Legal and regulatory framework
Laws and regulations
What are the relevant statutes and regulations governing securities offerings? Which regulatory authority is primarily responsible for the administration of those rules?
Some of the key statutes and regulations governing securities offerings in India and the authorities administering them are as follows:
- The (India) Companies Act 2013 (the Companies Act) is the principal legislation governing companies in India and sets out the broad framework for the offering of securities by companies, including public offerings and private placements. The Companies Act in its entirety, including the relevant provisions relating to offerings of securities by companies, has come into force. In addition, relevant rules pertaining to, among others, allotment of securities, share capital, issue of global depositary receipt and acceptance of deposits (the Rules) have also been notified under the Companies Act, and are in force. While the Companies Act is primarily administered by the Ministry of Company Affairs, certain specified provisions of the Companies Act, in relation to listed companies and public offering of securities, are administered by the Securities and Exchange Board of India (SEBI).
- The SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018 (the ICDR Regulations), framed and administered by the SEBI, is the principal legislation that comprehensively regulates offerings of equity and equity-linked securities by listed companies as well as those that propose to list on any stock exchange in India, which includes the main board of a stock exchange, the institutional trading platform (ITP) and the small and medium-sized enterprise exchange (SME exchange). The ICDR Regulations lays down detailed provisions on eligibility, disclosure requirements, restrictions and procedures for such offerings. These ICDR Regulations came into effect on 10 November 2018.
- The Foreign Exchange Management Act 1999 (the Foreign Exchange Act), including the rules and regulations framed and the circulars issued thereunder, sets out requirements in relation to foreign investment in Indian securities and also regulates debt securities by Indian companies that are issued overseas. The Foreign Exchange Act, including the rules and regulations framed and the circulars issued thereunder, is administered by the Reserve Bank of India (RBI).
- The Securities Contracts (Regulation) Act 1956 (the Securities Contracts Act), along with the rules framed thereunder, governs listing of securities on stock exchanges and certain aspects of the public offering of securities. The Securities Contracts Act is administered by the SEBI and the RBI.
- The SEBI (Issue and Listing of Debt Securities) Regulations 2008 (the Debt Regulations), issued by the SEBI, govern offering of debt securities, including public offerings and private placements of listed debt securities. The Debt Regulations are administered by the SEBI.
- The SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations 2013 (the RPS Regulations), issued by the SEBI, govern the offering of non-convertible redeemable preference shares, including public offerings and listing of privately placed non-convertible redeemable preference shares. The RPS Regulations are administered by the SEBI.
What regulatory or stock exchange filings must be made in connection with a public offering of securities? What information must be included in such filings or made available to potential investors?
Public offering of equity shares and convertible securities
In India, pursuant to a public offering, equity shares and convertible securities may be listed on any of following three market platforms:
- The main board: listing requires issuers to meet certain eligibility criteria and to fully comply with the disclosure regime mandated primarily under the Companies Act and the ICDR Regulations.
- The ITP: the regulatory requirements for listing permit a relaxation of eligibility and issuer disclosure requirements for certain entities meeting the stipulated minimum qualified institutional buyers (QIB) investment thresholds or those engaged in businesses involving intensive use of technology.
- The SME exchange: for listing of SMEs whose face value of post-IPO (initial public offering) capital is up to 250 million rupees. The regime for disclosures and eligibility of issuers on this platform has also been set out and is distinct from those for the main board of the stock exchange.
This chapter largely deals with listing on the main board of the stock exchange and the ITP.
In the case of a book-built issue, both primary and secondary public offerings of equity shares and convertible securities on the stock exchange require filing of a draft offer document (the draft red herring prospectus) with the SEBI, for its observations, and with the stock exchanges; filing of an updated offer document (the red herring prospectus), incorporating the SEBI observations, with the Registrar of Companies, before inviting subscriptions; and, thereafter, filing of an offer document updated for pricing details (the prospectus) with the Registrar of Companies. In the case of a fixed-price issue, both primary and secondary public offerings of equity shares and convertible securities require filing of a draft offer document (draft prospectus) with the SEBI for its observations. Upon receiving observations from the SEBI, the offer document with pricing details (prospectus) is registered with the Registrar of Companies, before inviting subscriptions.
For an ITP listing, an issuer may elect to list its securities on the stock exchange, either pursuant to an initial public offering, or without making a public offer. Accordingly, the issuer may file a draft offer document or a draft information document with the SEBI, with each carrying the specified disclosures, and subsequently, the red herring prospectus and final information document, respectively. The ITP is currently accessible only to institutional investors and non-institutional investors, and not to retail individual investors.
An issuer seeking to list its equity shares or convertible securities on the main board is also required to fulfil certain eligibility conditions prescribed by the stock exchanges. For instance, BSE Limited and National Stock Exchange of India Limited (NSE), for listing of equity shares pursuant to an IPO, prescribe a minimum post-IPO paid-up equity capital of 100 million rupees and a market capitalisation of 250 million rupees. Alternatively, an issuer listing its equity shares and convertible securities on the ITP is not required to fulfil any minimum capitalisation requirements. The NSE for listing on the main board also prescribes that there should not have been any material regulatory or disciplinary action initiated by stock exchanges or any regulatory authority against the applicant company in the three years before the date of application for listing and in the past year against the promoters, promoting companies, group companies, companies promoted by the promoters and promoting companies of the applicant company. In addition, at various stages of the offering process, certain approvals must be obtained from the stock exchanges where equity shares are proposed to be listed: an in-principle approval at the time of filing of the draft offer document, and a listing and trading approval upon the issuance or transfer of equity shares and prior to the commencement of trading of the equity shares on the stock exchanges. Further, if any of its promoters or directors is declared as a ‘fugitive economic offender’ by a designated court of law in India, such issuers are not eligible to make a public offering of equity shares on both the main board and the ITP of the stock exchange. Additionally, if an issuer or any of its promoters or directors is declared to be a wilful defaulter, or is in default of payment of interest or repayment of the principal amount in respect of debt securities issued by it to the public for a period of more than six months, such issuers are also not eligible to make a public offering of its equity shares or other convertible debt instruments.
For a public offering and listing on the main board, Schedule VI of the ICDR Regulations sets out detailed requirements in relation to the disclosures to be made in an offer document. These include detailed disclosures relating to capital structure, history and business of the issuer, risks relating to the issuer and the offering, objects of the offering, legal proceedings relating to the issuer, financial statements, management’s discussion and analysis on the financial condition of the issuer, and any other information material for investors to make an investment decision. Further, India has decided to adopt the convergence of its existing standards with International Financial Reporting Standards, referred to as the Indian Accounting Standards (Ind AS), and based on the net worth of the issuer; Ind AS shall be applicable to the issuers in a phased manner. In this regard, the SEBI has also clarified the manner of disclosure of financial statements in the offer document for companies intending to list their securities.
If it is a rights offering by a listed issuer, subject to compliance with the periodic disclosure requirements of stock exchanges and certain other conditions, the ICDR Regulations provide for limited disclosures in the offer document.
