Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements)(Second Amendment) Regulations, 2011

On September 23, 2011 The Securities and Exchange Board of India (“SEBI”) has issued the SEBI (Issue of Capital and Disclosure Requirements) (Second Amendment) Regulations, 2011 (“Amendment”) vide a circular (No. LAD-NRO/GN/2011-12/25/30309), amending the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (“Regulations”). The key changes to the Regulations are as follows:

Eligibility conditions for Public Issue

·        One of the conditions for an initial public offer, as laid down in 26(1)(a) of the Regulations is that, the issuer should have tangible assets of at least Rs.3 Crores during each of the three preceding years, of which only up to 50% can be held as monetary assets.  If more than 50% of the net tangible assets are held in monetary assets, the issuer should have made firm commitments to utilise such excess monetary assets in its business or project. The Amendment provides that this limit of 50% on monetary assets will not be applicable in case the public offer is made entirely through an offer for sale.

Though the offer document requires disclosure of both stand alone and consolidated financials, the Regulations were silent as to whether profitability criteria was to be applied on both stand alone and consolidated basis. The Amendment has clarified that it has to be applied on both stand-alone as well as consolidated basis for at least three out of the immediately preceding five years.

·       The Amendment also provides that an issuer who had subsidiaries for less than 5 years, should have net profits on a consolidated basis in at-least one year for which consolidated accounts are prepared.

Indian Depository Receipts

A new chapter relating to rights issue of Indian Depository Receipts (‘IDR’) has been introduced in the Regulations. Regulations 106A to 106L of Chapter XA which deals with Rights Issue of IDRs lays down the following key points:

• Regulation 106A says that an issuer has to prepare the offer document in accordance with the home country requirements.
• An issuer can make a rights issue of IDRs only if it satisfies the eligibility criteria laid down in Regulation 106B.
• Regulation 106C permits renunciation of the IDRs offered to the IDR holder.
• Regulation 106D has imposed certain obligations on the Depository, whereby the depository has to take necessary steps to enable the IDR holders to have entitlements under the rights offering and issue additional IDRs to such IDR holders. It also has to distribute the rights to the IDR Holders/renouncees or arrange for the IDR holders/renounces to subscribe for any additional rights which are available due to lack of take-up by other holders of underlying shares.
• Regulation 106E makes it necessary for an issuer to announce a record date for the purpose of determining the shareholders eligible to apply for IDRs in the proposed rights issue.
• Regulation 106F says that the offer document and the addendum attached must contain all material information in respect to rights issue.
• The issuer has to file the draft offer document and the addendum for rights offering as laid down in Regulation 106G and Regulation 106H.
• Regulation 106J says that a rights issue shall be open for subscription in India for a period as applicable under the laws of its home country; however it cannot be less than 10 days.
• The issuer has to issue an advertisement for the rights issue as laid down in Regulation 106K.
• Regulation 106L mandates that, only upon completion of the allotment process, can the issuer utilise funds raised in rights issue. 

Abridged Prospectus

·         Provisions relating to Disclosures in Abridged Prospectus in Part D of Schedule VIII have been amended with a view to restructure the Abridged Prospectus format. These essentially consist of provisions relating to the disclosures which ought to be made in Abridged Products.

Disclosures in the Addendum to the Offer Document and Disclosures in Abridged Letter of Offer

·         A new Schedule XXI has been introduced which primarily deals with disclosures in the addendum to the offer document and Disclosures in abridged letter of offer, for rights issue of Indian depository Receipts.

