Tag: Leading Lawyers

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Reforms to Rights Issues: A Major Highlight in SEBI’s September 2024 Board Meeting

In its September 30th, 2024, board meeting, SEBI introduced a major reform by reducing the timeline for rights issues from the existing average of 317 days to 23 days. This change is expected to significantly expedite the capital-raising process for companies, making it faster and more efficient for both issuers and investors.

Rights issues, where existing shareholders are given the right to buy additional shares at a discount, have long been seen as a favourable means of raising funds. However, the existing average timeline is comparatively lengthy, which may be a potential deterrent for companies, as they could be exposed to market volatility and investor uncertainty. The reduction brings various positives and highlights growing reforms in the market.

The Importance of the Reform

This reduction in the rights issue timeline is especially pertinent in today’s fast-growing markets, where the need for liquidity and quick access to capital is critical. Shorter timelines reduce the window for market fluctuations, thereby reducing chances of negative impact on share prices or investor sentiment. Companies, especially those needing immediate funds due to market opportunities or financial constraints, can now complete the fundraising process within a much shorter timeframe, allowing them to respond to market conditions more dynamically, and allow existing shareholders to participate in he continued growth of the issuer.

From an operational perspective, this shift also reduces the administrative burden associated with prolonged fundraising periods. Companies can now streamline their capital-raising process without the risk of their share prices being negatively affected by extended periods.

Implications for Issuers

For companies, the shortened timeline offers a great opportunity to raise funds more quickly, which can be crucial in times of economic instability or rapid market changes. Many companies may find this reform especially beneficial when looking for fast-tracked funding for business expansions, acquisitions, or debt reduction. The reduced timeline also mitigates the risk that prolonged processes might lead to a dilution of stock value or decreased investor confidence.

Moreover, this new framework could make rights issues a more attractive option compared to alternative fundraising methods, such as public offerings or taking on additional debt. Public offerings often involve extensive regulatory compliance, and borrowing can weigh down a company with additional liabilities. In contrast, rights issues, especially under the new timeline, offer a quicker and less cumbersome method of securing capital while keeping shareholder control largely intact.

Benefits for Investors

From an investor’s perspective, the quicker rights issue process reduces the uncertainty involved. Under the existing timeline, investors were often left waiting for extended periods, during which market dynamics could shift unfavourably. Now, with the shortened timeline, investors can make quicker decisions regarding their participation, reducing the risks associated with prolonged market exposure.

The new framework also allows investors to respond more efficiently to a company’s capital-raising needs, encouraging more active participation. Investors may be more likely to take up rights issues now, knowing that the process is quicker.

Boosting Confidence in the Capital Markets

This change is not just about improving efficiency; it’s also about restoring and boosting confidence in the Indian capital markets. Rights issues are a key indicator of market health, and a faster, more streamlined process indicates a more robust, dynamic market environment.

By reducing the timeline, SEBI is also aligning India’s rights issue processes more closely with global standards, making the Indian capital markets more attractive to both domestic and international investors.

Conclusion

SEBI’s decision to reduce the timeline for rights issues is a transformative step towards creating a more efficient and responsive capital-raising environment in India. For issuers, it provides a faster way to secure necessary funds, and for investors, it reduces the uncertainty tied to prolonged processes. This reform reinforces the use of rights issues as a preferred method for raising capital and could serve as a cornerstone for further regulatory developments aimed at modernising India’s capital markets and aligning it to more mature global standards.

SEBI Chairperson Outlines Key Initiatives to Boost and Expedite Capital Formation in India

In a speech delivered on Friday 2nd August, SEBI Chairperson Madhabi Puri Buch highlighted the regulator’s ongoing efforts to streamline the capital formation process in India, emphasising the importance of efficient fundraising for the growth of the economy.

India has emerged as the fastest-growing market for capital raising, though the overall size of capital raised still lags behind advanced economies. SEBI is taking several steps to facilitate and expedite the capital-raising process, with a focus on simplifying the procedures and reducing timelines for companies, including an AI backed streamlining process for offer documents.

The initiatives discussed involved the following:

 

New ECM Product and Performance Appraisal Agency 

SEBI has introduced a new Equity Capital Market (ECM) product that combines the features of rights issues and preferential allotments. This product is expected to significantly reduce the timelines for capital raising, and will be available to already listed companies without requiring SEBI’s review process. The compulsory appointment of merchant bankers in this process will also be waived.

Traditionally, a rights issue allows current shareholders to purchase additional shares, while a preferential allotment involves issuing shares or convertible securities to a select group of investors.

The Chairperson explained that under the new framework, if a company receives board approval for a rights issue, it will also have the flexibility to allocate shares preferentially to new investors if a portion remains unsubscribed. This aims to make fundraising more flexible and responsive to market conditions, providing companies with a more efficient pathway to secure capital. This will likely be under the framework provided under S. 62(1)(c) of the Companies Act, 2013.

Additionally, SEBI is setting up a framework for registered performance appraisal agencies to provide investors with simplified assessments of various capital market products. This agency will enable investors to compare products and verify claims of performance made by various intermediaries.

Furthermore, the Chairperson highlighted SEBI’s existing supervisory technology (sup-tech) used in document review and inspection activities. There is also a greater focus on implementing regulatory technology (reg-tech) to streamline compliance processes. SEBI envisions reg-tech enabling companies to fulfill regulatory obligations seamlessly, without disrupting their business operations.

 

Streamlining the Approval Process

Addressing the growing demand for market access, the Chairperson noted that while the number of documents requiring clearance has increased, this reflects a healthy trend of more companies seeking to enter the capital markets.

SEBI is focusing on the efficiency of the approval process, particularly in terms of the time taken to clear draft offer documents (Draft Red Herring Prospectus or DRHP). According to current SEBI data, only eight draft offer documents have been pending for more than three months, which is largely due to pending regulatory approvals or significant non-compliance issues.