ICDR Regulations regards the ITP as a trading platform, distinct from the main board of the stock exchange. The ITP has been made available to issuers with non-traditional business models, including those involving intensive application of technologies with at least 25 per cent of the pre-issue capital held by QIBs, or those other companies in which the shareholding of QIBs is at least 50 per cent. Certain categories of institutional investors are identified by the SEBI as being QIBs, which includes institutions such as scheduled commercial banks, insurance companies, systemically important non-banking financial companies. The intent of the ITP is to ease the public capital-raising process for companies meeting alternative criteria that would otherwise find it onerous to fulfil eligibility conditions of listing on the main board of stock exchanges. In terms of disclosure requirements, a company seeking to list on this platform will need to disclose broad objects for utilisation of the issue proceeds and the basis of issue price may include disclosures, except projections, as deemed fit by the issuer. The SEBI has made available to companies listed on the ITP the option to migrate to the main boards of stock exchanges three years after the expiry of the date of listing on the ITP, subject to fulfilment of certain conditions. In October 2018, the SEBI floated a revised consultation paper on the review of the framework for the ITP wherein it proposed to rename the ITP as the ‘Innovators Growth Platform’. The consultation papers also proposes to relax the requirement for companies using inter alia technology, information-technology, or intellectual-property to provide products or services to have at least 25 per cent of their pre-issue capital held by QIBs for them to list on the ITP. Under the proposed amendments, in addition to QIBs, this 25 per cent pre-issue capital can also be held by (i) family trusts; (ii) category III foreign portfolio investors; (iii) pooled investment funds; and (iv) accredited investors; each meeting certain prescribed requirements. By widening the investor base, the proposed amendments will enable a larger number of companies to be eligible to list on the ITP. The other key proposals, inter alia, included removing the restriction on any person holding 25 per cent or more of the post-issue capital of the company intending to list on ITP, decreasing the minimum application size from one million rupees to two hundred thousand rupees, reducing the minimum number of allottees to 50, and diluting the conditions for allocation for any specific category of investors. While SEBI has approved such key proposals in a recent board meeting, the corresponding amendments to the ICDR Regulations are yet to be notified by the SEBI.
Under the Securities Contracts Act, at least 25 per cent of the equity shares of a listed company should be held by members of the ‘public’, namely, by shareholders other than promoters and affiliates. An unlisted company undertaking an IPO is also required to comply with this condition by offering an appropriate number of shares to the public in the IPO. In this regard, the relevant rules provide for certain exceptions to this condition:
- in the case of public offers where the post-issue capital calculated at the offer price is more than 16 billion rupees and up to 40 billion rupees, the minimum public shareholding immediately upon listing can be a percentage pursuant to a public offer equivalent to the value of 4 billion rupees; and
- if the post-issue capital of the company calculated at the offer price is more than 40 billion rupees, the rules provide for an unlisted company to offer at least 10 per cent of its equity shares to public in the IPO.
In both cases, however, such a company will be required to increase its public shareholding to 25 per cent within three years from the listing, in a manner specified by the SEBI. In this regard, the SEBI has also recently recognised, among others, qualified institutional placements (QIP) offer for sale through stock exchange mechanism and open market sale as permitted routes, subject to applicable restrictions, for complying with the minimum public shareholding requirement. Until recently, Institutional Placement Programme (IPP) was also recognised as a permitted route for complying with the minimum public shareholding norms. The new ICDR Regulations has, however, done away with the IPP. Failure to meet minimum public shareholding requirements within the prescribed time could lead to action against the non-compliant entity by the stock exchanges, including imposition of a fine, freezing of the shareholding of the promoter or promoter group and also compulsory delisting, in accordance with applicable law.
Public offering of debt securities
In terms of the Debt Regulations, a public offering of debt securities requires filing of a draft offer document with a stock exchange for seeking public comments. Thereafter, upon suitably addressing the comments received from the public, an offer document (prospectus) is filed with the Registrar of Companies. Certain classes of issuers, such as public financial institutions, specified government companies, non-banking financial companies (including housing finance companies) and listed companies satisfying the prescribed eligibility criteria under the Debt Regulations may also undertake successive public offerings of debt securities through a shelf prospectus. A shelf prospectus is valid for a period of one year, and up to four offerings of debt securities can be made under such a shelf prospectus. Prior to each offering, an issuer is required to file an information memorandum with the Registrar of Companies, which sets out the principal terms and conditions of the securities offered, and any material developments that may have occurred after filing of the shelf prospectus. In terms of the Debt Regulations, an offer document (including a shelf prospectus) is required to set out all material disclosures necessary for the subscribers to make an informed investment decision, including certain matters specified in the Debt Regulations and the Companies Act. While certain disclosure requirements under the Companies Act and the Rules are no longer applicable to public equity issuances, they continue to apply to public offerings of debt securities, till new norms are issued by the SEBI. For purposes of listing of debt securities, an in-principle approval from the stock exchanges where the debt securities are proposed to be listed is to be obtained before launching the transaction; a listing approval upon allotment and a trading approval is required to be obtained from the stock exchanges before listing and commencement of trading. The Debt Regulations also provide that if an issuer or any of its promoters or directors is declared as a wilful defaulter by a bank or financial institution, or it is in default of payment of interest or repayment of principal amount in respect of debt securities issued by it to the public for a period of more than six months, such issuer will not be eligible to make a public offering of debt securities.
The SEBI has also prescribed additional norms governing public issue and listing of green debt securities (green bonds); including listing of privately placed green bonds. Debt securities shall be considered ‘green bonds’ if the funds raised through issuance of such debt securities are to be utilised for projects or assets falling under certain prescribed categories, including:
- renewable and sustainable energy;
- clean transportation;
- sustainable water management;
- climate change adaptation; and
- biodiversity conservation.
The SEBI requires all issuers of green bonds to make certain disclosures in their respective offer or disclosure documents, including a statement on the environmental objectives of the issue, details of the projects or assets in which proceeds of the green bonds are proposed to be allocated or invested and the criteria or decision-making process employed to identify such projects or assets. Further, in addition to the disclosures prescribed in the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (Listing Regulations), an issuer who has listed its green bonds is required to disclose along with its annual report, among others, a list and brief description of projects or assets to which proceeds of the green bonds have been allocated or invested, details of amount disbursed, qualitative performance indicators and quantitative performance measures of the environmental impact of the projects or assets, and methods and key underlying assumptions used in the preparation of such performance indicators and metrics.
Public offering of non-convertible redeemable preference shares
Similar to the Debt Regulations, under the RPS Regulations, prior to making a public offering of non-convertible redeemable preference shares, a draft offer document has to be filed with a stock exchange to invite comments from the public. Subsequently, upon suitably addressing the comments received, an offer document (prospectus) is filed with the Registrar of Companies. The offer document is required to set out all material disclosures necessary for the subscribers to make an informed investment decision, including certain matters specified in the RPS Regulations and the Companies Act. It may be noted that certain disclosure requirements under the Companies Act and the Rules are no longer applicable to public issuances, pursuant to the Companies Amendment Act 2017 (the 2017 Amendment). However, until new norms are issued by the SEBI, such disclosure requirements will continue to apply to issuance of non-convertible redeemable preference shares.
Listing of non-convertible redeemable preference shares requires certain eligibility conditions to be satisfied by an issuer. For instance, the issuer or the promoter should not have been restrained, prohibited or debarred by the SEBI from accessing the securities market or dealing in securities as on the date of filing of the draft offer document or offer document. Additional requirements under the RPS Regulations include obtaining an in-principle approval from the stock exchanges where the non-convertible redeemable preference shares are proposed to be listed and obtaining at least one credit rating by a credit rating agency registered with the SEBI. Pursuant to an amendment to the RPS Regulations in May 2016, if an issuer or any of its promoters or directors is declared as a wilful defaulter by a bank or financial institution or it is in default of payment of interest or repayment of principal amount in respect of non-convertible redeemable preference shares issued by it to the public for a period of more than six months, such issuer will not be eligible to make a public offering of non-convertible redeemable preference shares.
