3 June, 2019
In a capital starved world, quick access to capital is like a dream come true. It not only enables ease of doing business, but also helps in achieving the growth plans and capex requirements in a timely manner. While the regulatory framework for fund raising on a preferential basis has been relatively lucid, rights issues (which prevents dilution risks) and further public offerings (for wider investor participation) are marred by extensive disclosure requirements and time-consuming regulatory approvals except in case of fast track issues.
SEBI introduced the "fast track" route for rights issues and FPOs to not only allow truncated disclosures in the offer document (primarily dispensing the restated financial statements requirement) but also allow listed companies, subject to certain eligibility conditions, to skip filing the draft offer document with SEBI for its approval. As a result, the listed entities save a substantial amount of time and resources that may go in beefing up the draft offer document with extensive disclosures, restated financials and obtaining SEBI clearance.
While this all sounds like a fairy tale, fast tracking the fund raise also comes with certain sets of eligibility conditions, which may disqualify a listed company from enjoying this route. The eligibility requirements are laid down in the SEBI regulations, and includes inter alia, being listed for at least three years, holding of shares in demat for promoter group, redressal of investor complaints, no show cause notices or proceedings by SEBI and for past three years, compliance with the SEBI listing regulations and no settlement of securities law violations by the issuer, its promoter, promoter group and directors (under the SEBI settlement regulations). Among these eligibility requirements, compliance with the SEBI listing regulations is a major challenge, given the host of obligations which are imposed on a listed company. These compliances while being extensive are also time and format bound, which implies that non-compliance either in the form or in the timeline can impact the eligibility. The spectrum of compliances spans across submitting the shareholding pattern for each quarter, filing of the annual report with the stock exchanges, providing prior intimations for board meetings in certain matters, filing a quarterly compliance report on corporate governance, appointing a compliance officer, maintaining the composition of board and committees as per SEBI listing regulations, etc.
Data available on the stock exchange websites indicates a significant number of non-compliant companies. For example, more than 650 companies have not appointed a compliance officer, as per the data available on the website of BSE Limited for the quarter ended December 31, 2018. Furthermore, more than 240 companies had not timely submitted their annual report to the stock exchanges for Fiscal 2018
Providing prior intimations for holding board meetings as per the SEBI listing regulations is another crucial requirement where delays by companies have often been observed. Not only the timing but also the form in which the prior intimation is given is of utmost importance, especially if the board meeting is held for fund raising through issuance of securities. As mandated under the in-principal approval checklists of the stock exchanges, prior intimations for board meetings where fund raising through qualified institutions placement ("QIP") etc. is to be approved, needs to include details of such fund-raising options that the board is going to consider. There have been various instances where companies have had to revise their intimations and have often also been issued with warnings from the stock exchanges. This displays the critical nature of the compliances under the SEBI listing regulations and how a simple non-compliance may affect the eligibility of a listed company to take advantage of the fast track route. As per the data available on the BSE website, fines have been imposed on more than 25 companies in the month of February 2019 for not making prior intimations in accordance with the requirements of the SEBI listing regulations
In November 2009, SEBI further relaxed the eligibility requirement for fast track issues in so far as such non-compliances relate to composition of board of directors (i.e. non-executive directors, independent directors and woman directors). Here, SEBI while sympathizing with non-compliances triggered by actions outside the control of a company, has instead imposed the compliance of composition of board at the time of filing of the offer document. However, for matters in relation to non-compliance of composition of committees is still an open issue which may render many issuers ineligible for fast track issues. Basis the data available on BSE's website, for the quarter ended December 31, 2018, more than 140 companies did not have board compositions compliant with the SEBI listing regulations, more than 70 companies did not have compliant audit committee compositions and more than 100 companies did not have compliant nomination and remuneration committee compositions
Given the benefits associated with fund raising under the fast track route, SEBI, has been constantly working on revising the eligibility norms for fast track issues. For example, SEBI has modified the eligibility requirement around August, 2015, and provided some flexibility to the eligibility condition by exempting those non-compliances, where the stock exchanges have 'only' imposed a monetary fine on the listed issuer. While SEBI should be applauded for the constant realignment of fund-raising norms to make it market friendly, there still are certain areas of work which may be reconsidered. For example, another ineligibility for fast track issues is regarding settlement of security law violations. It is well understood from SEBI's discussion paper on 'Revisiting the capital raising process' that the intent for disallowing such issuers is inter alia to provide SEBI an opportunity to instruct additional disclosures in the offer document. Prescriptive disclosures for settlement of such security law violations within SEBI regulations could prove to be a more efficient and business-cum-regulator friendly approach, since it would provide a more level playing field (when compared with eligible issuers who have been fined for security law violations or eligible issuers who were non-compliant with composition of board norms).
Considering that three years is a fairly long period of time and the compliance requirements under the SEBI listing regulations are extensive, many companies may not be able to fulfill the eligibility for fast track issues. The ideal situation would be to ensure compliance with all applicable requirements of the SEBI listing regulations. Given that this may not always be possible and data available on BSE's website indicates that a large number of companies have some non-compliances, the following mitigation steps may be considered:
- firstly, such companies should prior to such contravention but after knowing of an event which may lead to such contravention, approach SEBI for extension in compliance with such requirement. Under SEBI listing regulations, a regulatory framework for delay in compliance is well prescribed;
- secondly, in case of receipt of a notice of non-compliance, it is in the interest of the listed company to pay the fine, since mere imposition of monetary fines does not disqualify from undertaking a fast track issue, whilst contesting a penalty notice before appropriate forum may render such issuer ineligible for the fast track issue till the final adjudication of the matter; and
- thirdly, in case of a securities law non-compliance, settling of such non-compliance under SEBI settlement regulations will also render the issuer ineligible for accessing the fast track route. In absence of any provision to cure such ineligibility, seeking SEBI exemptions under the SEBI listing regulations may be a better option.
For further information, please contact:
Ravi Dubey, Partner, L&L Partners