To expedite the approval process, SEBI has adopted a data-driven approach and is returning documents that fail to meet compliance standards. The return of documents will not be on frivolous grounds; only serious issues such as inconsistencies in reported figures, vague objects for use of IPO funds, or incomplete disclosures will warrant a return. This approach aims to prioritise compliant companies and reduce the backlog of pending approvals.

 

Introducing AI to Simplify Public Offer Documents 

In a move towards technological innovation, SEBI is working on implementing an AI tool for processing offer documents. This tool is expected to significantly reduce the time taken for SEBI’s review of draft offer documents, enhancing the overall efficiency of the capital raising process.

This process said to be “Demystifying the Offer Document”, involves a templated document. Possibly in a tabular or ‘fill in the blanks’ format, it is designed to simplify the disclosure process for companies, requiring them to fill in relevant details while addressing specific complexities or unique aspects in a separate section.

 

Key Performance Indicators (KPIs) and ESG/BRSR Norms

In her speech, the Chairperson also discussed SEBI’s efforts to enhance corporate governance standards.

SEBI is consulting with industry bodies such as ASSOCHAM and FICCI regarding the disclosure of Key Performance Indicators (KPIs). They have outlined its expectations for the KPIs to be disclosed, and the industry’s feedback is awaited.

Additionally, SEBI is planning to strengthen Environmental, and Social Governance (ESG) and Business Responsibility and Sustainability Reporting (BRSR) norms, reflecting a commitment to sustainable and responsible investing.

 

Conclusion

The SEBI Chairperson’s speech highlights the regulator’s aim to introduce proactive, technologically-driven approach to facilitating capital formation in India, ensuring that the capital markets remain transparent, and accessible to a broader range of companies and investors.

 

This blog is authored by Partners – Madhurima Mukherjee Saha and Arka Mookerjee.

Are the Labour Codes Future Ready?

The 4 Labour Codes on wages, industrial relations, social security and occupational safety, welfare and working conditions have been passed in 2019 – 2020 but are pending enforcement. While a few States are yet to frame their draft State-specific rules under one or more Labour Code, the Central Government has already issued the draft Central rules under all the 4 Labour Codes.

The enforcement of the Labour Codes has become essential to adapt the existing standards to the modern workforce, the changing business landscape and evolving focus on legal compliance. If the current ruling party wins the Lok Sabha elections this year, it has plans to enforce the new Labour Codes from 1st April 2025 to sync with the business cycles of enterprises. This would become clearer after the General Elections in June 2024.

With only 10 months remaining in this fiscal year, clarifications are needed on various aspects such as salary thresholds for applicability of the social security laws proposed to be repealed by the Labour Codes; overtime and minimum wage exemptions for white-collar employees performing non-supervisory and/or non-managerial roles; treatment of highly compensated employees or professionals including those designated as consultants; permissible clawbacks; exclusion of stock option plans from the new statutory definition of “wages”; fitness for purpose of the Labour Codes to contemporary, dynamic and flexible work arrangements (including gig and platform work); and issues concerning moonlighting, gender equality, to name a few.

These clarifications will close the loopholes and pave the path for streamlining implementation of the Labour Codes in letter and spirit and aid India Inc. to prepare for the regulatory challenges that lie ahead.

This blog is authored by Partner – Minu Dwivedi and Of-Counsel – Shreya Chowdhury.

Embracing Diversity at the Workplace: Transforming Challenges into Opportunities

What is diversity and inclusion?

There is no better example than mother nature when we speak about diversity and inclusion. Every single thing on earth has a role to play, a well-intended purpose! Nature teaches us that diversity is critical for not just a resilient and regenerative system, but also for a balanced and sustainable one. Likewise, India is one of the most diverse countries in the world, having varied topographies, cultures, customs, languages, traditions, rituals, cuisines, festivals etc. and yet, there is an underlying ‘Indian-ness’ that binds everything together.

Although the terms ‘diversity’ and ‘inclusion’ are often used in the same breath, it needs to be understood that both are two distinct aspects in order to address them meaningfully. While one may recognize diversity, one may not necessarily be inclusive or promote equity. It is as simple as being invited to a gathering but not being included in the activities of the group.

While ‘diversity’ describes a wide variety of differences that exist amongst people, ‘inclusion’ ensures that ‘diverse’ people feel welcome, safe and included. Inclusion at work is all about acknowledging varied skills, traits and perspectives that employees with unique backgrounds bring to the table. In other words, it involves recognizing the value of individual differences and embracing them to create a workplace where both employers and employees celebrate and shine together.

While one may hire a diverse workforce, if the work culture does not provide a supportive framework, it would not be possible to sustain such diversity. If diversity widens access to the best talent, inclusiveness and equity helps engage and retain that talent efficiently.

The Indian Legislative Framework

While India does not have a comprehensive anti-discrimination legislation in place, there are certain laws such as the Equal Remuneration Act of 1976[1] (“Remuneration Act”), The Scheduled Castes and Scheduled Tribes (Prevention of Atrocities) Act, 1989 (“SCST Act”), the Sexual Harassment of Women at Workplace (Prevention, Prohibition & Redressal) Act, 2013 (“PoSH Act”), The Rights of Persons with Disabilities Act, 2016 (“Disabilities Act”), The Human Immunodeficiency Virus and Acquired Immune Deficiency Syndrome (Prevention and Control) Act, 2017 (“HIV Act”) and The Transgender Persons (Protection of Rights) Act, 2019 (“Transgender Persons Protection Act”) which have all been enacted with the objective of inter alia prohibiting discrimination and harassment on the basis of characteristics protected under such laws.

The Remuneration Act seeks to narrow down the disparity in wages between male and female workers performing work of a similar nature, besides protecting women from employment or occupational discrimination. The Code on Wages, 2019 which will subsume the Remuneration Act, once made effective, broadens its ambit to prohibit discrimination in employment related matters on the grounds of ‘gender’ without limiting its focus to women alone. While the PoSH Act seeks to provide a safe and conducive workplace for women, the SCST Act, Disabilities Act, Transgender Persons Protection Act and HIV Act seek to prohibit discrimination on the basis of such characteristics and provide such persons with equal employment opportunities. Under the Disabilities Act and Transgender Persons Protection Act, employers are also mandated to frame and implement equal opportunity policies. In 2018, a constitutional bench of the Supreme Court of India struck down Section 377 of the Indian Penal Code, 1860[2], decriminalizing same sex relationships between consenting adults. This was a landmark judgement in terms of ensuring equality of people, regardless of their sexual preferences.