In a departure from the erstwhile position of requiring an issuer to enter into separate listing agreements for each kind of security proposed to be listed, the SEBI has prescribed a uniform listing agreement for issuers to enter into with stock exchanges. The substantive provisions of the erstwhile listing agreements have been provided for in the Listing Regulations. The Listing Regulations encapsulate standards to be adhered to by listed companies, including those relating to corporate governance and ongoing disclosures. A shorter uniform listing agreement, however, is still required to be entered into by listed issuers with the stock exchanges.
Review of filings
What are the steps of the registration and filing process? May an offering commence while regulatory review is in progress? How long does it typically take for the review process to be completed?
Public offering of equity shares and convertible securities
For the purposes of a public offering of equity shares and convertible securities, as an initial step, the draft offer document is required to be filed with the SEBI for its observations and with the stock exchanges. The draft offer document is also made publicly available on the website of the SEBI and that of the lead managers. However, the ICDR Regulations, subject to the fulfilment of certain conditions, provide for ‘fast-track issues’, wherein a draft offer document need not be filed with the SEBI for its observations. In terms of the ICDR Regulations, the SEBI may issue observations within a period of 30 days from the filing of the draft offer document or from the receipt date of any clarification sought by the SEBI on the offer document or date of receipt of a copy of in-principle approval letter issued by the stock exchange, whichever is later. Pending review of the draft offer document by the SEBI, the offer document cannot be filed with the Registrar of Companies and the offering cannot commence. The process of review of the offer document by the SEBI typically takes an average of two to three months, but it could take longer depending on the nature of the clarifications sought by the regulator.
In a book-built issue, upon receiving observations from the SEBI and before inviting subscriptions, an updated offer document (the red herring prospectus) is registered with the relevant Registrar of Companies. Thereafter, upon closure of the bidding period and the price discovery process, an offer document updated for pricing details (the prospectus), is filed with the Registrar of Companies.
In a fixed-price public offering of securities, the prospectus (with the pricing details) is filed before inviting subscriptions.
Public offering of debt securities
In a public offering of debt securities, the draft offer document or a draft of the shelf prospectus, as the case may be, is filed with the stock exchange and displayed on its website and is required to be made available for comments from the public for a period of seven working days. Such a draft offer document or draft shelf prospectus may also be displayed on the website of the issuer and the lead managers. Thereafter, upon suitably addressing the comments received from the public, the offer document (prospectus or shelf prospectus, as the case may be) filed with the Registrar of Companies is also to be simultaneously filed with the stock exchanges for dissemination and forwarded to the SEBI for its records. The offering can commence only upon the filing of the offer document with the Registrar of Companies and a designated stock exchange. In the case of an offering undertaken in pursuance of a shelf prospectus, an information memorandum (typically referred to as a ‘tranche prospectus’) is also required to be filed with the Registrar of Companies and simultaneously with stock exchanges and the SEBI, along with the shelf prospectus prior to inviting subscriptions.
Public offering of non-convertible redeemable preference shares
In a public offering of non-convertible redeemable preference shares, the opening of the offering can commence only upon filing of the offer document with the Registrar of Companies and the stock exchange. Similar to the requirements prescribed under the Debt Regulations, the draft offer document filed with the stock exchange and displayed on its website must be made available for comments from the public for a period of seven working days. The draft offer document may additionally be displayed on the websites of the issuer, lead managers and the stock exchanges where the non-convertible redeemable preference shares are proposed to be listed. Upon addressing the comments received from the public, the offer document (prospectus) filed with the Registrar of Companies is also to be simultaneously filed with the stock exchange for dissemination and forwarded to the SEBI for its records.
What publicity restrictions apply to a public offering of securities? Are there any restrictions on the ability of the underwriters to issue research reports?
Under the ICDR Regulations, publicity restrictions in relation to public offerings of equity shares and convertible instruments commence from the date of approval of the offering by the issuer’s board of directors. During the period between the date of approval of the offering by the board and the filing of the draft offer document with the SEBI, all public communications and publicity materials are required to be consistent with the past practices of the issuer, failing which a disclaimer is required to be provided in all materials indicating that the issuer is proposing a securities offering and is in the process of filing the draft offer document with the SEBI. After filing of the draft offer document, all publicity materials issued by the issuer or its associates are required to contain only factual information and not contain any estimates or projections or conjectures or otherwise state anything extraneous to the offer document. Additionally, all publicity materials, except those relating only to the products or services offered by the issuer, are required to contain a disclaimer stating that the issuer is proposing a securities offering and a draft offer document or offer document has been filed with the SEBI or the Registrar of Companies.
The Debt Regulations and RPS Regulations prescribe certain restrictions relating to advertisements by an issuer. The advertisements are required to be fair and clear and not contain any estimates or projections that are misleading, or otherwise state anything extraneous to the contents of the offer document. In addition, the advertisements must state that investors are to invest only on the basis of information contained in the offer document.
Research reports issued by the lead managers are required to be prepared only on the basis of publicly available information relating to the issuer, disclosed in the draft offer document or offer document or otherwise to the public by the issuer. Further, research reports are required to contain only factual information and not contain any estimates or projections or conjectures. In addition, the SEBI (Research Analysts) Regulations 2014 (the Research Regulations) provide for detailed conditions, among others, in relation to the registration of research analysts, their policies and procedures, and compensation and limitation on publication of research reports. Under the Research Regulations, subject to internal policy and procedures, the research analysts affiliated to book runners cannot issue a research report, in the case of an IPO for a period of 40 days following the pricing date, and in the case of a further public offering this restriction is only for 10 days, unless there is a prior written approval of legal or compliance personnel as specified in the internal policies and procedures. This restriction would also apply for the period commencing 15 days prior to any lock-up arrangement with respect to the issuer and continue until 15 days after expiry or waiver or termination of such lock-up arrangement. Further, the Research Regulations also specifically prohibit research analysts affiliated to other underwriters (being syndicate members) from issuing a research report for a period of 25 days from the date of opening of the public issue.
Are there any special rules that differentiate between primary and secondary offerings? What are the liability issues for the seller of securities in a secondary offering?
In cases of primary offerings, the securities are to be first offered to the existing shareholders of the issuer (a rights offering), unless a special resolution is passed by the shareholders. Further, in a primary offering of securities, the minimum subscription is required to be not less than 90 per cent of the offering, failing which, application money needs to be refunded to the applicants. This requirement does not apply to a secondary offering of securities. Restrictions relating to the further issuance of securities by the issuer, between the filing of the draft offer document and the listing of the equity shares, uniformly apply to both primary and secondary offerings of securities.
In the case of a secondary offering of securities, the selling shareholder is required to certify, as a declaration in the offer document, that all statements in relation to it and the securities being offered by it in the offer document are true and correct. Additionally, the selling shareholder is required to certify that it has obtained all approvals and consents to be obtained by it in relation to the offering. Any misstatement in this regard could attract civil and criminal liability under the Companies Act, action by the SEBI or tort liability under common law. Under the Companies Act, it is provided that a selling shareholder shall reimburse expenses incurred by the company on its behalf in undertaking the sale of secondary shares. Additionally, the selling shareholder is liable for the timely refund and for payment of interest in the event of any delay in making refunds.
