Explain the SEBI guidelines regarding public issues and debentures



Ans. The Capital Issues Control Act, 1947 (and the exemption orders and rules made there under) was the primary legislation regulating the issue of securities by the corporate sector till recently. This Act was repealed in May 1992 and capital issues were brought under the purview of the Securities Exchange Board of India (SEBI hereafter) which was clothed with statutory powers when the SEBI Act, 1992 was passed.
On June 12, 1992, SEBI released its guidelines applicable to capital issues. A comparison of these guidelines with the guidelines that were followed under the earlier regime (that is under the Capital Issues Control Act, 1947) suggests that the thrust of regulation is no longer on product and price control. In the earlier regime, there were restrictions on the kinds of securities that could be issued, the pricing of these securities, and .the interest rates or dividend rates payable on them. Under the new regime there is virtually no restriction on the types of securities (financial instruments) that can be issued, there is substantial freedom in pricing these securities, and there is no ceiling on interest/ dividend rate payable ‘on these securities. While the new regime more or less does away with product and price controls, it lays stress on adequate disclosure,seeks to safeguard the interest of investors, and emphasises prudential controls. The key SEBI guidelines are summarised below.
New Instruments
While there is no restriction on the kinds of financial instruments, the issuer of capital shall make adequate disclosures’ regarding the terms and conditions, redemption, security, conversion, and any other features of the instrument so that an investor can make a reasonable determination of risks, returns, safety, and liquidity of the instruments. The disclosures shall be vetted by SEBI in this regard.
Pricing of Public Issues of Equity Capital
The salient features of SEBI guidelines with respect to the pricing of public issues of equity capital are as follows:
A new company set up by entrepreneurs without a track record will be permitted to issue capital to public only at par.
A new company set up by existing companies with a five year track record of consistent profitability will be .free to price its issue provided the participation of the promoting companies is not less than 50 per cent of the equity of the new company and the issue price is made applicable to all new investors uniformly.
An existing private/closely held company with a three year track record of consistent profitability shall be permitted to freely price the issue.
An existing listed company can raise fresh capital by freely pricing further issue.
Fully Convertible Debentures (FCDs)/Partially Convertible
Debentures (PCDs)/Non-convertible Debentures (NCDs)
The guidelines relevant to these instruments are as follows:
1. Credit rating is compulsory in the case of FCDs if the conversion is effected after 18 months and in the case of NCDs/PCDS if the maturity period exceeds 18 months.
2. In the case of FCDs/PCDs the terms of conversion (time of conversion and conversion price) shall be predetermined and stated in the prospectus.
3. Any conversion in part or whole of the debenture will be optional at the hands of the debenture holder, if the conversion takes place at or after 18 months from the date of allotment, but before 36 months. FCDs having a conversion period exceeding 36 months must have ‘put’ and ‘call’ option (the ‘put’ option gives the debenture holder the right to sell the debentures back to the company at a specified price whereas the ‘call’ option gives the company first right to buy back the debentures at a specified price).
4. A Debenture Redemption Reserve (DRR) shall be created by all companies raising debentures, except when the debenture issue has a maturity of 18 months or less, on the following basis: (a) A moratorium up to the date of commercial production can be provided for creation of the DRR in respect of debentures raised for project finance. (b) The DRR may be created either in equal installments for the remaining period or higher amounts if profits permit. (c) In the case of PCDs, the DRR should be created in respect of the non-convertible
portion of the debenture issue on the same lines as applicable to NCDs. In respect of convertible issues by new companies, the creation of the DRR should commence firm the year the company earns profits for the remaining life of debentures. (d) Companies may distribute dividends out of general reserves in certain years if residual profits after transfer to the DRR are inadequate to distribute reasonable dividends. (e) The DRR will be treated as a part of general
reserve for consideration of bonus issue proposals and for price fixation related to post-tax return. (f) In the case of new companies, distribution of dividend shall require approval of the trustees to the issue and the lead institution, if any. (g) The company should create the DRR equivalent to 50 per cent of the amount of debenture issue before the debenture redemption commences. Drawl from the DRR is permissible only after 10 per cent of the debenture liability has been actually redeemed by the company.
Promoters’ Contribution and Lock-In Period
The key provisions in this regard are as follows: (a) Equity capital to be subscribed in any issue to the public by promoters, i.e., those described in the prospectus as promoters, directors, friends, relatives and associates should not be less than 25 per cent of the total issue of equity capital up to Rs 1000 million and 20 per cent of the issue above Rs 1000 million. In the case of FCDs, one third of issue amount should be contributed by promoters, directors, friends, relatives and associates by way of equity before the issue is made. In the case of PCDs, one third of the convertible portion should be brought in as contribution of promoters, directors, friends, relatives and associates before the issue is made. The minimum subscription by each of the friends/relatives and associates under the promoters’ quota should not be less than Rs 0.1 million. (b) The promoters’ contribution shall not be diluted for a lock-in period of five years from the date of commencement of the production or date of allotment whichever is later. Promoters must bring in their “full subscription to issues in advance before public issue. (c) All

firm allotments, preferential allotments to collaborators, shareholders of promoter companies, whether corporate or individual, shall not be transferable for three years from the date of the commencement of production or date of allotment whichever is later.

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