®     Disclosures in the Addendum to the Offer Document:

o   Schedule XXI, Part A, deals with disclosures to be made by the listed issuer making a rights issue of IDRs, in the addendum to the Offer Document for Rights Issue of Indian Depository Receipts.  

o   Part A of Schedule XXI has specified the contents that are to be incorporated in the addendum. This includes inter alia Instructions for Applicants, General Information regarding the issue, Information regarding management, Risk Factors and Proposals to address the risk, Financial Information of the Issuer, Information regarding the Capital Structure, Market price information and other information concerning the shares/IDRs, Exchange Rates, Material Litigations and Defaults and Other Regulatory and Statutory Disclosures.

o   The issuer should also make certain prescribed undertakings in connection with the issue and a declaration has to be made that none of the statements made in the addendum contravenes any of the provisions of the applicable corporate laws, as stated in Part A of Schedule XXI.

®     Disclosures in Abridged Letter of Offer:

o   Schedule XXI Part B deals with Disclosures required in the case of Abridged Letter of Offer.

o   The above mentioned disclosures include, General Information, Disclosure regarding capital structure of the issuing company, Terms and Particulars of the Issue, Details about the Company, Management and Project. The disclosures should also contain brief details of the Domestic Depository, Overseas Custodian Bank and Depository Agreement and also disclosure on Investor Grievances and Redressal System.