What is the typical settlement process for sales of securities in a public offering?
Under the ICDR Regulations, application monies should be deposited by the bidders at the time of making the bid. The SEBI prescribed regulatory regime requires that listing of securities should be achieved within six working days from the bid closing. Accordingly, the allotment or transfer of securities is to be completed and shares are to be credited in the dematerialised accounts within four to five working days of the bid closure date. In order to reduce the post-issue timeline for settlement in a public offering, for securities to be listed on the main board of the exchange and the ITP, the SEBI has made bids submitted through an ‘application supported by blocked amounts’ (commonly referred to as ASBA bids), which are not submitted with the underwriters but directly to the self-certified syndicate banks, mandatory. The SEBI has also removed the option to withdraw the bid after the bid closure date. Recently, the SEBI has also decided to introduce the use of Unified Payments Interface (UPI) as a payment mechanism with ASBA, for retail investors, with effect from 1 January 2019. This process will be introduced in a phased manner and will eventually reduce the time duration from issue closure to listing by up to three working days.Settlement of non-convertible debt securities is governed by the Debt Regulations and the by-laws of the stock exchanges. The SEBI has recently prescribed that in public issuances of debt securities, after closure of the bidding period, the listing of securities should be completed within six working days, as against the previous requirement of 12 working days, for all public issues of debt securities opening on or after 1 October 2018.
As regards trading and settlement of non-convertible redeemable preference shares, the RPS Regulations require listing of the non-convertible redeemable preference shares to be completed within 20 days from the deemed date of allotment, failing which penal interest is required to be paid to the investors. However, as per a recent circular issued by the SEBI, time taken for listing after the closure of the issue has been reduced to six working days for all public issues opening on or after 1 October 2018.
Are there specific rules for the private placing of securities? What procedures must be implemented to effect a valid private placing?
The Companies Act prescribes certain requirements in relation to private placements of securities, including shares and debentures. Under the Companies Act, for an offering to qualify as a private placement, the offer and invitation to subscribe for securities must not be made to more than 50 persons. However, under the Rules, this limit has been raised to 200 persons in aggregate in a financial year for each kind of security. Further, these limits do not apply to securities issued to employees under a scheme of employee stock options and to QIBs in that financial year.
Unrelated and independent multiple offers made during a financial year will be combined to determine compliance with the requirement to offer securities to fewer than the specified number of persons, provided the same class of securities are being offered. In other words, for an offer or invitation to subscribe to qualify as a private placement, the ‘rule of 200’ should be adhered to in one financial year, namely, all private placements (other than private placements to QIBs and employees under stock options) in one financial year will be aggregated for the purpose of computing the number of investors. However, it is equally important to note that the restriction on the number of persons to whom the offer can be made is to be reckoned individually for each kind of security, that is, individually for equity shares, preference shares or debentures. Further, the Rules state that each private placement is to be approved by a special resolution of shareholders. However, pursuant to a recent amendment to the Companies Act and the relevant Rules, a special resolution of the shareholders is not required for private placement of non-convertible debentures, subject to the issuer’s borrowings not exceeding the approved limits pursuant to such placement.
The SEBI has permitted issuers who have sold shares or debentures to persons exceeding 49, but below 200, in number, in a single financial year to avoid penal action, upon carrying out certain remedial measures. This revised regulatory treatment has enabled certain companies and is expected to continue to assist companies in the rectification of private placements that may have been held to be deemed public offerings under the Companies Act, 1956 (the 1956 act) when such allotments were made in the breach of the ‘rule of 50’.
Additionally, the 2017 Amendment, with effect from 7 August 2018, has streamlined various provisions pertaining to private placement (such as QIPs). Some of the key changes relate to dispensing with the requirement of filing of a private placement offer letter (commonly referred to as PAS-4) by the issuer, in favour of a more efficient process. Filing of the offer letter in prescribed formats to the Registrar of Companies, and with SEBI in the case of listed company, has been dispensed with. Now the record is to be maintained with the company itself. Further, issuers have also been restricted from utilising the money raised through private placement unless allotment has been made and return of allotment has been filed with the Registrar of Companies, within 15 days of allotment. The 2017 Amendment also clarifies that private placement offers shall not carry a right of renunciation.
For listed companies, the ICDR Regulations provides for the private placement of equity shares and convertible securities through the following routes:
- QIP under Chapter VI of the ICDR Regulations - through this route a listed company subject to approval from its shareholders may privately place its securities with QIBs. For the purpose of complying with minimum public shareholding norms, the promoters and other members of the promoter group are also permitted to offload their stake in the company as an offer for sale in the QIP. In a QIP, an issuer is required to issue a placement document to potential investors, which is to be filed with the stock exchanges. The placement of equity shares is required to be made at a price not less than the average of the weekly high and low closing price of the securities during the two weeks preceding the date of the board meeting that approves opening of the proposed issue, provided that a discount of up to 5 per cent may be given on such price, subject to specific shareholders’ approval.
- ‘Preferential issue’ under Chapter V of the ICDR Regulations - through this route an issuer may privately place its securities with any person subject to the fulfilment of certain conditions, including those related to pricing. A placement under this route is required to be approved by the shareholders. The floor price in a preferential issue is determined in light of various considerations, including the period for which the equity shares of the issuer have been listed on a recognised stock exchange and whether such equity shares are frequently or infrequently traded. For instance, equity shares offered under the placement, if equity shares of the issuer are frequently traded and have been listed on the recognised stock exchanges for a minimum of 26 weeks, are required to be allotted at a price not less than the higher of the average of the weekly high and low of the volume weighted average price of the securities during the two weeks or the 26 weeks preceding the date of the meeting of the shareholders that approves the placement. In the event equity shares offered are infrequently traded, pricing shall take into account, among other customary valuation parameters, book value and trading multiples for comparable companies.
An arrangement to sell a block of shares of an Indian listed company may be effectuated on an Indian stock exchange either as a ‘bulk deal’, a ‘block deal’ or as an offer for sale by promoters and their affiliates through the stock exchange mechanism (OFS) as follows:
- Block deal - a block deal involves the sale of shares in a single transaction through a separate trading window of a stock exchange. As per SEBI, this trading window is to be made available twice in a trading day for 15 minutes each as the ‘morning block deal window’ and as the ‘afternoon block deal window’ by the stock exchange. The order must be placed for a minimum value of 1000 million rupees. However, the order price cannot vary by more or less than 1 per cent of the previous day closing price or the ruling market price of the shares. Upon completion of the sale, the stock exchange is required to publish certain details of the transaction, such as the identity of the participants, quantity of shares traded and the trade price.
- Bulk deal - a bulk deal involves the sale of shares, through one or more transactions during a trading day, such that the total quantity of shares traded is more than 0.5 per cent of the number of shares of the company listed on the stock exchange. There is no restriction on the pricing of a bulk deal. However, the offer is placed in the open market due to which any participant may have the opportunity of accepting it. Upon intimation by the brokers, the stock exchange is required to publish certain details of the transaction, such as the identity of the participants, quantity of shares traded and the trade price.