With the objective of reducing women drop-outs and facilitating their return to work after childbirth, the Maternity Benefit Act, 1961 was amended in 2017 to enhance maternity leaves, besides extending several other benefits including provision of a crèche facility and work from home in situations where the work may be performed remotely, enabling mothers to attend to their motherly responsibilities while simultaneously managing their professional lives. Likewise, the Companies Act, 2013 requires every listed company and every public limited company having a paid-up capital of INR 100 crore or more or turnover of INR 300 crore or more, to have at least one woman director on the board, ensuring female representation.

Despite the rise in education, it is unfortunate that the female labour force participation worldwide has remained low especially in leadership level positions. Although the percentage of female population in India is about 48% of the total population, only 26% of India Inc.’s workforce comprises of women[3].

The Indian government has actively been championing the cause of increasing women labour force participation in the country and have accordingly been encouraging employers to adopt flexible work hours, work from home and other flexible work arrangements. Accordingly, The Industrial Relations Code, 2020 (“IR Code”) has formally recognized the concept of work from home, by including a reference to the same in the draft Model Standing Orders for the services sector.

Grievance redressal mechanisms

Another facet of ensuring diversity and inclusion at the workplace is to put in place robust grievance redressal mechanisms. In order to be inclusive, organizations will need to listen to their employees and build a culture where employees feel heard and have the right to raise their grievances fearlessly. Controversies and conflicts are normal in any system that is evolving and actively working to become better. However, an appropriate grievance redressal mechanism would help resolve such conflicts.

A system or mechanism for addressing grievances has been provided for in all of the afore-mentioned laws. For example, while the Industrial Disputes Act, 1947, one of India’s oldest labour laws, provides for the constitution of a Grievance Redressal Committee (“GRC”) for the resolution of disputes arising out of individual grievances, the PoSH Act provides for the constitution of an Internal Complaints Committee, consisting of at least 50% female members to redress complaints pertaining to workplace sexual harassment of women. The IR Code (which is yet to be made effective) also provides for the constitution of a GRC with female representation proportionate to the female representation in the industrial establishment. Likewise, the Disabilities Act requires every employer to appoint a Liaison Officer and the Transgender Persons Protection Act, and the HIV Act requires an employer to designate a person to be a Complaint Officer to deal with complaints relating to violation of the provisions of the law.

Diversity NOT a threat, but a potential for growth

There is an increasing body of evidence that establishes a positive co-relationship between diversity and inclusion practices and a healthy work culture, increased competitiveness, innovation, overall growth and engagement of the company. Implementing a strong diversity and inclusion framework facilitates the creation of a safe, supportive, dignified and respectful environment. The understanding and wisdom of a diverse work force also helps enrich the decision-making process. For example, many organizations have been undertaking internal surveys to collect the personal data of their workforce to analyse and take relevant actions.

While some organizations have appointed a chief diversity and inclusion officer to drive their diversity and inclusion agendas, many others are reshaping their parenting, wellness, PoSH and safety benefits. Some employers have gone a step ahead to ensure that their insurance policies accommodate the medical needs of same-sex partners and extend parental benefits to same-sex partners. Some employers have adopted programs with an intentional emphasis of hiring people in the autism spectrum. In order to ensure a more gender inclusive workplace, many employers have adopted flexible work entitlements such as extended maternity/parental support, work from home, extended child-care leave along with wellness programmes and have also been facilitating capacity and leadership development opportunities specifically for women. Some employers have even adopted Career Return Programs for women returning back from their sabbaticals, to dissolve the taboo associated with career breaks. For many industrialized companies, bringing women to the forefront in senior roles is now a priority agenda.

Conclusion

Building safe and inclusive workplaces that foster and nurture equal opportunities and respect for everyone is definitely a USP for organizations today. Several progressive organizations are on their way to making DEI (diversity, equity and inclusion) as a competitive differentiating factor for themselves and their stakeholders.

It is high time that all default thinking patterns are set aside and organizations begin to appreciate and embrace differences to create a culture of workplace belongingness. The objective should not be to simply tick-off a checklist to be in compliance with applicable laws or do certain things to follow the herd. In one of the landmark judgments by the Supreme Court of India, the court observed that in order to enable persons with disabilities to lead a life of equal dignity and worth, it would not be sufficient to simply mandate that discrimination against them is impermissible.[4] This also points towards the fact that we need to shift from a “charity-based” approach to a “rights-based” approach.

In order to further their DEI agendas, employers will need to take concrete steps enabling equal access to opportunities and address all forms of conscious and unconscious bias at the workplace. Increased workplace sensitivity is one of the most important steps towards this direction, which can be achieved with effective education and constant reminders of the organizational culture through employee engagement activities.

To enrich an organization with diversity, it is critical to institutionalize inclusion and equity. Merely having policies would not suffice, if they are not implemented and monitored carefully. Affirmative actions need to be taken in all spheres of employment, whether it be in relation to recruitments, talent pool creation, promotions or even governance structures itself. For example, ensuring diversity in leadership level roles will help shape policies and implementation strategies that are relevant and adaptable. Regular dialogue of mid and top-level leadership with the workforce can also help inspire confidence and a sense of belongingness, besides fostering an environment of inclusion and respect from top to bottom.

Ensuring gender diversity and inclusion is definitely a long-drawn collective commitment and there is no magic solution for the same. While India Inc. has made significant strides in building a diverse and inclusive workplace, sustained efforts would be required to ensure that we remain on the right track. The journey to create a safe, diverse, and inclusive workplace is an ever-evolving space with no finish line – it is a continuous process of creating a progressive and transformational culture which requires one to keep reinventing the wheel with changing times.

This blog is authored by Aishwarya Manjooran and Preetha Soman.

