Tuesday, August 9, 2011
Friday, July 29, 2011
The latest board meeting of the Securities and Exchange Board of India took place on July 28, 2011. As per the press release about the board meeting, one of the issues that was discussed and decision taken was due diligence records to be maintained by merchant bankers.
SEBI noted that the merchant bankers are required to exercise due diligence in the pre-issue and post-issue activities of issue management, takeover, buyback and delisting of securities. However at present, they are not required to maintain any records as to how they exercised due diligence. As a result, the merchant bankers follow different standards of compliance and the level of due diligence cannot be checked during inspection of merchant bankers by SEBI. Accordingly, SEBI approved amendment to Securities and Exchange Board of India (Merchant Bankers) Regulations, 1992, requiring merchant bankers to maintain records and documents pertaining to due diligence exercised in pre-issue and post-issue activities of issue management, takeover, buyback and delisting of securities. These amendments are yet to be notified by SEBI.
The foregoing is a welcome step since it would clarify what the securities market regulator expects of the merchant bankers in matters of due diligence. Accordingly the merchant bankers can revise their internal policy on maintenance of records without being in a state of uncertainty. This would also assist the merchant bankers in establishing due diligence during SEBI inquiries. Due diligence by merchant banks in public offers, takeover and other similar capital markets transactions has been judicially well recognized and reference can be made to various orders of the Securities and Appellate Tribunal during the years 2004 and 2008.
Further recognition by SEBI that currently the merchant bankers are not required to maintain any records as to how they exercised due diligence also clarifies an uncertain aspect on due diligence which is whether there is currently a legal obligation to maintain such records. In the context of stock brokers, a similar issue was recently adjudicated upon by the Adjudication Officer, Securities and Exchange Board of India on July 27, 2011 in the matter of UBS Securities India Private Limited (UBS). SEBI had alleged that UBS had failed to provide required information (telephonic records, Bloomberg messages and emails) that SEBI had sought in relation to dealings in securities by UBS as a stock broker. UBS successfully argued that there was nothing under the Securities and Exchange Board of India Act, 1992 and the rules and regulations framed thereunder which required it to retain emails, messages and telephonic records for a particular period of time. Hence it would be guided by its internal policy which it had followed.
Wednesday, July 27, 2011
Tuesday, July 12, 2011
After the completion of the preliminary investigation, SEBI came to the conclusion that there was more than reasonable possibility that the investors were beguiled by the artificial trends in the subscription. A major part of the subscription was subsequently found to be bogus and untrue. Consequently, SEBI, through its order dated July 11, 2011 (link) directed the company and the book running lead manager to, inter alia, do the following.
1. Give withdrawal option to all the investors who had been allotted shares in the non-institutional investors category and the retail individual investors category for such number of shares by which the allotment ratio was impacted due to withdrawals/rejections.
2. On the closure of the withdrawal option, if the subscription level after such withdrawals falls below the minimum level of subscription as required by law, the sole syndicate member cum book running lead manager, Ashika Capital Limited, would underwrite and may purchase or arrange purchase through any investor(s) identified by it of such number of shares so as to ensure that the subscription does not fall below the minimum level of subscription. Non-compliance of such condition shall result in refund of entire subscription money to the investors and cancellation of all the shares so allotted by the Company.
3. The company shall cancel those shares, which have not been underwritten or taken by other investors identified by the lead manager.
These directions of SEBI raise interesting legal issues and may be in complete heedlessness to the legal provisions:
1. As per SEBI’s order, upon exercise of withdrawal option, if the percentage of allotment falls below the minimum subscription level, the sole syndicate member has to underwrite. It’s unclear as to the legal basis for such an underwriting since underwriting (soft or hard) as a process, both under the underwriting agreement and in accordance with SEBI (Underwriters) Regulations, 1993, happens prior to allotment when the requisite subscription has not been achieved. In Vaswani’s case, subscription and allotment for the entire issue is complete and the sole syndicate has not been found guilty of any wrongdoing.