- OFS - the SEBI has provided the OFS as another mode of increasing public shareholding to 25 per cent in listed companies or for the promoters, and their affiliates, of listed companies on stock exchanges with a market capitalisation of 10 billion rupees and above, computed as the average daily market capitalisation for six months prior to the month in which the OFS opens, to sell part of their stock. The OFS route is available to promoters, members of the promoter group and to non-promoter-shareholder holding at least 10 per cent of share capital in a company. Under the OFS route, promoters, their affiliates and other eligible shareholders can sell shares in a listed company through a separate trading window on the stock exchanges. Subject to certain exceptions, the size of the offering is required to be at least 250 million rupees, including a minimum of 10 per cent of the offer size being reserved for retail investors. However, size of offer can be less than 250 million rupees so as to achieve minimum public shareholding in a single tranche. Although there is no restriction on the pricing of an OFS, the seller is required to set a floor price below which bids shall not be accepted. Further, the seller may offer a discount on the OFS pricing to retail investors. The SEBI also allows sale of shares by promoters of eligible companies to employees of such companies within two weeks from an OFS transaction. Such sale may be at the price discovered in the OFS transaction or at a discount and will be considered a part of the OFS transaction.
In addition to the Companies Act, the Debt Regulations and RPS Regulations also regulate the listing of debt securities and non-convertible redeemable preference shares, respectively, issued on a private placement basis. An issuer issuing such securities on a private placement basis and listing them on stock exchanges is required to obtain a credit rating of its securities. It is also required to file a disclosure document to the stock exchanges containing disclosures relating to certain matters specified in the Companies Act and the Debt Regulations and RPS Regulations, as applicable. Subject to certain exceptions, the SEBI has mandated electronic book building for issuance of debt securities on a private placement basis in the primary market wherein the issue size is 2 billion rupees and above (including a green shoe option). The requirement of using the electronic book mechanism has also been made applicable to tranche issues that individually may be less than 2 billion rupees, though as a part of a shelf offer, if such issues aggregate to more than 2 billion rupees (including a green shoe option) in a financial year and also for all subsequent issues, where the aggregate of all previous issues by an issuer in a financial year equals or exceeds 2 billion rupees.
What information must be made available to potential investors in connection with a private placing of securities?
Under the Companies Act, private placements are required to be made through a private placement offer-cum-application letter in the format prescribed under the Rules. The format prescribed under the Rules includes disclosures relating to the business, risk factors, legal action pending or taken by any government department or statutory body during the past three years against the promoters as well as details of the significant and material orders passed by the regulators, courts and tribunals impacting the going concern status of the company and its future operations.
In addition, the ICDR Regulations also prescribe the contents of an offer document depending on the form of private placement undertaken. In a QIP, the placement document issued to potential investors and filed with the stock exchanges must contain all material information in relation to the issuer and the placement, including details of risk factors and the business, legal proceedings considered material as per the materiality policy framed under the Listing Regulations, management of the issuer and details of use of proceeds in relation to the placement. In a preferential issue of securities by a listed issuer under the ICDR Regulations, the Regulations do not prescribe any additional information to be made available to potential investors. However, in the notice for the general meeting of the members approving the placement, certain details relating to the placement, such as the shareholding pattern of the issuer before and after the placement and the objects of the placement, and disclosures on whether any of the promoters or directors of the issuer is a wilful defaulter, are to be disclosed.
For listing of debt securities issued on a private placement basis, in addition to the Companies Act, the disclosure document is also required to contain certain disclosures specified in the Debt Regulations, such as details of the offering and the terms of the debt securities, the objects and brief details of business and corporate history of the issuer.
In relation to the listing of non-convertible redeemable preference shares issued on a private placement basis, in addition to the Companies Act, the disclosure document is also required to contain certain disclosures as set out in the RPS Regulations, including the terms of the issue, key operational and financial parameters for the three audited years prior to the issue and a brief summary of the business of the issuer.
Transfer of placed securities
Do restrictions apply to the transferability of securities acquired in a private placing? And are any mechanisms used to enhance the liquidity of securities sold in a private placing?
In a QIP, the allotted securities are not to be sold by the allottee for a period of one year from the date of allotment, except on the stock exchange.
In the case of a preferential issue under Chapter V of the ICDR Regulations, the equity shares and convertible securities allotted are subject to certain conditions and are non-transferable, for a period of three years from the date of trading approval for members of the promoter or promoter group, and one year for persons other than those belonging to the promoter or promoter group.
What specific domestic rules apply to offerings of securities outside your jurisdiction made by an issuer domiciled in your jurisdiction?
In relation to securities offerings outside India, the applicable provisions under the Foreign Exchange Act are required to be complied with. An expert committee appointed by the SEBI has recently made several recommendations to facilitate the process of direct listing of equity shares of Indian companies on overseas stock exchanges. The recommendations include an amendment to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 and the removal of any such equity shares’ listing from the ambit of Chapter III of the Companies Act, governing public offering by Indian companies, among others.
In addition to the Foreign Exchange Act, an offering of foreign currency convertible bonds (FCCB) and foreign currency exchangeable bonds (FCEB) are governed by Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipts Mechanism) Scheme 1993 (the FCCB Scheme), Issue of Foreign Currency Exchangeable Bonds Scheme 2008 (the FCEB Scheme) respectively, and regulations on external commercial borrowings, while depositary receipts (DRs) by an issuer in India in overseas jurisdictions are regulated by the Depository Receipts Scheme, notified in 2014 (the DR Scheme), the Companies Act and the Rules.
FCCBs are required to be issued with a minimum maturity period of five years and to comply with the conditions applicable to external commercial borrowings, including all-in-cost ceilings. FCEBs are bonds that are exchangeable into an equity share of another listed company (Offered Company), in any manner, including on the basis of any equity-related warrants attached to debt instruments. The issuer should be a part of the ‘promoter group’ of the Offered Company, as defined under the ICDR Regulations. Similar to FCCBs, these bonds are also subject to a minimum maturity period of five years.
Under the DR Scheme, Indian companies can issue any of the ‘permissible securities’ to a foreign depositary, as underlying security for issue of DRs, unlike the old regulations that permitted only equity shares to be offered as underlying security. Further, as a significant departure from the old regulations, the DR Scheme permits all Indian companies to raise capital abroad through issue of DRs without the (previously applicable) requirement of prior or subsequent listing in India. The DR Scheme provides for undertaking DRs issuance in the form of a sponsored scheme, where the Indian company is involved in the process (whether by issuing securities or by engaging with an existing security holder to deposit the securities with a custodian) and enters into a formal agreement with a foreign depositary, and also gives Indian companies access to the DR market in the form of an unsponsored scheme where any person other than the Indian issuer may, without any involvement of the issuer, deposit securities with a domestic custodian in India for the issue of DRs. However, if such unsponsored issue of DRs is proposed to be undertaken on the back of listed securities, the issuance can only be undertaken if the DRs give the holder the right to issue voting instructions and such DRs are listed on an international exchange.
Indian entities may undertake a DRs issuance in a foreign jurisdiction that is a member of the financial action task force on money laundering where the regulator of that securities market in that jurisdiction is a member of the International Organization of Securities Commissions. A current list of such permissible jurisdictions is provided in the DR Scheme. Further, according to the DR Scheme, the price of underlying securities issued should not be less than the price applicable to the corresponding mode of issuance to domestic investors under the relevant laws.
In addition, the RBI under the Foreign Exchange Act has also permitted Indian companies to issue rupee-denominated bonds (or ‘masala bonds’) in only those overseas jurisdictions and for subscription by investors that are residents of Financial Action Task Force-compliant countries or a similar regional body and countries whose securities market regulator is a member of the International Organization of Securities Commissions or a signatory to a bilateral memorandum of understanding with the SEBI for information-sharing arrangements. Issuance of masala bonds by eligible entities must comply with the parameters set out in the revised ECB Framework.