Provision vice changes

Provision	Changes made in the Provision
Under Regulation 8(1) (e) the lead merchant bankers is to submit to the Board along with the draft offer document, a certificate in the format specified in Part C of Schedule VII, confirming compliance of the conditions mentioned therein.	The wording of the regulation has been amended to provide that the certificate has to be in compliance of the conditions as specified in Part C of Schedule VIII.
Under Regulation 13 (2), where the issuer makes a public issue through the book building process, such issue has to be underwritten by book runners or syndicate members. It was laid down in the proviso that fifty percent [Sixty percent, if public issue is made with at least ten percent public offer under clause (b) of sub-rule (2) of rule 19 of the Securities Contracts (Regulation) Rules, 1957] of the net offer to public proposed to be compulsorily allotted to qualified institutional buyers for the purpose of compliance of the eligibility conditions specified in sub-regulation (2) of regulation 26 and regulation 27 cannot be underwritten.	The proviso to Regulation 13 (2) post amendment says that atleast fifty percent of the net offer to the public proposed to be compulsorily allotted to qualified institutional buyers for the purpose of compliance of the eligibility conditions specified in sub-regulation (2) of regulation 26 and regulation 27 cannot be underwritten. The limit of Sixty percent, if public issue is made with at least ten percent public offer under clause (b) of sub-rule (2) of rule 19 of the Securities Contracts (Regulation) Rules, 1957 has been omitted.
Under Regulation 26(1)(a) an issuer can make an initial public offer, if it has net tangible assets of at least three crore rupees in each of the preceding three full years (of twelve months each), of which not more than fifty percent are held in monetary assets: Provided that if more than fifty percent of the net tangible assets are held in monetary assets, the issuer must have made firm commitments to utilise such excess monetary assets in its business or project.	In Regulation 26(1)(a), a new proviso has  been inserted which says that the limit of fifty per cent on monetary assets is not be applicable in case the public offer is made entirely through an offer for sale.
An issuer can make an initial public offer, if it has a track record of distributable profits in terms of section 205 of the Companies Act, 1956, for at least three out of the immediately preceding five years as laid down in Regulation 26(1) (b); however the extraordinary items will not be considered for calculating distributable profits.	Regulation 26(1) (b) post amendment makes it possible to make an initial public offer if the issuer has a track record of distributable profits in terms of section 205 of the Companies Act, 1956, on both stand-alone as well as consolidated basis for at least three out of the immediately preceding five years. The extraordinary items will continue to be not considered for calculating distributable profits. The amendment has introduced a new proviso which says that an issuer who had subsidiary/ subsidiaries for a period lesser than five years, must have net profits on a consolidated basis in atleast one year for which consolidated accounts are prepared.
Regulation 82 (c) allowed  a listed issuer to make qualified institutions placement if it is in compliance with the requirement of minimum public shareholding specified in the listing agreement with the stock exchange.	Regulation 82, clause (c), has been amended such that a listed issuer can make qualified institutions placement if it is in compliance with the requirement of minimum public shareholding specified in the Securities Contracts (Regulation) Rules, 1957.
Chapter X A dealt with Issue of Specified Securities by Small and Medium Enterprises.	Chapter X A which dealt with Issue of Specified Securities by Small and Medium Enterprises is brought under Chapter X B after renumbering the provisions. The new Chapter X A deals with Rights Issue of Indian Depository Receipts
Schedule VIII dealt with disclosures in offer document, abridged prospectus and abridged Letter of offer and Part A laid down the disclosures to be made in red herring prospectus, shelf prospectus and Prospectus; Para 1 laid down the instructions on this regard.	In Schedule VIII Part A, para (1) a new instruction has been inserted as sub-clause (h), by which the issuer has to  ensure that in the document of the Red Herring Prospectus, the document is referred to as ‘Red Herring Prospectus’ or ‘RHP’
Schedule VIII, Part A, Para 2, specified the disclosures to be made in the offer document, Item (I), sub-item (A) laid down the specifications for front cover pages.	In sub-item (A), clause (2), a sub-clause (aa) has been inserted pursuant to which the front cover page of the offer document should incorporate the following clause- “Please read Section 60B of the Companies Act, 1956.”
Schedule VIII, Part A, Para (2), Item VII sub-item (K) deals with Basis for Issue Price. Clause (1), Sub-Clause (h) says that, the basis for issue price, floor price or price band, as the case may be, has to be disclosed and justified by the issuer on the basis of Comparison of all the accounting ratios of the issuer as mentioned in items (a) to (g) of Clause (1), with the industry average and with the accounting ratios of the peer group i.e., companies of comparable size in the same industry. The source from which industry average and accounting ratios of the peer group has been taken has to be indicated.	In relation to item (VII), sub-item (K), clause (1), sub-clause (h), the amendment has laid down that the following has to be ensured: ·         Consistency in comparison of financial ratios of issuer with companies in the peer group, i.e., ratios on standalone/ consolidated basis of issuer will be compared with ratios on standalone/consolidated basis of peer group, respectively. ·         Explicit statement as to whether the financial ratios (of issuer as well as its peer group) are either on standalone or consolidated basis.  ·         Financial information relating to companies in the peer group shall be extracted from regulatory filings made by such companies to compute corresponding financial ratios.
Schedule VIII, in Part A, in Para (2) Item (XII), sub-item (B), clause (3), specified certain details that has to be disclosed in the offer document and application form.	Item (XII), in sub-item (B), in clause (3), has been amended to the effect that the disclosure requirements specified in the provision is not applicable in the case of application form.
Schedule VIII, in Part A, in Para (2) Item (XII) clause (28) deals with ‘mode of making refunds’. Sub-item (B), sub-clause (b), section (ii) said that in case of applicants apart from those who are residing in any of the centres specified by the Board, the refund has to be by  despatch of refund orders by registered post, where the value is Rs 1500/- or more, or under certificate of posting in other cases, subject to postal rules.	Clause (28) of sub-item (B), sub-clause (b), section (ii), has been amended such that for applicants apart from those who are residing in any of the centres specified by the Board, the refund has to be by dispatch of refund orders by registered post, subject to postal rules.
Schedule VIII, Part D dealt with Disclosures in Abridged Prospectus.	Schedule VIII, Part D has been entirely replaced by new provisions dealing with Disclosures in Abridged Prospectus.
Schedule XI which deals with Book Building Process, in Part A, Item (9) prescribed certain conditions in relation to Application-cum-Bidding form.	Schedule XI, Part A, Item (9), has been amended such that the manner and contents of Application-cum-Bidding Form and Revision Application-cum-Bidding Form (accompanied with abridged prospectus) will be as specified by the Board through Circular.
	A new schedule, Schedule XXI, on Disclosures in the Addendum to the Offer Document for Rights Issue of Indian Depository Receipts has been introduced.