Market regulator Securities and Exchange Board of India (SEBI) has introduced a series of proposed reforms aimed at overhauling the rights issue process to make it a more attractive and efficient method for companies to raise funds. These proposed changes, detailed in a recent consultation paper, focus on reducing processing timelines, streamlining the letter of offer and introducing new mechanisms for better supervision and investor protection.
One of the key proposals from SEBI is the mandatory appointment of a 'monitoring agency' to oversee the use of funds raised through all types of rights issues involving equity shares. This change aims to enhance transparency and ensure that the proceeds are utilised effectively.
SEBI also suggested enabling allotments to selective investors in rights issues, a move that would come with adequate checks & balances. Notably, the regulator has recommended doing away with the need for issuers to appoint a merchant banker for rights issues, shifting some of these responsibilities to registrars to the issue or stock exchanges instead.
Currently, issuers offering securities worth less than Rs50 crore through a rights issue are exempt from the requirement to appoint a monitoring agency. SEBI’s proposals also include stricter eligibility criteria, such as disallowing companies whose trading in shares is suspended at the time of the rights issue from proceeding with such an offering.
These reforms are being considered against the backdrop of declining interest in rights issues as a fundraising tool. SEBI observed that the amount raised through rights issues in the fiscal year 2023-24 was significantly lower compared to other methods such as qualified institutional placements (QIPs) and preferential allotments. Additionally, the number of rights issues was notably fewer than preferential allotments during this period.
Another significant proposal is the rationalisation of the content required in a 'letter of offer' for rights issues. SEBI proposes that only essential information such as the objective of the issue, pricing, record date and entitlement ratio needs to be disclosed. The regulator argues that, given the similarities between investing in a rights issue and making a secondary market purchase, much of the information traditionally included in a letter of entitlement in favour of selectiffer is already available in the public domain and does not need to be repeated.
In an effort to expedite the process, SEBI has suggested reducing the current timeline for completing a rights issue to T+20 working days, starting from the date of the board meeting that approves the issue until its closure. Presently, the process can take up to 317 days for non-fast-track rights issues, with fast-track issues averaging 126 days.
SEBI also proposed to reassign several tasks traditionally handled by merchant bankers, such as validation of applications and finalizing the basis of allotment, to stock exchanges and depositories, to further streamline the process.
In a move that could significantly impact promoters, the regulator has suggested easing the restrictions on renunciation by promoters, allowing them to renounce their rights entitlement in favor of selective investors.
If implemented, these changes could make the rights issue a more preferred route for companies seeking to raise capital, enhancing its appeal in the competitive landscape of corporate fundraising.