Masala bonds can be either placed privately or listed on exchanges as per host country regulations. Recently, the RBI has revised the prescribed minimum maturity period of these bonds to three years, with a few exceptions. For instance, manufacturing companies may raise external commercial borrowings (including through masala bonds) with a minimum maturity period of one year for sums amounting up to US$50 million or its equivalent.
The RBI has also introduced an all-in cost ceiling of 450 basis points over the prevailing yield of the government of India securities of corresponding maturity for rupee-denominated bonds. The proceeds of the issue may be utilised towards all permitted ends other than a few exclusions, such as investment in real estate, capital markets, or on-lending to certain entities. Further, unlike the regulations applicable to traditional external commercial borrowings, the framework for masala bonds does not seek to impose any substantive restrictions on eligibility of issuers - except to the extent discussed above.
Offerings of other securities
What special considerations apply to offerings of exchangeable or convertible securities, warrants or depositary shares or rights offerings?
Offerings of convertible securities by listed companies in India are governed by the Companies Act and ICDR Regulations and disclosures in offer documents need to comply with the provisions contained therein. These regulations also set out the pricing mechanisms and conversion periods of these securities. The Companies Act and the Rules also prescribe certain specific conditions applicable to an offering of depositary receipts, such as in relation to eligibility requirements, voting rights and use of proceeds.
Rights issues of equity or convertible securities by listed companies may be made with limited disclosures in offer documents, provided issuer companies comply with certain requirements laid down in the ICDR Regulations.
Although warrants are recognised instruments for raising capital under the ICDR Regulations, they may be issued only if accompanied by non-convertible debt instruments, if issued under the QIP route. In a public issue or a rights issue, the tenure of warrants issued along with securities should not exceed 18 months and each security may have one or more warrant attached to it. Further, the permission of the government of India is required for the issuance of warrants to non-residents by Indian companies operating in certain sectors where foreign direct investment requires a prior government approval.
FCCBs, FCEBs and DRs are instruments that, if issued by listed companies, also need to comply with the regulations prescribed by the RBI and the government, including the external commercial borrowings framework.
Types of arrangement
What types of underwriting arrangements are commonly used?
Typically, underwriting arrangements require underwriting only to the extent of the completion of the bids procured by the underwriters from investors. Further, underwriters may not be required to underwrite certain types of obligations such as obligations that arise from negligence of ‘self-certified syndicate banks’, in the case of ASBA bids.
What does the underwriting agreement typically provide with respect to indemnity, force majeure clauses, success fees and overallotment options?
Typically, indemnity provisions in underwriting agreements relate to the obligation of issuer companies to indemnify the lead managers for any untrue statement in the offer documents or any breach of the representations and warranties provided by the issuer in the underwriting agreement. The liability of lead managers to indemnify issuer companies, if any, is limited to the extent of their details and particulars specified in the offer document.
Force majeure clauses pertaining to the volatility of the stock markets and general economic and financial conditions grant the lead managers the right to terminate the underwriting agreement with reasonable notice being provided to the issuer company. Remuneration details, including success fees, if any, are usually captured in separate engagement letters negotiated between the issuer company and each of the lead managers.
Overallotment options, or green shoe options, are permitted under the ICDR Regulations, granting the option of allotting securities in excess of the securities offered in the public issue as a post-listing price stabilising mechanism. However, issuer companies rarely resort to green shoe options in public issues in India.
What additional regulations apply to underwriting arrangements?
In the event that an issuer making an IPO, on the main board of a stock exchange, does not meet certain conditions specified in the ICDR Regulations, it is required to allot at least 75 per cent of the issue to QIBs. Under the ICDR Regulations, allotment to QIBs in such a case cannot be underwritten. Further, a rights issue can be underwritten only to the extent of the entitlement of shareholders other than the promoters and promoter group. The provisions relating to underwriting under the ICDR Regulations are not applicable to listing on the ITP made without a public issue.
Under the new ICDR Regulations, the underwriting obligations can be limited to the extent of minimum subscription required for the issue. In case of a pure fresh issue or a combination of a fresh issue and an offer for sale, underwriting will be to the extent of 90 per cent of the fresh issue portion, subject to the dilution complying with minimum float requirements. In the case of a pure offer for sale, it will be for such number of shares as is required to meet the minimum public float requirement.
In addition, the SEBI (Underwriters) Regulations 1993 (the Underwriters Regulations) lay down conditions relating to the registration process for underwriters, their duties and obligations towards fulfilling underwriting commitments, and some of the clauses that underwriting agreements must contain. The Underwriters Regulations also grant extensive powers to the SEBI to oversee the underwriting process, including powers to inspect the books of accounts, records and documentation of an underwriter and powers to appoint auditors to audit the books of underwriters, if deemed necessary.
Ongoing reporting obligations
Applicability of the obligation
In which instances does an issuer of securities become subject to ongoing reporting obligations?
At the time of the listing of the securities, the issuer is required to enter into a uniform listing agreement with the stock exchanges and comply with the Listing Regulations. The uniform listing agreement entered into applies to all forms of securities listed on Indian stock exchanges, including on the ITP. The Listing Regulations replace the periodic and regulatory disclosure requirements set out in the erstwhile standard listing agreement, and also specify the manner of dissemination of certain disclosures relating to price-sensitive information to be made by the issuer to the stock exchanges, which is also to be made available on the website of the issuer.
In the event that an issuer plans to issue securities to persons resident outside India, it is also required to report this to the RBI in a specified form and within a specified period, giving particulars of the investors, the rupee equivalent of funds received, particulars of the authorised foreign exchange dealer through which such funds are received and details of any governmental approval required for such remittance. Further, within 30 days of the issue of the securities to such foreign investors, an issuer is required to submit a report on the issue to the RBI in a prescribed form, indicating compliance with the terms and conditions of the Companies Act, the applicable regulations of the RBI, the pricing formula for the issue and certain other details.
Further, an issuer making an issue of debt instruments and non-convertible, redeemable preference shares to persons resident outside India is subject to various pre-issue and post-issue reporting requirements of the RBI, including under the guidelines for foreign currency loans. Additionally, such an issuer is subject to various periodic post-issue reporting requirements to the Indian stock exchanges in terms of the Listing Regulations and the uniform listing agreement, including dissemination, on a half-yearly basis, of its credit rating, asset cover, debt-equity ratio and the status of interest payments redemption of existing debt securities. Any other events that may affect the business and operations of the issuer are also required to be notified to the stock exchanges by the issuer as and when such events occur.
Additionally, an issuer has to comply with a number of reporting requirements under extant SEBI regulations on takeovers and insider trading, once such securities are listed on the Indian stock exchanges.
Information to be disclosed
What information is a reporting company required to make available to the public?
The Listing Regulations prescribe significant periodic and event-based reporting requirements on listed companies. These include disclosures to the stock exchanges of material events, and in some cases, of stipulated events without any determination of materiality. The factors to aid the board of directors of the listed company to ascertain materiality have also been set out and are to be incorporated in a policy for determination of materiality to be framed by the listed company. For instance, information with respect to granting, withdrawal, surrender, cancellation or suspension of key licences or regulatory approvals; commencement or any postponement in the date of commencement of commercial production or commercial operations of any unit or division; and litigation, disputes or regulatory actions are required to be disclosed by listed companies, if deemed to be material in accordance with the aforesaid policy on materiality.
