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Unraveling And Tapering The Complexity Of Rights Issue

The sine qua non for the smooth functioning of any company is its capital. It is incumbent that a company ensures effective management of its working capital. The adequacy of the capital can be raised via the internal resources of a company. One of the primary resources for arranging capital is through the right issues. Today, we are going to have a discussion regarding the recent changes pertinent to it.



Meaning:

The rights issue, as the name suggests imparts a right but not an obligation to the existing shareholders of the company for purchasing the additional issue of shares by the listed company at a price lower than the market value. Such purchase is applicable on a pro-rata basis i.e. on the basis of the current proportionate shareholding of the shareholders. Rights Issue is defined under Regulation 2(xx) of the SEBI (Issue of Capital and Disclosure Requirements) (“ICDR”) regulations as “An offer of specified securities by a listed issuer to the shareholders of the issuer as on the record date fixed for the said purpose”.

The entire rights issue process was deemed to be riddled in complexity, hence, the SEBI incentivized to remedy the same and simplified the entire process by amending the SEBI (ICDR) and Listing Obligations and Disclosure Requirements (“LODR”) regulations. It first laid out a discussion paper on the process of a rights issue which was open for public consultation. Following the paper, it provided for the streamlining of the rights issue process vide its circular - SEBI/HO/CFD/DIL2/CIR/P/2020/13 on January 22, 2020. This article will briefly touch upon and elucidate the key changes.


Applicability of the new framework:

The currently listed changes are only applicable for all rights issues and fast track rights issue where the Letter of Offer (“LOF”) has been filed with the stock exchanges on or after Feb. 14., 2020.


Key Changes:


1. Tenure of Advance Notice:

The regulation 42(2) of the LODR provided for a requirement of a 7 working days’ advance notice for the purpose of a rights issue. For increasing the efficiency and effectiveness of the same, the 7 working days period has been reduced to 3 working days. The proviso attached to it provides clarification that the aforesaid 3 days are exclusive of the record date and the date of intimation.


2. Advertising in the Newspaper

Regulation 84 (1) of the ICDR Regulations provides for the issuance of an advertisement in One English National Daily, One Hindi National Daily, and One Regional Language daily newspaper of wide circulation in pursuant to the disclosure of the date of completion of despatch of the offer letter. The current time period provided for a 3 days advance to the date of opening of the issue. Circumventing the same, the amendment has reduced cut down on the current three days criterion to 2 days before the date of opening of the issue.


3. Introduction of Dematerialised Nature of Rights Entitlements

The new changes forwarded the criteria of crediting the rights entitlements in the dematerialized form to the shareholders. The rights entitlements would be deposited in the Demat accounts of the respective eligible shareholders.


4. Duration of the trading of Rights Entitlements

One of the significant changes is the introduction of the codified framework for trading of the rights entitlements in the stock exchanges. The onus is transferred on the stock exchanges for the creation of the procedural guidelines for the same.


5. Mode of Payment

As per SEBI, the fresh applications for the rights issue shall now mandatorily be processed only via the Applications Supported by Blocked Amount facility (“ASBA”). The justification provided for solely concentrating on a single payment mode was the feasibility and the expeditious nature of the ASBA which would further facilitate for the fast track completion of the process. There is also an embargo on the shareholder which disables him for withdrawing his application post the closing of the issuance date. This measure is taken so as to curb mischief and lessen the delay and inconvenience caused to the entire procedure.


The way forward:

Thus, the measure of easing the guidelines of the rights issue is a step in the right direction. There are several next consequential steps that can further open the curtains for the raising of the capital by the company. However, in my personal opinion, the current list changes in the process are certain to allure more companies to raise funds via the process of the rights issue. How much so, only time will tell.

ABOUT THE AUTHOR

Ankit Tewari is a 5th-year student at Amity Law School Delhi, IP University.

They can be contacted at ankit.tewari0701@gmail.com

Edited by: Arushi Gupta

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