Mint explainer: Why Sebi rethinks on 1% security deposit on public/rights issues
Based on the recommendations of an expert committee, capital markets regulator Securities and Exchange Board of India’s recently sought public comments for removal of the 1% security deposit in public/rights issues that has been in vogue for several years. The move is aimed at encouraging more companies to access the primary markets for raising funds, helping in capital formation and ease of doing business under Sebi’s ICDR (Issue of Capital and Disclosure Requirements) Regulations. The last date for submitting comments was 9 February.
Why is Sebi’s recommending removal of the 1% security deposit?
Currently, ICDR Regulations mandate companies going public or raising additional capital through rights issues to deposit 1% of the issue size as a security deposit with stock exchanges like NSE and BSE. This security deposit amount is refundable or forfeitable in the manner specified by the board. The requirement of 1% security deposit was put in place by the regulator for public/rights issues so that an issuer expeditiously redresses investor complaints pertaining to refund of application money and allotment of securities, etc.
What is the rationale behind the recommendations?
After various deliberations, industry stakeholders suggested that the requirement of 1% security deposit for public/rights issues may be done away with for ease of doing business. The expert committee, in its consultation paper, stated that in the light of several reforms and present framework for public/rights issues such as application through ASBA (application supported by blocked amount), UPI mode of payment, mandatory allotment in demat, concerns of post-issue investor complaints on refund of application money, non-dispatch of physical certificates, etc, do not arise. Pertinently, this will also lead to the reduction of cost and compliance for corporates.
What are the experts’ views on the recommendations?
Shefali Shankar, associate at law firm MDP & Partners, believes that the objective of the mandatory 1% security deposit was largely to take care of the investor grievances, if any. She adds, however, in the current scenario, investor complaints are significantly low. Given this, the mandatory requirement of 1% security deposit does not hold much relevance. If this mandatory requirement is done away with, the issuer companies can also save on their costs. This will be an important move and will certainly bring some relief to the companies that have a plethora of regulatory requirements to comply with.
How will it increase issuers’ access to the primary market?
Removing the 1% requirement aligns with facilitating a more efficient and accessible primary market for companies, ultimately promoting economic growth and investment opportunities. This move not only reduces the financial burden on issuers but also fosters an environment conducive to the ease of doing business. This strategic adjustment acknowledges the changing landscape of the financial sector and underscores a commitment to promoting a more accessible and efficient primary market, according to Rohit Jain, managing partner, Singhania and Co. Moreover, Sebi’s consultation paper showed that from the data it was observed that an average number of complaints per IPO has reduced post-implementation of T+3 listing in IPOs, meaning that the scrip lists three days after closure of the IPO. Also, majority of the complaints relate to a delay in unblocking of ASBA funds by self-certified syndicate banks, which satisfy conditions laid down by Sebi. SEBI has through a 16 March 2021 circular already prescribed a mechanism to deal with such complaints of delay in unblocking of application amounts under ASBA.
