The Securities and Exchange Board of India (SEBI), at its board meeting held on 19 June 2014, had decided to take up the following proposals with the Ministry of Finance to take up the following amendments to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009:

  1. Minimum dilution to public shall be 25% or Rs 400 crores (whichever is lower) for companies with post issue capitalisation of Rs 4,000 crores; and
  2. In case dilution was less than 25%, public shareholding of 25% was to be achieved within 3 years, whether the company in question was a public sector undertaking or not. 

The recommendation sought to make the dilution in public issues, promoter neutral. It also sought to remove the anomaly that existed in case of a company that fell just short of Rs 4,000 crores market capitalisation but was required to dilute Rs 1,000 crores while another company that had Rs 4,000 crore market capitalisation was required to dilute Rs 400 crores[1].

The Ministry of Finance, Government  of India has accepted the SEBI’s recommendations and has amended Rules 19(2) and 19A of the SCRR pursuant to the Securities Contracts (Regulation)  Second Amendment Rules, 2014 (Second Amendment Rules) and the Securities Contracts (Regulation) Third Amendment Rules, 2014 (Third Amendment Rules).

The Third Amendment Rules are summarised in this Newsflash as below :

Minimum dilution to public in an initial public offer (IPO) of equity shares or debentures convertible to equity shares shall be as follows:

Click here to view table.

Companies referred to in Sr.No. (ii) and (iii) above are required to increase their public shareholding to 25% within a period of 3 years from the date of listing of the securities.

The above requirements do not apply to companies whose draft offer document is pending with SEBI and such company satisfies the conditions prescribed by the erstwhile Rule (19) (2) (b) of the SCRR (as existent prior to the Third Amendment Rules). Consequently, every company whose draft offer document is pending before SEBI as at 18 November 2014 shall not be able to take benefit of the Third Amendment Rules.

Further the above norms will apply to Public Sector Companies (PSU). Any listed PSU not meeting with the minimum 25% public shareholding requirement would need to increase the public shareholding to 25% with a period of 3 years.

Khaitan Comment

The above is a welcome change. This will help many mid cap companies and their private equity investors as it allows for lower dilution at the IPO stage. As holding of private equity investors would be deemed to be public holding post  IPO,  further dilution may not be required if the residual holding of PE and the IPO dilution exceeds 25% of the post-issue capital.