The Securities and Exchange Board of
India (Sebi) this month announced a raft of primary market
reforms in a bid to facilitate retail investment and capital
raising. But lawyers are unconvinced the changes will be
Key changes within Sebis
suggested reforms include a provision to enable retail
investors in second-tier cities to utilise the nationwide
broker system of exchanges to distribute electronic IPOs, and
access application forms on exchange websites. Every retail
applicant will also be allocated a minimum bid lot as long as
shares are available.
The reforms aim to foster greater
retail investor participation by creating a more open
architecture for IPOs as well as more corporate fundraising
opportunities ahead of a June 2013 requirement for public
companies to float 25 percent.
Lawyers are, however, skeptical the
move will encourage retail participation in Indias
Sandeep Parekh, founding partner of
Finsec Law Advisors and former executive of legal affairs and
enforcement at Sebi, said that many retail investors would
rather look towards fixed deposits for stability and to bypass
demanding know your customer (KYC) norms having lost money
investing in the boom and bust cycles in 2001 and
Fixed deposits are both safer
and dont require excruciatingly complex KYC norms which
vary across different financial products, he said.
A bank KYC is insufficient for a securities market KYC.
Its a painful process investing in equity markets when
compared to the comparative ease of investing in bank
Rohitashwa Prasad, senior partner at
J Sagar Associates, said that the participation of retail
investors in the short term was dependent on the equity markets
outlook, and with respect to any particular issue, upon that
To encourage more corporate
fundraising opportunities, Sebi also suggested a reduction in
the average free float capitalisation requirements for
companies from Rs 5000 crore to Rs 3000 crore. Additional means
of rights and bonus issues to reach minimum public shareholding
requirements were also proposed.
Sebi also specified that listed
entities should file a comprehensive annual disclosure
statement in addition to the existing requirements on the lines
of 20F filing prescribed by the US SEC.
Lawyers were largely underwhelmed by
the suggested changes, however. Srinivas Parthasarathy,
Trilegals head of capital markets said Sebi should allow
any offering of shares compliant with existing laws so
long as they effectively reduce promoter holding in a genuine
fashion - instead of listing specific ways companies could
raise capital to meet the 25 percent float.
Counsel were also surprised by the
level of disclosure that may be required. Parekh explained that
the 20F initiative was mooted when he was at Sebi after several
years of work in a sub-committee on integrated disclosures.
Aside from improving continuous disclosures of listed
companies, further capital raising was considered cheaper,
quicker and of a higher qualitative level since disclosures
were already in the public domain.
Although Sebi has not yet clarified
the measure, lawyers said the implementation of rules along the
lines of the 20F filing would be an enormous step forward for
Indias disclosure regime.
Parthasarathy said that the current
disclosure regime was a fairly ambigious agreement between
issuers and the exchange. The 20F initiative would put a formal
framework around post-listing disclosure.
Ajay Vaidya, chief legal and
compliance officer of Kotak Mahindra Capital agreed. The
small print has not yet been debated, but 20F is a high
standard for annual disclosure, he said.
Parthasarathy said that the
information required in 20F might be similar to that necessary
under the Issue of Capital and Disclosure Requirements (ICDR)
for a prospectus. The information required for the ICDR was so
comprehensive it has discouraged certain issuers from seeking
IPOs, but Parthasarathy believed it would bring significant
maturity in terms of disclosure post-listing.