SEBI

10 Key Features of SEBI (Underwriters) Regulations

The SEBI (Underwriters) Regulations, 1993, established a plan for regulation so that the underwriter’s role in Indian capital markets could be performed accurately. To promote transparency and stability in underwriting practices, the regulations laid down guidelines on issues related to registration, capital adequacy, and the renderings of the underwriters.

Over the years, the features of SEBI regulations have played an important role in controlling the financial undertakings of underwriters and their evolution to meet changing market needs.

Let us explore the 10 key features of SEBI Underwriters Regulations and how relevant they have become to the financial ecosystem in India.

Mandatory Registration for Underwriters

The derivative provisions under the SEBI Underwriters Regulations include compulsory registration of the underwriters. As per Rule 3(1), no person shall act as an underwriter unless a certificate has been granted to them by the SEBI. It ensures that only qualified and verified entities provide the underwriting services.

• Importance: This step eradicates the earlier informal system where banks, financial institutions, and individuals will offer underwriting services without specific credentials.
• Exemptions: Every merchant banker and stockbroker who has obtained a valid underwriters registration with SEBI shall not obtain separate certification as an underwriter under Rule 3(2).

This measure was introduced in order to create an organised underwriting ecosystem with enhanced credibility by the SEBI underwriters regulations.

Agreements between Issuers and Underwriters

Rule 4(b) provides that an underwriter shall enter into a valid underwriting agreement with respect to the underwriting relationship regarding the issuance in question, whereby the agreement discloses the scope of responsibilities, obligations, and duties between both parties.

• Significance: The contractual obligation reduces ambiguity in ascertaining the roles of both parties when issuing any capital.
• Protection: It gives protection to the underwriters’ interest by binding the issuers with defined terms in order to prevent potential disputes.

This feature of the SEBI regulations helps to build up accountability and trust among the stakeholders.

Capital Adequacy Norms under SEBI (Underwriter) Regulations

Minimum capital adequacy requirements under SEBI (Underwriters) Regulations were introduced to make sure that underwriters have adequate financial backing to absorb risks from underwriting.

• Minimum Requirement: Underwriters shall have a net worth of ₹ 20 lakhs according to regulation 7(1).
• Evolution: While the threshold specified in 1993 was adequate for the time, current market preoccupations have called for change, particularly if their thresholds are compared with that of merchant bankers or brokers, whose net worth is far greater.

By revising the features of SEBI regulations amendments, a minimum representative net worth standard can be higher in the industry, which will ensure better risk management.

Ceiling on Underwriting Obligations

The maximum limit of underwriting obligation an underwriter can assume is prescribed under the SEBI (Underwriters) Regulations. Regulation 15(2) herein states that an underwriter shall not undertake an obligation exceeding twenty times of their net worth.

• Purpose: This ceiling minimises the risk of over-leveraging by underwriters and ensures they maintain financial stability.
• Challenges: The ambiguity around the exact definition of net worth has caused some practical difficulties that have resulted in the need to introduce further clarification in amendments.

Such a provision reinforces the financial integrity of the underwriting system and is considered a vital feature of SEBI regulations amendments over time.

Definition and Scope of Underwriting

Rule 2(g) of the regulations defines underwriting as an agreement, conditional or unconditional, to subscribe for securities when the existing shareholders or the public fail to do so. This definition perhaps serves as a starting point, but it has been criticised because it is overly restrictive.

• Limitations: The above definition excludes situations that may involve obtaining subscriptions from third parties or an “offer for sale.”
• Changes suggested: The definition in most international practices has a wider amplitude that covers third-party arrangements and the underwriting of issued securities and offers for sale.

Amending the SEBI (underwriters) regulations in order to address such gaps would align the framework with the emerging dynamics of the capital market.

Payment of Underwriting Commission

These Regulations govern the process and timing of the underwriting commissions. Traditionally, commissions are paid only when the issue closes, permissions to list are secured, and when funds are cleared.

• Delay Concerns: Commission payment delays, often stretching for several months after the listing, have been a common issue.
• Recommendation: Issuers could be required to expedite commission disbursals as a way of incentivising underwriters further.

This feature emphasises fairness and ensures that underwriters are duly compensated for the risks undertaken.

Infrastructure and Experience Requirements

Under Regulation 6 and Form A, SEBI considers an applicant’s infrastructure and their underwriting experience while granting them registration. However, the criteria of “adequate infrastructure” and “experience” remain undefined.

• Gap in Implementation: Most underwriters, in operation, would already be registered for some other operation, like merchant banking or stockbroking, under any other SEBI regulation. Requiring additional registration here is superfluous and only increases the administrative burden.
• Overlap with Other Regulations: The overlap in regulations related to banks and financial institutions increases the complexity of compliance.

Hence, future revisions in the features of the SEBI regulations amendments may make these requirements more streamlined, hence more efficient and practical.

Code of Conduct for Underwriters

The SEBI (Underwriters) Regulations include the code of conduct which shall be followed by the underwriters to ensure the adoption of ethical practices. The outlines of the code are under SEBI regulations under Regulation 13 and Schedule 3.

• Key Principles: The code encourages transparency, accountability, and fair dealing by the underwriters.
• Limitations: The critics view the code as general and not having specific provisions that can deal with the complexity of the market.

Therefore, by strengthening the code, SEBI will be able to address evolving challenges that arise, more effectively.

Focus on Liquidity and Tangible Assets

While Regulation 7 identifies net worth as the principal measure of capital adequacy, it does not deal with liquidity position and tangible assets, which are essential for underwriting.

• Importance of Liquidity: Liquidity is a matter of importance as it provides the underwriter with a liquid asset base to meet immediate financial commitments.
• Auditor’s Role: The chartered accountants participate and play their role in the underwriting process to measure their net worth and liquidity status to ensure the presentation of proper presentation of facts.

Addressing liquidity concerns could thus be one of the major features of the amendments to SEBI underwriters’ regulations in the future.

Repeal of the SEBI (Underwriters) Regulations

In the last couple of years, SEBI started to repeal redundant regulations, including the SEBI (Underwriters) Regulations, 1993, and integrated relevant provisions into the broader frameworks. This move reflects SEBI’s effort to simplify and modernise compliance requirements.

• Rationale: The result was that the stand-alone regulations became less relevant as most underwriters were already registered under other SEBI norms.
• Impact: Consolidation would also reduce the administrative overhead for SEBI and market participants while preserving the essence of underwriting regulation.

The repeal of the SEBI (Underwriters) Regulations underlines the commitment of SEBI to regulatory efficiency and adaptability.

To Wrap Up

The SEBI (Underwriters) Regulations have contributed significantly to shaping India’s capital market by introducing essential safeguards and fostering trust. Right from registration and capital adequacy norms to ethical guidelines, this regulation has provided a comprehensive foundation for underwriting practice. However, with the constantly changing requirements of the market, there is a need for periodic revision and refinements.

By addressing challenges such as delayed commissions, ambiguous definitions, and regulatory overlaps, SEBI can further refine the features of its regulations. Repeal of the SEBI (Underwriters) Regulations symbolises an ongoing change towards integration and modernization, would definitely keep the Indian regulatory framework abreast of international best practices.

These 10 key features not only epitomise the strength of the 1993 regulations, but they also act as guidelines for future amendments on the continuous process of establishing a resilient and efficient underwriting system.

To get expert assistance in registration of underwriter with SEBI, visit https://enterslice.com/.

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