Contributed by Animesh Chaturvedi

I.Introduction: Efficiency vs. Transparency in Combining IPO Statutory Advertisements

The Securities and Exchange Board of India (SEBI) has undertaken significant reforms in its regulatory framework, particularly focusing on initial public offerings (IPOs), rights issues, insider trading, and offshore derivative instruments (ODIs). SEBI’s recent move to combine pre-issue and price-band advertisements under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (hereby “ICDR”) is aimed at reducing redundancy and lowering costs for issuers. Under this new proposal, a single advertisement, enhanced by a QR code for additional disclosures, is expected to streamline the process. While this reform cuts down on repetitive content, it raises concerns about accessibility, particularly for retail investors. SEBI’s proposal assumes a high level of digital literacy and access to technology, potentially excluding certain investor groups.

According to the World Bank, India still has substantial digital inequality, with internet penetration in rural areas lagging significantly behind urban regions. Investors reliant on traditional media may miss out on critical information if they cannot access QR-code-based disclosures. Further, consolidating critical details into one advertisement could overwhelm investors with too much information at once, diluting the clarity of financial and procedural disclosures. Pre-issue advertisements and price-band disclosures serve distinct purposes: the former highlights the offering’s general details, while the latter focuses on pricing mechanisms.

Blending them into one might cause investors to overlook essential aspects. Rather than fully integrating these advertisements, SEBI could retain separate segments for pre-issue and price-band information, while embedding detailed disclosures in the QR code. Additionally, issuers should be required to offer printed copies of full disclosures upon request to ensure inclusivity for all investor demographics. This hybrid approach could strike a balance between efficiency and comprehensive transparency.

II.        The T+23 Rights Issue Timeline: Speed at the Cost of Due Diligence?

SEBI’s introduction of a T+23 timeline for completing rights issues (from the board meeting approval to the issue’s conclusion) is a notable attempt to expedite fund-raising processes. The aim is to reduce the average completion time of 317 days currently observed for non-fast-track issues, making rights issues an even faster alternative to preferential allotments​. While the intention is to increase the attractiveness of rights issues as a capital-raising method, the accelerated timeline could pressure issuers, legal teams, and intermediaries to condense key steps, including due diligence. A compressed window for rights issues may undermine the thorough vetting of disclosures, jeopardizing the quality of financial checks, especially for smaller issuers unfamiliar with the process.

Fast-tracking without adequate safeguards could also lead to errors in share allotments, pricing miscalculations, or incomplete disclosures. Investor confidence, particularly in less experienced issuers, might suffer if the speed of the process comes at the cost of transparency or financial soundness. SEBI could introduce a phased timeline system, where issuers with a proven track record can utilize the T+23 framework, while first-time issuers or those raising smaller sums are provided a longer window. This would ensure that due diligence is not compromised, particularly for issuers who may lack the infrastructure to handle such compressed timelines. SEBI could also mandate interim audits or reviews to ensure compliance without slowing down the process.

III.        Relaxation of Merchant Banker Requirements: Streamlining or Undermining Oversight?

One of SEBI’s notable reforms under the ICDR Regulations is the dispensation of the requirement to appoint merchant bankers for rights issues, with tasks being reallocated to registrars and other market infrastructure institutions​. The intention here is to reduce costs and quicken processes, but does this compromise the quality of oversight? Merchant bankers play a critical role in ensuring regulatory compliance, verifying disclosures, and managing financial assessments during rights issues. By relegating their role, especially in smaller rights issues, SEBI risks reducing the level of scrutiny applied to issuers, particularly those with complex financial arrangements. Registrars and market infrastructure institutions may not have the same financial acumen or expertise as merchant bankers, potentially leading to lapses in the quality of oversight.

This relaxation might save issuers money in the short term, but it could result in long-term consequences, such as increased legal disputes, investor dissatisfaction, or even market instability, particularly if issuers mismanage their financial disclosures. SEBI should adopt a graded framework, where only issuers with simple financial structures or a strong compliance history are exempted from appointing a merchant banker. For more complex rights issues, especially those involving material acquisitions or high debt, the role of merchant bankers should remain mandatory. This would ensure that smaller issuers can still benefit from cost savings, without compromising investor protection or market integrity.

IV.        Promoter Renunciation in Rights Issues: Fair or Favoritism?

SEBI’s decision to allow promoters to renounce their rights entitlements to specific investors during rights issues is a bold move. It introduces flexibility, but could also create opportunities for preferential treatment, potentially locking out minority shareholders from these renounced shares​. While this reform allows promoters to allocate shares to specific investors, it could foster favouritism, where certain investors are given priority access to shares at the expense of others. This dynamic could undermine the principle of equitable treatment in rights issues, as minority shareholders might find themselves excluded from these opportunities.

Moreover, renunciation could lead to unintended consolidation of ownership, where promoters, through select renunciations, concentrate share ownership in the hands of a few investors. This could result in indirect control shifts, affecting the balance of power within the company without triggering regulatory oversight. To prevent abuse, SEBI should require that any renunciations by promoters be carried out transparently through a public bidding or open-market mechanism. This would ensure that all shareholders, including minorities, have the opportunity to participate in the renounced shares. Additionally, SEBI could limit the percentage of rights that a promoter can renounce to any single investor, preventing undue concentration of shares.

V.        Harmonization of ICDR and LODR Regulations: Enhancing Corporate Governance

SEBI has made efforts to harmonize certain provisions of the ICDR and LODR regulations, particularly in defining material subsidiaries, material litigation, and compliance officer qualifications. This harmonization is aimed at reducing regulatory fragmentation, but there are concerns about its impact on corporate governance. While aligning these definitions may simplify compliance, it could also reduce the oversight of certain subsidiaries or legal actions. For instance, the focus on financial thresholds alone for determining material subsidiaries could allow companies with high-risk, low-revenue subsidiaries to escape rigorous scrutiny. Similarly, the mandatory disclosure of litigation without materiality thresholds might overwhelm investors with irrelevant details, diluting the importance of truly critical information.

Furthermore, requiring a company secretary to act as the compliance officer in IPOs under the ICDR Regulations could standardize accountability, but smaller issuers may struggle to meet this requirement. SEBI should introduce qualitative factors, such as risk profile or industry type, into the definitions of material subsidiaries, ensuring that high-risk but low-turnover subsidiaries receive adequate oversight. For litigation, SEBI could implement tiered disclosure requirements, focusing on actions with significant financial or reputational implications. Finally, flexibility in compliance officer qualifications for smaller issuers could prevent unnecessary barriers to market entry, without compromising regulatory oversight.

VI.        Conclusion

SEBI’s regulatory reforms signal a new era for Indian capital markets, one that emphasizes speed, efficiency, and transparency. However, these reforms must be implemented with caution, ensuring that they do not inadvertently undermine the very principles of fairness and accountability they seek to uphold. By critically engaging with these reforms, legal scholars, market participants, and regulators can collectively shape a more resilient and inclusive market. SEBI’s role as a regulatory body will continue to be pivotal, not only in creating rules but also in adapting to the evolving needs of a diverse and dynamic financial ecosystem.