Despite the challenging times, the Indian capital markets are hitting all-time highs on a daily basis and have been flooded with capital. This has seen a rush of equity offerings over the last 12 months including record filings for draft documents over the last few months. In their continuous efforts to make India exchanges more competitive, the Securities and Exchange Board of India (“SEBI”) has notified the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) (Third Amendment) Regulations, 2021 (“ICDR Amendment”). Pursuant to the ICDR Amendment, SEBI has revisited some of the requirements relating to lock in of equity shares post-IPO (one of the oldest requirements of SEBI), as well as the concept of promoter group and group companies under the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018, as amended (“ICDR Regulations”).
Certain key highlights of the ICDR Amendments are as follows:
Reduction in Lock-in Period for Promoters and Persons other than Promoters
Previously, in case of an initial public offer (“IPO”), 20% of the post-offer shareholding (“minimum promoter contribution”) was to be mandatorily held by promoters (with some exceptions) and was to be locked-in for a period of three years from the date of commencement of commercial production or from the date of allotment in the IPO, whichever was later. Further, the equity shares held by the promoters, in excess of the minimum promoter contribution and all other pre-IPO shareholders of the Company (except for employees who held shares through the vesting of ESOPS) were required to be locked-in for a period of one year from the date of allotment in the IPO. This requirement was to ensure ‘skin in the game’, especially for issuer companies raising public capital for project financing or greenfield projects; and has been a requirement in the Indian capital markets for over 20 years.
However, SEBI does not see the need (and rightly so) to continue with this cumbersome requirement, especially given the pedigree and credentials of companies accessing the capital markets through the IPO route in recent times, existence of institutional investors prior to listing of such companies, promoters having demonstrated ‘skin in the game’ for several years before listing, nature of use of proceeds raised from IPO and various other checks and balances (such as involvement of monitoring agency in case of fresh issue size above Rs. 100 crore, exit opportunity to dissenting shareholders of the issuer company in case of variation in objects, etc). Therefore, the lock-in period for minimum promoter contribution as well as for equity shares in excess of minimum promoter contribution held by the promoters has now been reduced to 18 months and six months from the date of allotment in the IPO, respectively. If, however, where an IPO involves a fresh issue of equity shares and the majority of the proceeds from such fresh issue is proposed to be utilised for capital expenditure (i.e. including civil work, miscellaneous fixed assets, purchase of land, building and plant and machinery, etc.), then the lock-in period for minimum promoter contribution as well as for equity shares in excess of minimum promoter contribution by the promoters shall continue to be three years and one year from the date of allotment in the IPO, respectively.
Apart from the above, earlier persons other than the promoters were required to lock-in their pre-IPO holding for a period of one year from the date of allotment in IPO, and venture capital funds/ alternative investment funds of Category I or Category II/ foreign venture capital investors (“Identified Investors”) were exempt from this requirement so long as such equity shares were held by them for a period of at least one year from the date of purchase by them. SEBI has now reduced the lock-in period of persons other than promoters as well as holding period of Identified Investors to six months.
The reduced lock-in periods will make the Indian capital market more attractive to institutional investor-led companies, who may have had certain concerns about tapping public markets and being locked up for lengthy periods subsequently. This will not only allow them relatively quicker access to liquidity, post listing, but also more flexibility in line with other jurisdictions. Thus, this amendment is very timely and relevant.
Modification of Definition of Promoter Group
Earlier, in case the promoter of an issuer company was a body corporate, then any body corporate (say ‘A’) in which a group of individuals or companies or combinations thereof acting in concert (“Investors Group”) held 20% or more of the equity share capital in A, and such Investors Group also held 20% or more of the equity share capital of the issuer company and are also acting in concert, then A would form a part of the ‘promoter group’ of the issuer company. For example, if there is a group of financial investors (i.e. A, B C), which are acting in concert and collectively hold 20% or more in (i) an investee company (i.e. X), and (ii) the issuer company proposing to undertake IPO, then X would be identified as promoter group in the offer document of the issuer company. This often resulted in unrelated companies with common financial investors being identified as ‘promoter group’ of each other. SEBI also felt that capturing details of holdings by financial investors could be a challenging task and may not result in any meaningful information to investors. It also felt that once the issuer company is listed, it may be more relevant to identify and disclose related parties and related party transactions. Therefore, SEBI has now removed this requirement in order to rationalise the disclosure burden and to align it with the post listing disclosure requirements.
This amendment will do away with a pain point for companies with common financial investors as well as the financial investors themselves. A narrower definition of ‘promoter group’ will ensure that relevant obligations under the ICDR Regulations and other SEBI regulations (applicable post listing) are restricted to entities that are actually related, and unrelated will be excluded.
Streamlining Disclosures of ‘Group Companies’
The term ‘group company’ of an issuer company has been defined under the ICDR Regulations to include companies (other than promoter(s) and subsidiary/ subsidiaries) with which there were related party transactions, during the period for which financial information is disclosed, as covered under the applicable accounting standards, and also other companies as considered material by the board of the issuer company. Because of the straitjacketed definition, more often than not, companies which were either not material or were in the nature of financial investors (on account of investment or divided payment only) or had ceased to be a ‘related party’ at the time of filing of the draft offer document, were getting identified as ‘group companies’ of the issuer company. In light of such redundancies and the fact that there are no post-listing requirements in relation to ‘group companies’, SEBI has rationalised the disclosure requirement relating to ‘group companies’. The key modifications include (i) deletion of the requirement to include risk factors in case of refusal to list in the last 10 years, failure to meet listing requirement or large number of pending investor grievances in relation to group companies, (ii) limiting the disclosure requirement in the offer document to, inter alia, names, registered office address, common pursuits and any pending litigation involving the group company, which has a material impact on the issuer company, and (iii) providing that the offer document now discloses the website of the top five group companies (based on market capitalization for listed/ based on turnover in case of unlisted) where each of such group companies will be required to host certain information based on their respective audited statements.
This amendment will ensure that information relating to related parties, which are not material for investors to make an informed investment decision are excluded from the offer document. While a positive step forward, we believe that over the last few years the concept of group companies has been losing relevance. In addition, it may be impractical for issuers to ensure that companies over which they do not exercise control provide the specified information on their respective websites (which they may or may not have). Therefore, SEBI should consider further modifying the concept of ‘group companies’ and restrict it to only related parties with whom companies have material transactions and not all related parties. This would make the offer document and the related disclosures more meaningful.
Whilst a progressive step, SEBI has made this amendment applicable to issuer companies that are proposing to file draft red herring prospectus after the notification of this amendment. Thus, all issuer companies which have already filed the draft red herring prospectus (and are looking to file the red herring prospectus in due course) or have recently completed the IPO, would not be able to take benefit of these amendments. Although retrospective laws are generally unpopular, making the amendment relating to lock-in period applicable for all companies listed in the last 18 months or at least for those companies listing after this amendment would have made this a very popular retrospective law. Restricting the applicability to IPOs completed in the last 18 months will help avoid sudden excess liquidity in the market and probability of high volatility.
Having said that, in light of these amendments and SEBI’s proposal of shifting from the concept of promoter to ‘person in control’ or ‘controlling shareholders’ in a smooth, progressive and holistic manner, we believe that SEBI has taken positive steps in the right direction. In recent years, a number of new age/ tech companies with diversified shareholding and professional management are looking at listing their securities, and with the proposed permission to Indian companies to list their equity shares on foreign stock exchanges, we see this as a constructive step in moving towards international practices and making listing in India even more attractive.