2. As per SEBI’s order, if minimum level of subscription is achieved, the company has to cancel the allotted shares which have been rejected by the investors. It’s unclear what sort of corporate action will be followed by the company for cancelling such allotments. As per companies act, allotments are voidable or void under sections 71 and 73 respectively, which do not apply to this case. The other method of cancelling allotted shares would be through buy back, the conditions of which Vaswani Industries may not be able to meet.
3. SEBI’s order seems to have ignored the applicability of section 73 (1A) of the companies act. The IPO closed on May 3, 2011. By the time Vaswani Industries completes complying with SEBI’s directions, the ten week period would be over without Vaswani Industries having received the listing permission. So as per section 73 (1A), the entire allotment made pursuant to the IPO would become void.
Friday, May 28, 2010
The disinvestment of PSUs has not been successful particularly in the retail and employee reservation category and this is a matter of concern for the government if one is to go by the number of articles in business papers on this issue. Hence is it not surprising that Coal India, the country’s largest coal miner, is negotiating with some of the state-owned banks such as SBI to seek cheap loans for its employees so as to enable them to subscribe to the shares reserved for the employees in its upcoming initial public offering. (See link). While these efforts on the part of Coal India carry good intentions since its employees will become equity holders, the method might require adherence to certain specific provisions of the Companies Act and, pursuant to which, specific disclosure in the prospectus will have to made.
As per section 76 of the Companies Act, a company may pay commission to any person in consideration of, inter alia, his procuring or agreeing to procure subscription for any shares in the company subject to fulfillment of certain conditions such as the payment of the commission must be authorized by the Articles, the commission paid should not exceed a certain specified amount, the amount of commission and the number of shares must be disclosed in the prospectus and a copy of the contract for the payment of the commission is delivered to the Registrar at the time of delivery of the prospectus. Underwriting agreements are a classic example whereby the company pays commission to the underwriter for it to agree to subscribe or procure subscription of shares being offered in the public offer. As a result section 76 is complied with and necessary disclosures are made in the prospectus.
In this backdrop, the efforts on the part of Coal India may trigger section 76 since if a big company like Coal India is negotiating access to cheap loans from big banks like SBI, it is unlikely that no monetary consideration would flow from Coal India to SBI in the shape of commissions. And for cheap loans to be made available, SBI would have to come up with a new loan product meant for prospective employee investors of Coal India and market it. This may amount to ‘procuring subscription’.
In the alternative, negotiating of cheap loans for IPO subscription by employees could also come within the ambit of section 77 of the Companies Act, which, inter alia, permits the provision by a company, in accordance with any scheme for the time being in force, of money for the subscription of shares in the company for the benefit of the employees of the company. This is one of the exceptions to the general rule which prohibits public companies to give any financial assistance in connection with subscription of shares in the company.
Thus the act of Coal India might fall under section 76 or 77 and this will depend on the modality that is adopted by Coal India such as the size of the loan, whether Coal India has a scheme in place or not etc. However if it falls under section 76, it will require additional compliances as indicated earlier.
Tuesday, May 25, 2010
A recent judgment by the Delhi High Court in Kimsuk Krishna Sinha v. SEBI (MANU/DE/0743/2010) throws interesting light on the role of SEBI in ensuring correct disclosure in offer documents and actions that SEBI can or should take in case there is misstatement in prospectus.
Friday, May 21, 2010
What is the legal framework for public offering of securities by SMEs?
The legal framework for the public offering of securities by SMEs is primarily contained in the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 (“ICDR Regulations”), SEBI press release dated November 9, 2009 and SEBI circulars dated April 26, May 17 and May 18, 2010.
Who can issue securities under the legal framework for public offering of securities by SMEs?
An issuer whose post-issue face value capital does not exceed ten crore rupees can issue securities in accordance with Chapter XA of the ICDR Regulations. An issuer whose post issue face value capital is more than ten crore rupees and upto twenty five crore rupees can also issue securities in accordance with Chapter XA of the ICDR Regulations. The second category of issuer may migrate its securities from the SME exchange to the ‘Main Board' (a recognized stock exchange having nationwide trading terminals, other than SME exchange) if its shareholders approve such migration by passing a special resolution through postal ballot to this effect and if such issuer fulfils the eligibility criteria for listing as laid down by the ‘Main Board’.
