SEBI Pushes for Faster Fundraising: New Rules to Streamline Rights Issues for Indian Companies

The Securities and Exchange Board of India (SEBI) is proposing changes to make it quicker and more efficient for Indian companies to raise funds through rights issues. These changes would allow companies to raise money faster, and promoters (major shareholders) would be able to transfer their rights to a specific investor if they choose.

What is a Rights Issue?

A rights issue is a way for companies to raise additional capital by offering new shares to existing shareholders in proportion to their current holdings. This method allows shareholders to maintain their ownership percentage in the company if they decide to purchase the new shares.

Proposed Changes

SEBI is suggesting several updates to the current process:

• No Draft Letter Requirement: Companies would no longer need to submit a draft letter of offer to SEBI for approval.
• No Need for Merchant Bankers: The requirement to appoint merchant bankers for rights issues would be removed.
• Shorter Timeline: The time from the company board’s approval of a rights issue to the closure of the process would be reduced to 20 days.

Currently, it takes about 317 days to complete a non-fast track rights issue and 126 days for a fast-track rights issue. SEBI aims to make rights issues more attractive by speeding up the process.

Why Rights Issues Aren’t Popular

Despite the benefits of rights issues—such as fair treatment of existing shareholders and the ability to trade rights entitlements—this method has not been widely used for raising funds. According to SEBI, in the last three financial years, the amount raised through rights issues has been much lower than that raised through other methods like Qualified Institutional Placements (QIPs) and preferential allotments. For example, in the 2023-24 financial year, companies raised ₹15,110 crore through rights issues, compared to ₹68,972 crore through QIPs and ₹45,155 crore through preferential allotments.

Simplifying the Process

SEBI points out that for investors, a rights issue is similar to buying shares in the secondary market. Investors usually need only additional information like the purpose of the issue, the price, the entitlement ratio, and the promoters’ participation. Since most of the necessary information is already public, there’s no need to gather it all over again.

Relaxing Rules for Promoters

SEBI is also proposing to ease the rules on how promoters can transfer their rights. Currently, promoters can only transfer their rights within the promoter group unless the issue meets the minimum subscription criteria. SEBI suggests allowing promoters to transfer their rights to any specific investor as long as they disclose this upfront. Once an investor applies for the rights transferred to them, they cannot withdraw their application.

These changes are intended to make rights issues a more popular and efficient way for companies to raise funds.