 

[1] To be replaced by the Code on Wages, 2019

[2] Navtej Singh Johar and Ors. vs. Union of India (UOI) and Ors. (AIR 2018 SC 4321)

[3] As reported in https://www.assocham.org/uploads/files/Diversity%20Report_compressed.pdf

[4] Vikash Kumar vs. Union Public Service Commission and Ors. (AIR 2021 SC 2447)

A Letter of Intent vis à vis an Offer Letter: Five key points for an Employer to effectively draft a Letter of Intent

A letter of intent (LOI) issued by an employer to a potential candidate, as the name suggests, indicates only the employer’s intention to issue an offer of employment. It is a common misconception that an LOI is an offer, which, once accepted, becomes a binding contract. Recently, while addressing concerns about onboarding, Capgemini clarified that the candidates selected on-campus had been issued only LOIs, which per se, were not offers of employment, and Capgemini’s onboarding would be based on its staffing requirements.

While determining the legal implications of an LOI, a Division Bench of the Hon’ble Supreme Court in the matter of South Eastern Coalfields Ltd. & Ors. vs. S. Kumar’s Associates AKM (JV) held that an LOI indicated merely a party’s intention to enter into a contract, and no binding relationship was concluded thereby unless an unambiguous agreement was clear from the terms of the LOI. Therefore, it is crucial to draft an LOI precisely to avoid any confusion and mitigate potential risks of claims arising therefrom.

Five key points for employers to keep in mind while drafting an LOI are as follows:

  • The intention of the document to be an LOI and not an offer of employment should be explicitly and unambiguously mentioned in the LOI.
  • The LOI should clearly mention that if the employer has decided to employ a candidate, an Offer Letter will be issued to the candidate within a certain time frame. If the candidate does not receive an offer within the specified time frame, the LOI will be deemed to have expired without any further act, deed, or formal decision by the employer or any other person.
  • The LOI should not bar the potential candidate from accepting jobs with other employers on the assumption that the LOI has established an employer-employee relationship between the parties.
  •  The language of an LOI should be significantly different and distinguishable from that of an offer letter. The LOI may have certain basic details of the intended job role and the approximate cost to company (CTC) that the candidate could expect if he/she were offered employment within the specified time frame. The offer letter, on the other hand, should be more detailed, and should set out the exact CTC and salary breakup, benefits, job description, expected joining date, and other terms and conditions of employment.
  • The language of the LOI should not create any contractual rights and obligations on either party, which could potentially be interpreted to establish an employer-employee relationship between them.

This blog is authored by Minu Dwivedi and Shreya Chowdhury.

SEBI Board Meeting Outcome

The SEBI board at its meeting held on March 29, 2023 has approved the following key amendments and changes to the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended (“LODR”) and the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018, as amended (“ICDR”).

Disclosure of material events

1. Introduction of quantitative materiality threshold for determination of materiality of events or information.

Regulation 4 of the LODR, casts the following obligations are on a listed entity:

  • The listed entity shall provide adequate and timely information to recognised stock exchange(s) and investors
  • The listed entity shall ensure that disseminations made under provisions of these regulations and circulars made thereunder, are adequate, accurate, explicit, timely and presented in a simple language.
  • Channels for disseminating information shall provide for equal, timely and cost efficient access to relevant information by investors.

Regulation 30(4) of the LODR requires disclosure of material information based on certain qualitative criteria, namely:

  • the omission of an event or information, which is likely to result in discontinuity or alteration of event or information already available publicly; or
  • the omission of an event or information is likely to result in significant market reaction if the said omission came to light at a later date;
  • In case where the criteria specified in sub-clauses (a) and (b) are not applicable, an event/information may be treated as being material if in the opinion of the board of directors of listed entity, the event / information is considered material.

Listed entities are also required to devise a materiality policy based on the above principles for disclosure of information. Generally, listed entities include a further quantitative criteria for disclosure of certain material events such as litigation. This may be in the form of any event which has a monetary or determinable impact, such as 10% of the profit after tax or 1% of the revenue of the listed entity. Basis the above amendment, similar monetary or quantifiable thresholds are likely to become applicable for all kinds of disclosures.

2. Timelines for disclosure of material events or information for decisions of the board of directors or emanating from within the listed entity

Presently, Regulation 30(6) of the LODR allows for disclosure of material events within a period of 24 hours from the event, with exceptions for certain decisions of the board, such as approval of dividends, buybacks, increases in capital or approval of financial results, which have to be intimated within 30 minutes of the conclusion of the meeting. The amendments approved would likely make the 30 minute timeline applicable for a wider range of board decisions, if not all, while the overall time period for disclosure of material information has been reduced from 24 hours to 12 hours.

3. Verification, confirmation or clarification of market rumours

With effect from October 1, 2023, the top 100 listed companies by market capitalisation will be required to verify, confirm or clarify on market rumours. This clarification or confirmation regime will be extended to the top 250 listed companies by market capitalisation on April 1, 2024. Based on the press-conference by the SEBI chairperson, we understand that this will be limited to mainstream media. One of the key points of interest will remain the definition of mainstream media, as the universe of information has increased exponentially in recent times with the advent of the digital news medium and social networking sites.

4. Disclosure of certain types of agreements binding listed entities

As per a recently released discussion paper, a new clause 5A is proposed to be incorporated in para A of Part A of Schedule III to the LODR to cover disclosure of any agreement that impacts the management or control of a listed entity or imposes any restriction or creates any liability on a listed entity. Further, agreements whose purpose and effect is to impact the management or control or impose any restriction or create any liability also needs to be disclosed. However, agreements entered by a listed entity for the business operations of a company (e.g. supply agreements, purchase agreements etc.) is proposed to be excluded from the scope of disclosures.

Further, the discussion paper had also proposed a takeover regulations type event based disclosure, making it obligatory on shareholders, promoters, promoter group members, directors, key managerial personnel or related parties to inform the listed entity of entering into such agreements.