Further, an issuer listed on a recognized stock exchange other than a SME exchange and whose post-issue face value capital pursuant to further issue of securities of the same class does not exceed ten crore rupees will have option to make further issue of specified securities of same class in accordance with Chapter XA of the ICDR Regulations provided that its entire specified securities of the same class shall be listed on the SME exchange.
Where are securities, issued by SMEs pursuant to ICDR Regulations, listed?
Securities issued by SMEs pursuant to the ICDR Regulations are required to be listed on a SME exchange.
What is a SME exchange?
Regulation 106B (1) (c) of the ICDR Regulations defines SME exchange to mean a trading platform of a recognised stock exchange having nationwide trading terminals permitted by the SEBI to list the specified securities issued in accordance with chapter XA of the ICDR Regulation and includes a stock exchange granted recognition for this purpose but does not include the ‘Main Board’.
What is the legal framework for setting up of a SME exchange?
SEBI, through a circular issued in May 18, 2010 superseding a guideline issued earlier in November 5, 2008, laid down the framework for recognition and supervision of stock exchanges or platforms for SMEs. For the listing of securities issued by SMEs, either a dedicated stock exchange for SMEs can be set up or an existing stock exchange can set up platform for the SME sector. A new stock exchange or a platform can be set up after applying to Market Regulation Department, SEBI in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 and Securities Contracts (Regulation) Rules, 1956 subject to the applicant fulfilling certain conditions such as corporatisation of the stock exchange, minimum balance sheet networth of Rs. 100 crores, nationwide trading terminals and an online screen based trading system etc.
What are the important differences in the process of offering of securities under the SME legal framework as opposed to offering of securities under the non-SME legal framework of the ICDR Regulations?
· The SMEs issuers, making a public issue or a rights issue, are not required to file the draft offer document with SEBI.
· While filing the prospectus with the SME exchange, they are required to file a copy with the SEBI on which SEBI will not issue any observation.
· The underwriting shall be for the entire hundred percent of the offer through the offer document and shall not be restricted upto the minimum subscription level
· The merchant banker shall underwrite at least fifteen percent of the issue size on his or their own account.
· The minimum application size in terms of the specified securities shall not be less than one lakh specified securities.
· Further no allotment shall be made pursuant to any initial public offer if the number of prospective allottees is less than fifty.
Further, SEBI has made the process of market making mandatory in a SME public offerings and the responsibility is on the merchant banker to ensure compulsory market making through the stock brokers of the SME exchange for a minimum period of three years from the date of listing of the specified securities. Pursuant to a SEBI circular dated April 26, 2010, SEBI has laid down the norms for the market makers involved in the process of market making such as registration of the market makers, the obligations and responsibilities of the market makers, risk containment measures and monitoring of market makers etc.
Is migration from a SME exchange to the Main Board and vice versa permitted?
The ICDR Regulations permits migration of companies to SME exchange or migration to the Main Board.
Is there a listing agreement in place for listing of securities on a SME exchange?
Pursuant to a circular dated May 17, 2010, SEBI specified the model SME equity listing agreement containing of listing for issuers seeking listing on SME exchange.
What are the differences in the model listing agreement for listing on a SME exchange upon comparison to the listing requirements in Main Board?
Some relaxations are provided to the issuers whose securities are listed on SME exchange in comparison to the listing requirements in Main Board, which inter-alia include the following:
· Companies listed on the SME exchange may send to their shareholders, a statement containing the salient features of all the documents, as prescribed in sub-clause (iv) of clause (b) of proviso to section 219 of the Companies Act, 1956, instead of sending a full annual report;
· Periodical financial results may be submitted on “half yearly basis”, instead of “quarterly basis” and
· SMEs need not publish their financial results, as required in the Main Board and can make it available on their website.