In yet another move to up the role of the retail investor in the stock market the Securities and Exchange Board of India (SEBI) has recently amended the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2010, to increase the extent of participation allowed by retail investors.
At the same time SEBI has added to the built-in restrictions on promoter participation in the preferential allotments of an issuing company and also expanded the definition of a qualified institutional buyer. These regulations apply to the following issues: public issues, rights issues, preferential issues, bonus issues by a listed issuer, qualified institutional placements by listed issuers and an issue of Indian depository receipts.
The amendment expands the application limit for an individual retail investor in an IPO from Rs100,000 (US$2,185) to Rs200,000. The amended definition states that a retail individual investor or shareholder is a person who applies or bids for securities for a maximum value of Rs200,000 and not Rs100,000. This will translate into an increase in the investor base for IPOs as more investors will now fall within the 35% reservation available to retail investors.
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The amendment also adds stringent norms to the existing preferential allotment framework. As such, a promoter, either an individual or a group entity, who previously subscribed to the warrants of a company but did not exercise the warrants, would be ineligible to receive the company’s equity shares or convertible securities or warrants for one year from the date of expiry of the currency or cancellation of the warrants. In addition, if a promoter has sold shares in the previous six months, then such an individual or group would be ineligible to receive any allotment on a preferential basis.
As a result of this amendment the Department of Post’s Postal Life Insurance Fund and Rural Postal Life Insurance Fund have also been brought within the definition of a qualified institutional buyer. This means both these funds can now bid for shares under the 50% quota reserved by issuing companies for qualified institutional investors.
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The legislative and regulatory update is compiled by Nishith Desai Associates, a Mumbai-based law firm. The authors can be contacted at nishith@nishithdesai.com. Readers should not act on the basis of this information without seeking professional legal advice.