Once enacted, the disclosure paper also envisaged disclosure of such agreements by June 30, 2023 and ratification by the board and shareholders of the listed entity at subsequent general meeting during Fiscal 2024.

Corporate governance norms

5. Periodic shareholder approval of special rights

With a view towards further strengthen  corporate governance norms at listed entities, SEBI has approved amendments to include a periodic approval of any special rights granted to certain shareholders. As per a recently issued discussion paper, the proposal was to seek shareholder approval for special rights, such as director nomination, at an interval of five years. The discussion paper had also proposed that the existing special rights available to shareholders be renewed within a period of five years from the date of notification of the amendments to the LODR. Depending upon the amendment regulations, it may also open flood gates for shareholders who were contemplating to avail special rights in a listed company. Moreover, as the SEBI board meeting mentions ‘any special right granted to a shareholder of a listed company’, it may lead to queries from private equity investors for retaining certain special rights (other than appointment of nominees) to be continued post the IPO of a company, on the grounds of the same being permitted in case of any listed company (subject to periodic shareholder approval).

6. Alignment of disclosure requirements for BTAs and schemes of arrangement

In terms of a recent discussion paper, SEBI had proposed to institute an additional mechanism for shareholder verification and approval of the process of disposal of undertakings or entities outside the scheme of arrangement process. Currently, the scheme of arrangement requires approval of the shareholders and stock exchanges, with certain exceptions and the amendment proposed would align the need to seek approval between business transfer agreements or slump sale arrangements with those applicable to schemes of arrangement.

The proposals included disclosure of objects and commercial rationale for such sale, disposal and/or lease to the shareholders with voting approval to be obtained from the majority of the minority shareholders. It should be noted that this approval would be in addition to approvals required from shareholders for disposal of assets under the Companies Act, 2013.

7. Periodic approval of directorship term

In the interest of good corporate governance at listed entities, all directors appointed to the board of a listed entity will need to go through periodic shareholders’ approval process, thereby providing legitimacy to the director to continue to serve on the board. In terms of the recent discussion paper, this would be on the similar lines being followed for the appointment / re-appointment of whole time directors and independent directors. The proposal set out in the discussion paper was to have such periodic shareholders’ approval at least once in every five years from the date of his / her first appointment to the board. For existing directors, who have not been subject to reappointment since April 1, 2019, the re-appointment would require to be obtained during Fiscal 2024.

8. Disclosure of financial statements by newly listed entities

Read with a recently issued discussion paper, the proposed amendment would require a newly-equity listed entity to disclose its first financial results post its listing, for the period immediately succeeding to the periods for which financial statements were disclosed in its offer document for initial public offer, within 15 days from the date of listing or as per the applicable timeline under LODR Regulations, whichever is later. The below illustration from the discussion paper dated February 20, 2023 helps explain the requirements:

For example, in case of listing on March 01, 2023, as per the requirement under ICDR Regulations, the issuer would have disclosed in its offer documents the financial results till the period ended September 30, 2022. Hence, post its listing, it would be required to disclose the financial results for the succeeding period, i.e., quarter ended December 31, 2022, within 15 days from the date of listing, i.e. by March 16, 2023.The annual financial results for the financial year ended March 31, 2023 would be required to be disclosed as per the timeline specified in the LODR Regulations, i.e., by May 30, 2023.

Having said that, SEBI in its board meeting has communicated that a streamlined approach will have to be followed by newly listed companies towards releasing their first set of financial results immediately post listing, primarily to bridge the gap between the financials as disclosed in the prospectus and subsequently post listing.

9. Timeline for filling up vacancies

Listed entities will be required to fill up the vacancy of the offices of directors, compliance officer, chief executive officer and chief financial officer within a period of three months from the date of such vacancy, to ensure that such critical positions are not kept vacant indefinitely.

Amendments to ICDR

10. Underwriting

In furtherance of the SEBI consultation of February 2023 on ICDR, , SEBI has approved amendments to the ICDR to legislate the difference between underwriting for shortfall in demand and underwriting for technical rejections or payment risk. In either case, if adopted, will require to be agreed upon by the issuer and the underwriters prior to the filing of the red herring prospectus and disclosed to the prospective investors. This development mandates issuers, selling shareholders (if any) and lead managers to evaluate the need to underwrite an IPO only at the red herring prospectus stage, after factoring all aspects during that phase until allotment of shares for any know or unknown event expected to hinder the IPO (whether directly or indirectly).

Suitable amendments to Regulation 40 of the ICDR, as suggested by the discussion paper are awaited.

11. Bonus issues

SEBI also approved two amendments in relation to bonus issues of shares by listed entities. First, as long as there is a mismatch between the issued and listed capital of a company, it shall not be entitled to undertake a bonus issue given that a bonus issuance announcement is price sensitive. Accordingly, SEBI has mandated to resolve such discrepancies in the share capital via seeking in-principal approvals by the issuer from the stock exchanges for all its pre-bonus shares. This is a positive move to iron out hindrances faced by bourses in granting in-principal approvals during the aforesaid situation as it only widens the existing gap.

Second, bonus issuances must henceforth be done compulsorily in dematerialised form. This is in line with the recent regulatory move of compulsory dematerialisation of securities and allotment and transfer of securities in dematerialised form including for issuers enroute an initial public offering. While this step is surely progressive, practically, this may impact certain issuers with legacy physical shareholders who remain untraceable. Probably, the registrars and stock exchanges may have to huddle up, to draw a road map to park such unclaimed bonus shares akin to the framework in case of rights issues, wherein such shares are kept in suspense account.

It is critical to note that the SEBI press release specifically mentions that the amendments to ICDR are ‘with the objective of increasing transparency and streamlining certain issue process’ and consequently, the above two developments are only some of the amendments approved by SEBI in its board meeting and one will have to wait for the fine print of the ICDR amendment regulations to get hold of the other amendments to ICDR.

This blog is authored by Capital Markets team.

UGC’s Draft Regulations – Setting up of Campuses of Foreign Universities in India

Summary of UGC’s draft Regulations on setting up of campuses of Foreign Universities in India, as well as issues that require further clarity from UGC.

