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April 19, 2010 IPO Regulations Amended: Lower Threshold for Small and Medium Enterprises In a landmark move, that could impact the Indian industrial landscape, the Securities and Exchange Board of India (“SEBI”) has recently amended the SEBI (Issue of Capital and Disclosure Requirements) Regulation, 2009 (“SEBI ICDR Regulations”), and added a new chapter that provides for separate and reduced thresholds for listing of securities of small and medium enterprises (“SMEs”). Though attempts had been made in the past to address the fund-raising issues faced by SMEs, including the development of BSE IndoNext, such efforts failed to generate adequate investor interest. In view of the aforementioned concerns, there was an indispensable requirement to set up a dedicated stock exchange/ platform for the issuance/ trading of securities of the SMEs. Accordingly, SEBI, through the introduction of a new chapter XA in the SEBI ICDR Regulations provides for ease of entry and less onerous disclosure requirements with minimum level of regulation for the SMEs. The salient features of the new Chapter XA providing for relaxed criterion for SMEs are summarized as below: Salient features of Chapter XA1: · Reduced paid-up capital threshold: An issuer company whose post-issue paid-up capital is not more than Rs. 100 million shall be eligible to list its securities on the SME exchange. Those issuer companies, whose post-issue paid-up capital lies between Rs. 100 million and upto Rs. 250 million, have the option to list their securities either under the provisions of this Chapter XA or else comply with the terms and conditions prescribed2 for the purpose under the existing chapters of SEBI ICDR Regulations. As per the provisions of the SEBI ICDR Regulations, a minimum paid up capital of Rs. 100 million is required for listing of securities on any of the main boards of National Stock Exchange and the Bombay Stock Exchange (collectively referred to as the “Stock Exchanges”). · Filing of the offer document: The offer document is required to be submitted to the merchant banker who in turn will file it with SEBI along with the new Form H3. A prospectus in relation to the issue shall also be filed with the SME exchange and the Registrar of Companies. It has been specifically mentioned that SEBI will not scrutinize the offer document since the investors are expected to make informed investment decisions. This is contrary to the current practice where the offer document is filed with SEBI and the recognised stock exchanges where issuer company seeks listing. · Underwriting: Underwriters to the issue under Chapter XA shall ensure that the issue is 100% underwritten and that a disclosure to that effect is made to SEBI, a day prior to the opening of the issue. A minimum of 15% of the issue size is mandated to be underwritten by the merchant bankers. Certain Nominated Investors may be permitted to enter into contractual arrangements with the merchant bankers to share the burden of devolvement of underwriting obligations; however such contractual arrangements shall be subject to the prior approval of the SME Exchange. In case the underwriters or the Nominated Investors4 fail to achieve the minimum subscription, the merchant banker shall be required to fulfill its underwriting obligations. · Application size: Minimum issue application size is fixed at Rs.100,000 per application as opposed to the minimum application value ranging from Rs.5,000 to Rs.7,000 per application under the existing Regulation 49(1) of Chapter III of the SEBI ICDR Regulations. Further, the minimum number of allottees should be at least 50. · Migration to SME Exchange: A listed issuer whose post-issue paid-up capital is less than Rs. 250 million has an option to migrate to the SME/ main boards of the Stock Exchanges, as the case may be, subject to the approval of its shareholders and compliance with the eligibility criteria laid down by the SME Exchange or the main boards respectively. · Migration from SME Exchange: Companies listed on the SME Exchange shall compulsorily migrate to the main board of the Stock Exchanges if their post-issue share capital is in excess of Rs. 250 million. Upon the performance of any rights issue/ preferential issue/ bonus issue which results in triggering of the above limit, then such company would have to compulsorily migrate to the main board. Such companies shall therefore be required to comply with the provisions of the Listing Agreement of the main exchange and all regulatory requirements including compliance with SEBI ICDR Regulations, for the purposes of the same. · Market-making: The merchant banker to the issue shall bear the responsibility of compulsory market making for a minimum