: The post-issue lead merchant bankers shall look into post-issue activities, such as allotment, refund, dispatch, and giving instructions to syndicate members, and monitor the redress of investor grievances.
Post-issue Reports: The lead merchant banker shall submit post-issue reports to SEBI, including a final post-issue report with a due diligence certificate, within the specified timeframe.
Post-issue Advertisements: The merchant banker shall ensure that advertisements giving details relating to subscription, basis of allotment, and other information are released within ten days from the date of completion of the various activities.
Co-ordination with Other Intermediaries: The post-issue merchant banker shall maintain close coordination with registrars to the issue and arrange to depute its officers to the offices of various intermediaries.
Miscellaneous Responsibilities: The merchant banker shall ensure that all information contained in the offer document is not more than six months old from the issue opening date and shall ensure the dispatch of refund orders, allotment letters, and share certificates by registered post or certificate of posting.

SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018 (Part 6)

Person Acting in Concert (PAC): A company or individual that acts in conjunction with the promoter entities of a company, having the right to appoint a majority of the board of directors.
Promoter Group: Includes the promoter, relatives of the promoter, and other entities that are directly or indirectly controlled by the promoter, such as Independent Media Trust (IMT).
Disclosure Requirements: Companies are required to disclose all entities that are part of the promoter group, including those that may be considered PAC, in their draft letter of offer and letter of offer.
Consequences of Non-Disclosure: Failure to disclose entities that are part of the promoter group can result in violations of the ICDR Regulations, leading to penalties and settlement charges.

Key concepts related to the SEBI (ICDR) Regulations include:

Post-Issue Activities: Coordinated by the Lead Merchant Banker, these activities include deciding on centers for holding conferences, processing rematerialisation requests, and finalisation of the basis of allotment.
Financial Statements: As per SEBI (ICDR) Regulation, only audited and consolidated financial statements need to be prepared in accordance with GAAP (Generally Accepted Accounting Principles).
Minimum Subscription: The minimum subscription to be received in an issue must be at least 90% of the offer through the offer document.
Advertisement: An advertisement may not be issued giving any impression that the issue has been fully subscribed or oversubscribed during the period the issue is open for subscription, without prior intimation to SEBI.

Review questions and answers:

(d) All of the above
(a) True
(d) 90 per cent
(b) False