Under the Listing Regulations, a listed issuer of equity shares is also required to make certain periodic disclosures to the stock exchanges without resorting to determination of materiality, including:
- acquisitions, amalgamations, demergers, restructuring, sale or disposal of any business units, divisions or subsidiaries of the entity;
- entering into agreements, such as a joint venture or with media companies, that are binding and not in the normal course of business, or revision, amendment or termination of such agreements;
- schedule of analyst or institutional investor meetings and presentations on financial results made by the listed entity to analysts or institutional investors; and
- notice of any change in the directorship of the company or in the auditors.
In order to ensure transparent and substantive disclosures by listed companies, SEBI has recently notified certain amendments to the reporting requirements prescribed under the listing regulations. For instance, in the event of a change in auditors, listed entities will be required to disclose detailed reasons for such change, within 24 hours of receipt of such resignation. Similarly, reasons for changes in independent directors will have to be intimated to the stock exchanges within seven days of such resignation, along with a confirmation by independent directors that there are no other reasons for such change.
The SEBI issued regulations on insider trading that have been in force since May 2015. These regulations are a significant step forward in the manner and mode of periodic and event-linked disclosures, including moving a fair burden of ensuring compliance by insiders, to the company itself. Previously, under the Companies Act, norms governing prohibition of insider trading were applicable to all companies, including private companies. The 2017 Amendment, however, has removed private companies, as well as public companies having unlisted securities, from compliance of insider trading requirements, with effect from 9 February 2018. Thus, presently, the prohibitions on insider trading as prescribed under the SEBI Act and Insider Trading Regulations are only applicable to securities that are listed or ‘proposed to be listed’, as defined in the regulations. Some of the disclosures required to be made by issuers under the new regulations include: disclosure on trading plans of insiders; and disclosure of a transaction or series of transactions of a promoter, director or employee of the company where the trades exceed a value of 1 million rupees, in a calendar quarter.
In addition, the insider trading regulations require certain additional disclosures by, inter alia, the promoter or the director in relation to details of securities of the company held and transactions in securities of the company, beyond prescribed thresholds.
In 2011, the SEBI issued revised regulations on the substantial acquisition of shares and takeovers of listed companies. The revised regulations do not require a company to make periodic disclosures to the stock exchanges. However, acquirers, sellers and the promoters of the listed companies are required to disclose certain details in relation to their shareholding and voting rights, to the company as well as to the stock exchanges. Typically, such disclosures must be made upon the shareholding of the acquirer or seller or promoters reaching certain prescribed threshold limits. In addition to this, promoters and certain shareholders holding over 25 per cent of the shares of the company are required to make periodic disclosures in relation to their shareholding at the end of each financial year.
What are the main rules prohibiting manipulative practices in securities offerings and secondary market transactions?
The Securities and Exchange Board of India Act 1992, as amended (the SEBI Act), prohibits any person from indulging in ‘fraudulent’ and ‘unfair trade practice’ in relation to securities markets. Further, the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations 2003, as amended, provides for certain acts to be included within the ambit of ‘fraudulent’ or ‘unfair trade practice’ in relation to securities. Such acts include:
- dealing in securities not intended to effect a transfer of beneficial ownership but to operate ‘only as a device to inflate, depress or cause fluctuations in the price of such security for wrongful gain or avoidance of loss’;
- any act or omission amounting to manipulation of the price of a security; and
- ‘circular transactions’ in respect of securities entered into between intermediaries in order to increase commissions to provide a ‘false appearance of trading in such security or to inflate, depress or cause fluctuations in the price of such security’.
‘Manipulation of market’ would be analysed on the basis of the intention of the parties, as determined on the facts and circumstances of each case. The artificiality of trades cannot be established on the basis of percentage of purchases, but only on the basis of collusion or nexus between the parties to the transaction. Further, such nexus should be intended to ‘create misleading appearance of trading and to manipulate the price and volume of the scrip price to tamper the discovery mechanism’. SEBI has also identified certain intermediaries, such as chartered accountants, company secretaries, valuers, and others, who play a vital role in examining, auditing or vetting the disclosures made by the companies in the market, and floated a consultation paper in this respect. That consultation paper on proposed SEBI (Fiduciaries in the Securities Market) (Amendment) Regulations has made certain key recommendations, which include providing a definition of ‘fiduciary’, which would include company secretary, chartered accountant, valuer, monitoring agency, cost accountant and appraising agency in the relevant laws governing the markets, and empowering SEBI with the power to initiate action in case of contravention by these fiduciaries under the applicable regulations. Through this, SEBI aims to bring such third-party intermediaries within its ambit and regulate their conduct in security market transactions.
Further, under the Companies Act, any person who deceives another person to induce him or her to enter into any agreement for dealing in securities or agreement for securing profits from a yield of securities or by fluctuations in the value of securities is liable for action as fraud. Under the Companies Act, inducing by deception or by misleading, any person to enter into an agreement for obtaining credit facility from any bank or financial institution has also been specifically included with the ambit of the provision.
Permitted stabilisation measures
What measures are permitted in your jurisdiction to support the price of securities in connection with an offering?
A greenshoe option, or overallotment option, is a recognised mechanism in the ICDR Regulations pertaining to price stabilisation. It grants the option of allotting shares in excess of the shares offered in a public issue on the market, as a post-listing price-stabilising mechanism. Specific provisions governing the role of stabilising agents and the process of overallotment have been laid down in the ICDR Regulations. However, issuer companies do not usually opt for greenshoe options in public issues in India.
While the ICDR Regulations provide the mechanism for price discovery in public offerings through the ‘book-building’ process, the SEBI does not regulate pricing in public offerings. Given the macroeconomic and sector-specific reasons, among others, Indian capital markets have witnessed the trading prices of a large percentage of companies getting listed falling below the issue price, post-listing. In this regard, the erstwhile SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009 (2009 ICDR Regulations) provided for a safety net mechanism, whereby a promoter of the issuer could voluntarily undertake to provide a one-time exit opportunity for retail investors at the issue price, in the event the price of the securities, post-listing, falls below the issue price. However, the ICDR Regulations no longer provides for this mechanism, since equity shares listed pursuant to an IPO are inherently a risky product and providing a safety net mechanism would deem to be a contradiction in this regard.
Liabilities and enforcement
Bases of liability
What are the most common bases of liability for a securities transaction?
Liability in respect of a securities offering under Indian law can broadly be classified as follows.
The Companies Act provides for civil liability for the inclusion of any misleading statement in a prospectus (as opposed to ‘untrue statement’ under the 1956 Act). A civil suit under the provisions of the Companies Act may be initiated by any person who subscribes to the securities in the offering against the directors or promoters of the issuer or any other person who has authorised the issue of a prospectus. The Companies Act also extends civil liability over persons named as ‘experts’ in the prospectus, for any such misstatements in a prospectus. The Companies Act does not provide for certain carve-outs, which were otherwise provided in the 1956 Act. Accordingly, persons attracting civil liability may no longer disclaim liability on statements made in a prospectus. However, it carves out an exception for a director who withdraws his or her consent before the issue of prospectus and the prospectus is issued without his or her authority, or a person, who neither gave consent nor had the knowledge of the prospectus, gives a reasonable public notice on becoming aware that the prospectus has been issued without his or her consent or knowledge. The 2017 Amendment, however, allows directors, promoters and the persons authorising the issue of the prospectus to rely on expert statements as a defence for civil liability for misleading statements in a prospectus, unless the prospectus has been issued with an intention to defraud applicants. Consequently, experts identified in the prospectus would be solely liable for statements prepared by them. Recently, an exception from such liability has been carved out for misstatements in the offer documents, purported to be made by experts, where the person making such misstatement had, among others, reasonable grounds to believe in the accuracy and the fairness of the alleged misstatement.