  • Regulation of Foreign universities/institutions conducting undergraduate, postgraduate, Phd, Post Doc. programmes in India.
  • Open to, top universities which are ‘recognised’ in the country of origin.
  • Approval of UGC for setting up campuses mandatory.
  • Quality of education to be at par with that of main campus.
  • Programmes can’t be offered in on-line mode.
  • Subject to quality and assurance audit by UGC.
  • Indian campus can’t act as Rep office of parent entity.

 

UGC needs to tie up the following loose ends:

  • Stipulate the term for which the initial approval lasts
  • elaborate on concept of “duly recognised” and quality assurance from  a “recognised body”
  • flesh out the approval criteria so that the discretion for approval is not open ended
  • clarify if the Indian campus can be set up by an incorporated entity
  • clarify on fee collection by parent entity
  • FEMA 1999 will have to be amended

 

This update is authored by Shivpriya Nanda, Partner – Corporate Practice.

SEBI notifies confidential DRHP filing norms

The Fourth Amendment introduces the construct of:

  • Confidential filing of draft offer documents for Indian issuers looking to undertake an initial public offering (“IPO”);
  • Monitoring of issue proceeds for preferential issues and qualified institutions placements (“QIP”), amongst others.

 

Highlights of the Process of Confidential Filing:

  1. The issuer prepares and files a draft red herring prospectus with SEBI and the stock exchanges (“Confidential DRHP”), however, this Confidential DRHP will not be available for public review or comments.
  2. The issuer needs to issue a public advertisement that it has filed the Confidential DRHP with SEBI, but not mentioning any other details of the public issue, neither guaranteeing that it will complete the IPO nor inviting comments from the public.
  3. SEBI reviews the Confidential DRHP and provides comments on the Confidential DRHP. Usually this involves a few rounds of comments from the regulator on the Confidential DRHP, which process one can reasonably expect to continue.
  4. Stock exchanges may also provide comments on the Confidential DRHP.
  5. After incorporating the comments received from SEBI and the stock exchanges, the issuer will be required to file an updated Confidential DRHP (“UDRHP-I”) reflecting the changes made to the Confidential DRHP pursuant to regulatory comments and other factual changes.
  6. At this stage, the issuer will also have to issue a second advertisement, informing the public of the filing of this UDRHP-I and inviting comments on the same. The period for inviting comments shall be 21 days. The key difference from the public filing process is that the draft document made available for public comments, has already undergone regulatory scrutiny and therefore more likely to be a more complete document from a disclosure perspective.
  7. Between stages 2 and 3, the issuer can approach a selected list of qualified institutional buyers (“QIB”), for marketing the IPO. This is a formalisation of the current public filing process, wherein issuers do conduct marketing post the filing of a draft red herring prospectus.
  8. Taking cue from the listing regulations, while the issuer is supposed to maintain a record of the investors it meets for marketing, presently there is no need to file this data with the regulators. Information shared with these QIBs will need to be limited to the Confidential DRHP. Parties may have to consider entering into non-disclosure agreements with these QIBs to ensure that the content of the Confidential DRHP remains within select set of participants and is not disseminated.
    Comment: It is interesting to note that while SEBI has asked for a minimum time gap of 7 working days between the closure of these investor meetings and filing of the UDRHP-I. These meetings can be conducted only until any observations are issued by SEBI on the Confidential DRHP.
  9. Fourth, after incorporating comments received from the public, the issuer will be required to file a further updated version of UDRHP-I, which is termed as UDRHP-II, to show changes pursuant to public comments and any factual changes.
  10. This UDRHP-II, with the IPO launch dates and other finalised details of intermediaries such as bankers to the offer, will be the red herring prospectus (“RHP”).
  11. Once finalised, the RHP will be filed with the registrar of companies (“ROC”).
    Comment: The process of opening and closing of the IPO remains the same as per the SEBI ICDR Regulations.

 

Other Key Considerations

Eligibility for OFS

  1. The holding period of 1 year for shares to be offered in an IPO is to be calculated from the date of filing of UDRHP-I.
  2. The Confidential DRHP will have to be redone in case there is any change in the size of the offer for sale by more than 50%.
    Comment: Practically, parties may have to decide on the indicative sellers in the IPO at the time of the Confidential DRHP itself, so that there are no substantial alterations, for various reasons, including the outcome of investor meetings.

 

Publicity

  1. Publicity activities for the period prior to UDRHP-I will require to be kept in line with past practices.
  2. Post filing of the UDRHP-I, the existing publicity restrictions and disclaimers will have to be followed.

 

Convertibles

  1. The issuer is entitled to retain outstanding convertible securities and rights available to shareholders to receive equity shares till SEBI issues observations.
  2. The public filing process contemplates that all such convertibles should be converted or be terminated or extinguished before the RHP is filed with the ROC.
  3. The Fourth Amendment has proposed that all such convertible securities and rights should be converted prior to the issuance of SEBI observations on the DRHP.
  4. The exceptions to this conversion requirement are options granted under employee stock option schemes and fully paid-up convertible securities, which are required to be converted on or prior to the RHP filing.
    Comment: While the wording has remained similar to the existing eligibility conditions under Regulation 5(2) of the SEBI ICDR Regulations, in future, SEBI may consider clarifying conversion of convertibles at the RHP filing with ROC stage for the confidential filing process.

 

Timelines

  1. In case of IPOs via the Confidential DRHP, the time period for opening of an IPO has been extended to 18 months from the date of final observations by SEBI, up from 12 months as per the public filing process.
  2. However, an issuer is required to file UDRHP-I by 16 months from the date of the observations.

 

Monitoring use of proceeds: Private placements not so private anymore?

  1. One of the key changes introduced through the Fourth Amendment is the requirement to have monitoring of use of proceeds of preferential allotments and QIPs above Rs. 100 crores.
  2. This requirement to have a credit rating agency monitor the use of funds raised (by other than by a public financial institution, insurance company or a bank) through preferential issues and QIPs aligns monitoring requirements with current IPOs and rights issues.
  3. Oversight of utilisation of money raised through public processes would always lead to greater compliance and is a move in the right direction. Having said that, SEBI may need to examine the existing disclosure regime for objects of QIPs and preferential issues in order to enable the credit rating agency to appropriately confirm the end-use.

