Disclosure gains – SEBI’s Proposal on listing

Source: This post is based on the article “Disclosure gains”, published in Business Standard on 24^th Feb, 2023.

Syllabus Topic: GS Paper 3, India Economy – Financial Market

News: The Securities and Exchange Board of India (SEBI) has proposed to tweak disclosure norms to improve transparency and streamline processes.

Amendments are connected to various aspects of SEBI Issue of Capital and Disclosure Requirements, or ICDR Regulations 2018.

Aspects included:

1. Underwriting public issues,
2. The preconditions for announcing a bonus,
3. The eligibility of pension funds to participate as anchor investors,
4. Providing material documents and contracts for inspection in the case of a public issue.

What are the changes proposed?

Underwriters: First, presently, investors don’t know, if appointment of underwriters is on a “soft” or “hard” basis. Soft basis means underwriter is only handling the technical rejections. Hard basis means underwriter will have to pick up a stake in the company, in case of under-subscription.

A hard commitment means underwriter has a stake and believes that the share price valuations are fair.

Proposed change: Any agreement with the underwriters regarding under-subscription and few related information should be mentioned in Red Herring Prospectus (RHP). It would give investors an idea of the underwriters’ commitment and fair valuation.

Bonus Shares: Bonus issues involve capitalisation of reserves or profits. However, it is seen sometimes that companies have not fulfilled the conditions of issuing bonus shares. For example, the company may have outstanding employee stock options or convertible debentures.

Proposed change: company should be allowed to issue a bonus only if it has received in-principal approval for all prior issues, including employee stock options and convertible debentures/warrants.

Pension funds: pension funds that are associates of the lead manager (LM) or sponsored by an associate of the LM may not participate as anchor investors.

Proposed change: If a pension fund hold a minimum corpus of Rs 25 crore, it should be allowed to participate as anchor investor.

Reports: Presently, material documents and industry reports are available at the issuer’s registered office only for a physical inspection.

Changes proposed: The papers should be available online, at the issuer’s website.