The Companies Act also imposes criminal liability for inclusion of any untrue statement in a prospectus. Criminal action may be initiated against any person who has authorised the issue of the prospectus. Under the Companies Act, criminal liability will not be attracted, if the person having authorised the issue of prospectus establishes that the statement or omission was immaterial or that he or she had reasonable grounds to believe that the statement was true or necessary.
SEBI Act and the ICDR Regulations
Under the SEBI Act and the ICDR Regulations, the SEBI has wide powers to take steps in the interests of investors, including prohibiting an issuer from issuing an offer document. Further, various intermediaries associated with a securities’ offering, including the lead managers, are required to be registered with the SEBI and are to discharge certain obligations in relation to the offering. For instance, in a public offering, the lead managers are required to certify to the SEBI that disclosures in an offer document are true, fair and adequate so as to enable the investors to make a well-informed decision as to the investment. To this end, lead managers are required to conduct due diligence of the issuer, and maintain records and documents pertaining to the due diligence. Action may be initiated by the SEBI against intermediaries, in terms of the regulations framed under the SEBI Act, for a breach of such obligations. The ICDR Regulations permit the stock exchanges to, inter alia, impose fines, freeze shareholding of a promoter or promoter groups in the event of a contravention of the provisions of the ICDR Regulations. Subsequently, the SEBI has also prescribed the fines that may be imposed by stock exchanges on listed entities for non-compliance with certain specific provisions of the ICDR Regulations.
Common law liability
Common law liability is recognised in India and a suit may be initiated against the issuer and the lead managers for negligent misstatement in the offer document. However, instances of claims under common law are few in India and courts are perceived not to award substantial amounts for claims for damages.
What are the main mechanisms for seeking remedies and sanctions for improper securities activities?
Securities litigation is at a developing stage in India at present. The Companies Act prescribes both civil and criminal consequences for misstatements in a prospectus. In addition, the SEBI Act prescribes both civil and criminal sanctions against persons or entities that are in violation of its provisions, including failure to supply requisite information or documents to the SEBI, failure to maintain books of accounts or redress investor grievances in a listed company, the omission of insider trading, non-reporting under the extant regulations on acquisitions of shares and takeovers, and the failure by various intermediaries in the securities market to adhere to rules and regulations laid down by the SEBI. Complaints on any such grounds may be filed by any entity with an adjudicating officer appointed by the SEBI on its behalf, who is empowered, upon hearing both the parties in the matter, to impose such penalties as he or she may deem fit against the entity against whom the complaint is directed, within the contours of the SEBI Act.
Appellate proceedings in such regard may also be filed by any aggrieved individual by an order of the adjudicating officer with the Securities Appellate Tribunal, a special appellate tribunal constituted under the SEBI Act to redress violations relating to the securities market. Any decision of the Securities Appellate Tribunal may subsequently be appealed to the Supreme Court of India as the court of last appeal. The SEBI Act excludes civil courts from ruling upon any matter or in any dispute that pertains to the jurisdiction of the SEBI adjudicating officer or the Securities Appellate Tribunal. Also, special courts have been set up for trials of offences under the SEBI Act, which are expected to provide a speedy remedy.
Besides the above-mentioned remedies, the SEBI may also take note of any violation of its rules and regulations by any entity of its own accord and impose civil and criminal sanctions as it may deem fit.
Additionally, the SEBI has strengthened its enforcement mechanism through the issue of the SEBI (Settlement Proceedings) Regulations 2018, enabling it to settle violations of securities laws with regulated entities, through an imposition of monetary or non-monetary penalties, including a combination of both. The SEBI (Settlement Proceedings) Regulations 2018 also prescribe a summary settlement procedure for settlement of proceedings in respect of certain specific alleged defaults including, inter alia, late filing of returns or documents, delays in making disclosures and failure to make disclosures in the prescribed formats. However, the said regulations do not allow for settlements in certain prescribed cases: for instance, if the settlement has a market wide impact, caused losses to a large number of investors or affected the integrity of the market. Further, the SEBI also may not agree to settle offences where the applicant is a fugitive economic offender or a wilful defaulter or an entity which has defaulted in payment of any fees due or penalty imposed under securities laws.
Under the ICDR Regulations, stock exchanges have been specifically empowered to undertake actions such as the imposition of fines, suspension of trading, and freezing of promoter or promoter group shareholdings for contravention of ICDR Regulations. Subsequently, the SEBI has also prescribed the fines that may be imposed by stock exchanges on listed entities for non-compliance with certain specific provisions of the ICDR Regulations. This is expected to reduce the cost of undertaking adjudication or quasi-judicial actions in the case of minor violations for listed entities. The stock exchanges are also empowered to fine and suspend the trading of the securities of a listed entity that has not complied with the disclosure requirements as per the Listing Regulations. In addition to this, the depositories are required to freeze the entire shareholding of the promoter and promoter group of any such non-compliant entity, upon receiving the intimation from the respective stock exchanges.
Update and trends
Are there current proposals to change the regulatory or statutory framework governing securities transactions?
21 Are there current proposals to change the regulatory or statutory framework governing securities transactions?
The past year has witnessed significant developments in the regulatory framework governing the securities markets in India. The 2017 Amendment has relaxed the disclosure requirements to be made by the issuer for public offerings of equity shares, and also simplified the private placement process in favour of a more efficient process. Moreover, the securities market regulator, SEBI, notified the new ICDR Regulations, 2018 (replacing the erstwhile ICDR Regulations, 2009) with an aim to rationalise the issuance of equity and convertible securities, and to streamline the regulations with the various informal guidance notes and interpretative notes issued by the SEBI from time to time. The Securities and Exchange Board of India (Buy-back of Securities) Regulations, 2018 were also notified during the year, aimed towards aligning the regulations with the relevant provisions of the Companies Act, 2013 and bringing in much-needed consistency to the legal regime.
Given the dynamic nature of the securities markets in a developing economy, along with an increasingly interactive global financial landscape, there is a constant need for continuously updating the regulatory and legal regime. With a view to facilitating the listing of new age start-ups and enhancing the Indian start-up ecosystem, SEBI has also floated a consultation paper to review the existing ITP framework and proposed easing of norms for such start-ups to list on the ITP, as against the main board. SEBI has also recently published a report of the expert committee for listing of equity shares of companies incorporated in India on foreign stock exchanges and of companies incorporated outside India on Indian stock exchanges, making several recommendations for easing the manner of listing for such companies.
At the same time, SEBI also recognises that - in contrast to relaxing the norms governing the securities’ markets and opening up of securities markets - there are certain parties in the offering process that need further scrutiny by the regulator. Accordingly, SEBI has floated a consultation paper proposing amendments across relevant regulations aimed at bringing certain identified intermediaries, such as chartered accountants, valuers, et al., who play a vital role in examining or vetting the disclosures made by the companies in the market, within the ambit of SEBI’s oversight. These proposed amendments are aimed at increasing the responsibility of such intermediaries, ensuring that credible and accurate data is disseminated to investors and thereby bolstering the investor confidence in the markets.