 

Submission of offer documents

  1. In a reversal of the previous decentralisation of the IPO offer document review process, SEBI has not directed that offer documents be submitted to the head office.
    Comment: This has implications:
    a) a standardised approach to review of offer documents;
    b) while potential bottlenecking and increased review times due to increased number of offer documents, remains a potential area of concern.

Simplifying disclosures

As a follow up to ongoing directions issued by SEBI through observations and through the Association of Investment Bankers of India, certain amendments have been carried out to disclosure requirements in IPO offer documents under Part A of Schedule VI. The key changes can be summarised as follows:

 

Key Performance Indicators

  1. In order to simplify the use of performance indicators by issuers to showcase their growth and potential, SEBI has directed that all such ‘Key Performance Indicators’ or ‘KPIs’ will now need to be provided to all investors and defined in simple terms.
  2. If defined using technical terms, such technical terms must in turn be defined. KPIs must be certified by auditors/peer reviewed independent chartered accountant or cost accountant and such certificate will become a material document for inspection.
  3. The KPIs in turn must be approved by the audit committee of the issuer and explanation must be provided as to how the disclosed KPIs have been used historically by the management to track or monitor the operational or financial performance of the issuer.
  4. Importantly, KPIs disclosed to investors prior to the IPO must be disclosed in the offer document and those disclosed in the IPO offer document will require to continue to be disclosed post listing, for a one year period or till the IPO proceeds are utilised, whichever is later.

 

IPO price justification

Another amendment which is in line with recent SEBI directives, is the requirement to set out the justification of the IPO price.

  1. Issuers will now have to provide details of the price at which significant number of shares (exceeding 5% of the fully diluted pre-transaction share capital) have been issued in the last 18 months (whether in a single tranche or on a rolling basis over a 30 day period).
  2. Similarly prices at which significant number of shares (exceeding 5% of the fully diluted pre-transaction share capital) have been acquired by promoters, selling shareholders, members of the promoter group or shareholders with the right to nominate directors to the board have been transacted in the last 18 months (whether in a single tranche or on a rolling basis over a 30 day period) have to be disclosed.
  3. Moreover, SEBI has also now formalized the requirement of the price band advertisement specifically including a mention of the recommendation from a committee of independent directors of the issuer re the price band being justified based on quantitative factors / KPIs disclosed in ‘Basis for Issue Price‘ section vis-à-vis the weighted average cost of acquisition of primary issuance / secondary transaction(s) disclosed in ‘Basis for Issue Price‘ section.

 

This blog is authored by Capital Markets team.

 

Disclaimer for Updates / Client Alerts 

This update is not an advertisement or any form of solicitation and should not be construed as such. This update has been prepared for general information purposes only. Nothing in this update constitutes professional advice or a legal opinion. You should obtain appropriate professional advice before making any business, legal or other decisions. JSA and the authors of this update disclaim all and any liability to any person who takes any decision based on this publication.

Recent Key Reforms Enforced by SEBI

Pursuant to a board meeting of the Securities and Exchange Board of India (“SEBI”) held on September 30, 2022 (“Press Release”), a series of reforms and amendments were enforced by SEBI.

A summary of the key reforms and amendments are as follows:

  1. Introduction of pre-filing of offer document as an optional alternative mechanism for the purpose of initial public offer on the main board of stock exchanges

SEBI has approved the proposal of a pre-filing mechanism of offer documents as an alternative to the existing mechanism of filing offer documents, in relation to initial public offers on the main board of the stock exchanges.

SEBI pursuant to its “Consultation Paper on Pre-filing of Offer Document in case of Initial Public Offerings” (“Consultation Paper”), discussed the concerns of the issuer companies proposing to raise funds by an initial public offer (“IPO”), including disclosure of sensitive information in the draft red herring prospectus, which may be beneficial to competitors of such issuer companies, without the certainty that the IPO would be executed.

In terms of the Consultation Paper, issuer companies will have the option under the pre-filing mechanism to file the draft red herring prospectus with SEBI and stock exchanges, without making it available for public, for an initial scrutiny period only (“Confidential Filing”). SEBI will provide its observations on the Confidential Filing. In the event the issuer company proposes to undertake the IPO, an updated draft red herring prospectus after incorporating the comments received from SEBI on the Confidential Filing (“UDRHP I”) will be filed with the SEBI and stock exchanges and will also be made available for public comments for at least 21 days.

The issuer company will be required to file a further updated documents with the SEBI and stock exchanges incorporating (a) comments received from the public; and (b) any regulatory or factual updates in UDRHP I, as applicable (such document, “UDRHP 2”). Pursuant to SEBI taking note of changes in the UDRHP-II, the issuer company may file the Red Herring Prospectus (“
RHP”) with Registrar of Companies (“RoC”), stock exchange(s) and SEBI.

While SEBI pursuant to its Press Release has approved the proposal of pre-filing of offer document, the finalised framework for pre-filing mechanism of offer documents is yet to be notified by SEBI, based on comments received on the Consultation Paper. Further, while the consultation paper clearly specified that marketing of the IPO can only be undertaken post UDRHP-1 filing, a clarification on the same is pending from SEBI.

  1. Monitoring of utilization of issue proceeds raised through preferential issue and qualified institutions placement (QIP) issue, in terms of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“SEBI ICDR Regulations”)

SEBI has approved the proposal to introduce monitoring of utilization of issue proceeds raised through preferential issues and qualified institutions placement (QIP), with credit rating agencies as monitoring agencies, for issues of size above Rs. 100 crores. This will enable shareholders to stay abreast of and keep a track on the status of the utilization of funds raised by the company as against the disclosed objective of utilization of funds. Further, since monitoring of the utilization of proceeds is required for all pubic and rights issue with an issue size of above Rs 100 crores, this reform has now aligned the requirement of monitoring of utilization of proceeds with that of the public and rights issues, which we feel is a positive step towards attaining overall investor protection.