period of 3 years. The securities being bought and sold as part of the market making shall ultimately get transferred to the Nominated Investor. During the compulsory market-making period, the market makers are restricted from buying any securities from the promoters/ promoter group of the issuer or any other acquirer. The promoters may therefore be allowed to dilute their shareholding either through offer for sale or to an acquirer. However, the promoters’ shareholding which is not locked-in may be traded with the prior permission of the SME Exchange. In case, the value of the shareholding of the Nominated Investors falls below Rs. 1 lakh, for any reason whatsoever, the market maker is obligated to buy the entire shareholding of such investor in a single lot. Additional amendments: In addition to the above, significant changes have also been affected in other chapters of the SEBI ICDR Regulations, some of which are as follows: · Definition of the term ‘Employee’ Regulation 2 (1) (m): The amendment seeks to broaden the ambit of the definition of ‘employee’ by including therein, an employee of the holding company or subsidiary company or that of the material associates of the issuer company whose financial statements are consolidated with those of the issuer company according to Accounting Standards 21. Consequent changes to the term ‘employee’ have been made in other applicable provisions of the SEBI ICDR Regulations in order to reflect the change in this definition. Implication: By virtue of this amendment, an employee of the holding, subsidiary and material associates will also be able to benefit from employee stock option plan/scheme and the employee allocation portion of the issue. · Preferential issue (Amendment to Regulation 70): In the light of the proposed amendments, it has been clarified that the lock-in provisions as stipulated herein shall only be applicable to a preferential issue of equity shares pursuant to a rehabilitation scheme approved by the Board of Industrial and Financial Reconstruction. Implication: This amendment brings welcome relief to the public shareholders of the resultant amalgamated company which will not be subject to the lock-in provisions. · Conditions for issue of Indian depository receipt (“IDR”) (Regulation 98): Regulation 98 (e) of the SEBI ICDR Regulations as it stands today, requires a minimum of 30% of the total 50% (which may be allocated among the non-institutional investors and retail individual investors) of the IDR issued, shall be allocated to retail individual investors. As opposed to this, the new amendment requires a mandatory allotment of 30% of the total IDR issue, to the retail individual investors. Implication: This amendment will facilitate an enhanced retail participation in SMEs for investors having a high-risk appetite. CONSEQUENTIAL CHANGES MADE IN OTHER LEGISLATIONS In line with the amendment to the ICDR Regulations, a new provision has been added to the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2000 (“Takeover Code”) as Regulation 3(1)(f)(vii) with effect from April 13, 2010. The new Regulation envisages that the provisions of the Takeover Code shall not be applicable to acquisition of shares by the merchant bankers/ market makers provided that such merchant bankers/ market makers do not have the intention of taking over the management and there is no resultant change in control (direct or indirect) of the issuer company. _____________________________________________________________ 1 Regulation 106B (1) (c) defines an SME Exchange to mean a trading platform of a recognized stock exchange having nationwide terminals permitted by SEBI to list the specified securities in accordance with the terms of this new Chapter XA and includes a stock exchange granted recognition for this purpose. 2 In case the issuer company desires to list its securities on the main boards of the NSE or the BSE, it shall have to comply with Regulation 6(1), 6(2), 6(3), Regulation 7, Regulation 8, Regulation 9, Regulation 10, Regulation 25, Regulation 26, Regulation 27 and Regulation 49(1) of the SEBI ICDR Regulations. 3 A new Form H has been introduced by the recent amendment which contains certain additional confirmations to be provided to SEBI at the time of filing the offer documents. 4 Regulation 106B (1) (b) defines ‘Nominated Investor’ to mean a qualified institutional buyer or private equity fund who enters into an agreement with the merchant banker to subscribe to the issue in case of under-subscription or to receive or deliver the specified securities in the market-making process.
- Harshita Srivastava, Alap Yadav & Diptee Deshpande
You may direct your comments to Ramya Krishnan-AniL +91 900465 0363 |
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