The Securities and Exchange Board of India (“SEBI”) has recently issued an addendum to its Consultation Paper titled "Interim Recommendations of the Expert Committee for Facilitating Ease of Doing Business and Harmonization of the Provisions of ICDR and LODR Regulations," originally released on January 11, 2024. This addendum incorporates further recommendations from the Expert Committee, specifically focusing on the Issue of Capital and Disclosure Requirements (“ICDR”) Regulations related to the "Review of the Requirement of 1% Security Deposit in Public/Rights Issue of Equity Shares."
Background and Rationale
Under the existing ICDR Regulations (Regulation 38, 80, 135, 197 and 259 of ICDR Regulations), issuers conducting public and rights issues of equity shares must deposit 1% of the issue size with the designated stock exchange. This mandatory security deposit, outlined by the Board and stock exchange(s), aims to guarantee redressal for investors in case of complaints related to the transaction. Such complaints may include issues regarding the refund of application money, allotment of securities, and dispatch of certificates. The rationale behind this requirement lies in ensuring timely resolution of investor grievances without placing undue burden on the issuer. The deposited funds serve as a readily available resource for expediting reimbursements or rectifying discrepancies, upholding investor protection and fostering faith in the capital raising process.
Key Proposal
In light of recent advancements within the public/rights issue framework, the Expert Committee has proposed the abolition of the 1% security deposit requirement. This re-evaluation stems from the implementation of mechanisms like ASBA payments, UPI integration, and mandatory dematerialization, which aim to streamline the transaction process and address potential investor grievances.
Additionally, the introduction of T+3 listing for IPOs and a documented decrease in post-issue complaints, coupled with SEBI's existing measures to expedite the unblocking of ASBA funds, have bolstered the committee's recommendation to remove Regulations 38, 80, 135, 197, and 259 of the ICDR Regulations, effectively eliminating the security deposit requirement. This proposed change signifies the committee's confidence in the existing safeguards and their potential to ensure investor protection without the need for the aforementioned deposit.
Benefit and Impact
Firstly, eliminating the 1% deposit frees up capital for companies, potentially making public/rights issues more attractive. Additionally, removing the deposit process itself simplifies administrative procedures, streamlining transactions and potentially reducing issuance timeframes. This could benefit companies seeking faster access to capital for growth and expansion.
Secondly, While the proposed change eases the burden on companies, it raises concerns about potential risks for investors. Without the dedicated security deposit, some may fear delays or difficulties in resolving complaints related to refunds, allotments, or certificate dispatch. This could lead to reduced investor confidence in the public/rights issue process. However, the proposed change hinges on the effectiveness of existing safeguards, including ASBA payments, mandatory dematerialization, and SEBI's regulatory oversight. If these mechanisms function efficiently, investor protection can be maintained without the need for the deposit.
And, lastly, the success of abolishing the security deposit hinges on ensuring efficient and transparent grievance redressal mechanisms. SEBI's existing regulations and oversight will play a crucial role in upholding investor confidence. Additionally, monitoring the impact of this change on complaint resolution rates and investor sentiment will be essential to assess its effectiveness and ensure a balanced approach that protects both issuers and investors.
Our Take
This proposed change represents a potential shift towards streamlining capital raising and prioritising ease of doing business. While some investors might initially harbour concerns, the potential for cost reduction, efficiency, and transparency improvements could ultimately benefit the entire market by attracting more issuers and fostering investor confidence. However, ensuring robust investor protection mechanisms and efficient grievance redressal will be crucial for successful implementation and long-term market stability.
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