  1. Disclosure of key performance indicators (“KPIs”) and price per share of the issuer, in public issues, based on past transactions and past fund raising from the investors

Issuers proposing to raise funds by IPOs will now have to disclose the (i) KPIs, and (ii) price per share of the issuer company, based on past transactions and past fund raising done by it from investors prior to IPO (“Pre-IPO Fund Raising”), under the ‘Basis for Issue Price’ section of the offer document, as well as in the price band advertisement to be issued by the issuer company in terms of the SEBI ICDR Regulations.

In relation to the Pre-IPO Fund Raising, SEBI has specified that the price per share of the issuer company based on primary or new issue of shares and based on secondary sale / acquisition of shares, during the 18 months period prior to the IPO will have to be disclosed and in case there are no such transactions during the 18 months period prior to IPO, then information for price per share of the issuer company would have to disclosed based on last five primary or secondary transactions done within three years of the IPO. Further, the weighted average cost of acquisition (“WACA”) based on primary/ secondary transaction(s) and ratio of WACA vis-à-vis IPO floor price and cap price will have to be disclosed in the offer documents and in the price band advertisement.

A committee of the independent directors of the issuer company will also have to provide a justification on the price band based on quantitative factors/ KPIs vis-à-vis the WACA of primary issuance and secondary transaction(s).

While this amendment is a step in the right direction, there are certain points which may need clarity from SEBI. For instance, in relation to disclosure of price per share of the issuer company, SEBI in its consultation paper dated February 18, 2022, clearly specified that Pre-IPO Fund Raising of both equity shares and convertible shares would have to be considered for calculating the price per share of the issuer company. However, basis the Press Release, we are unable to ascertain whether the issuance of both convertible securities and equity shares would have to be considered for the calculation of the aforesaid parameter.

  1. Amendments to the Listing Regulations in re appointment and removal of independent directors

In terms of Regulation 25 (2A) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“Listing Regulations”), the appointment, re-appointment or removal of an independent director of a listed entity, shall be subject to the approval of shareholders by way of a special resolution. Further, in accordance with the Section 149 (10) of the Companies Act, 2013, no independent director shall hold office for more than two consecutive terms.

SEBI by way of its Press Release has provided flexibility in the approval process for appointment and / or removal of independent directors by approving an alternate method for the appointment and removal of independent directors appointed for the first term

If the special resolution for appointment of an independent director is unable to attain the requisite majority, under alternative method, such independent director will be deemed to be duly appointed if following thresholds are met:

  • Threshold for an ordinary resolution in terms of the Companies Act, 2013;
  • Threshold for majority of minority shareholders.

 

The aforesaid thresholds would similarly be applicable for the removal of an independent director appointed under this alternate mechanism.

Further, while SEBI in its “Consultation Paper on Review of Regulatory Provisions related to Independent Directors” dated March 1, 2021, has defined “minority shareholders” as shareholders, other than the promoter and promoter group, we await clarification on the exact scope and meaning of “minority shareholders”.

This blog is authored by Capital Markets team.

 

Disclaimer for Updates / Client Alerts 

This update is not an advertisement or any form of solicitation and should not be construed as such. This update has been prepared for general information purposes only. Nothing in this update constitutes professional advice or a legal opinion. You should obtain appropriate professional advice before making any business, legal or other decisions. JSA and the authors of this update disclaim all and any liability to any person who takes any decision based on this publication.

The Employee Moonlighting Dilemma

“Moonlighting” laws restrict an employer’s ability to take adverse employment decision against an employee who works for a different employer outside his regular work hours if the ancillary employment does not compete or interfere with such employee’s ability to adequately perform his primary job.

In India, certain statutory provisions provide for exclusive service and impose restrictions on double employment such as the Delhi Shops and Establishments Act, 1954, the Factories Act, 1948, and the Industrial Employment (Standing Orders) Central Rules, 1946. Further, restrictive covenants in employment contracts which are intended to operate during the subsistence of an employee’s employment are also enforceable under the Indian laws. Hence, the contractual provisions against moonlighting will be enforceable by employers against a defaulting employee.

In 2016, the Central Government enacted the Model Shops and Establishments Act, to revise the regulatory norms for operating offices and commercial establishments in India. Following this, several States amended their State-specific Shops and Establishments Act to modify the local law requirements in their respective jurisdictions. However, Maharashtra was the first State to repeal and reenact its State-specific Shops and Establishments Act. With this repeal and reenactment, the statutory restriction on double employment under the Bombay Shops and Establishment Act was omitted.

Amongst the labour law reforms that are in the pipeline, the Occupational Safety, Health and Working Conditions Code, 2020 imposes a restriction on double employment in a factory and mine. However, the draft Model Standing Orders for the Services Sector, 2020, which will be applicable to the IT sector too, while retaining the provision on “exclusive service” goes a step ahead by enabling workers to take up an additional job/assignment with their employer’s prior permission and subject to conditions, if any, imposed by their employer.

Job quality and pay issues may, over a period, lead to reduced levels of job satisfaction and loyalty in full-time employees. Such dissatisfied full-time employees become vulnerable and are more likely to fall for opportunist white-collar gig jobs. On the other hand, the entities offering white-collar gig jobs may be oblivious to the job status of their recruits, given that they are saved from having to hire and train freshers as these new recruits, who may be full-time employees of another entity, already have the expertise of quality and trained manpower.
The employer perspective on the issue of moonlighting remains divided. Whereas some regard it as cheating/deceitful and, therefore, unethical, others do not see much harm, provided that the freelance project, or second job, does not impact the full-time employee’s productivity or involve cross-leveraging of confidential data. Consequently, based on business requirements, including confidentiality and intellectual property rights (IPR) issues, an emergence of company policies that are either restricting moonlighting and dismissing defaulting employees from service, or allowing their employees to take up internal or external gigs, is being observed.

Authored by the Minu Dwivedi – Partner, JSA.

 

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