The SEBI has streamlined certain aspects of the rights issue process that is expected to not only reduce the timelines but also provide clarity on the renunciation and trading of rights entitlements. These are welcome changes and will potentially make rights issues a preferred option to raise capital for listed companies.
Whilst rights issues are offerings to existing shareholders, it typically takes 55 to 58 days to complete the process (excluding SEBI review and the time taken for due diligence and drafting the offer document). The process involves (i) a minimum 15-day rights issue application period, (ii) mandatory participation by certain investors only through the non-ASBA process (such as through cheque) and (iii) a seven clear working days intimation prior to the record date. SEBI has addressed some of these concerns through amendments to the SEBI ICDR Regulations, SEBI Listing Regulations (both effective from December 26, 2019) and a circular with effect from February 14, 2020.
Earlier, renouncees were required to invest only through the non-ASBA mechanism and this also involved physical verification of forms. Accordingly, post issue closing, it could take up to 12 working days for the allotment and trading of shares. Now, all applications in rights issues are mandatorily required to be done through the ASBA mechanism. This should significantly reduce the rights issue timeline and allow for allotment and listing soon after the issue closure and may also eliminate defaults.
Record date and advertisement
The advance notice for the record date has been reduced from seven clear working days (excluding the date of intimation and the record date) to three clear working days specifically for rights issues. Further, a newspaper advertisement confirming dispatch of application forms to shareholders is now required two days prior to issue opening instead of the earlier requirement of three days. Additionally, both shareholders and renouncees have been allowed to use a common application form.
Rights entitlement – demat credit and trading
Companies undertaking a rights issue are mandatorily required to credit the rights entitlement to shareholders in demat form. SEBI has also introduced a legal framework for renunciation of rights entitlement and has allowed trading of such rights entitlement on the stock exchanges or transfer through off-market transactions, confirming the existing market practice. Depositories and stock exchanges have been directed to provide necessary procedure in this regard. Companies should factor in time for those shareholders, who own shares in physical form, to open demat accounts.
However, credit of rights entitlement to the demat account of shareholders who are resident in other jurisdictions will require detailed analysis in view of offering restrictions applicable under securities laws of other countries. In view of the existing practice of reading laws of various jurisdictions harmoniously and the global practice for rights offerings, crediting rights entitlements to shareholders who are resident outside India will require further discussion.
SEBI has also clarified that the investors will not be allowed to withdraw their application after the issue closing date.
Other changes to be considered in the future:
Offer period: Under the Companies Act, a rights issue is required to be open for a minimum of 15 days. Given our experience and the above suggested changes, we believe that this period can be significantly reduced – perhaps to five working days (an IPO is three working days) – as the rights issue is well publicized through stock exchange intimations, newspaper advertisements and individual intimations to each shareholders. Reducing this timeline would significantly shorten the rights issue process and help protect issuers and investors from pricing risk. This will require changes to the Companies Act and hence may take longer.
Rump placement: SEBI should consider permitting QIBs to subscribe to the unsubscribed portion in rights issues (also called rump in certain jurisdictions). This concept is already permitted under the Companies Act. This would be fair to the shareholders as they have been given an opportunity to invest first (unlike preferential allotments and QIPs). If the price is lower than the market price, it is likely that existing shareholders will participate in full and there will be no rump; if the price is higher than the market price, whilst existing shareholders would be given a fair opportunity to participate, they may not participate and the rump can be offered to QIBs. We believe existing provisions of the Takeover Code also addresses some of the regulatory concerns that may arise in this regard. This would also benefit issuers whose promoters do not have sufficient funds to pick up their own entitlement or the unsubscribed portion and the increasing number of professionally managed companies (without promoters). Accordingly, rights issues would become a more attractive alternative for companies looking to raise funds.