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Relaxation on Rights issue due to Covid-19

Ashish M. Shaji

| Updated: Jul 02, 2020 | Category: Finance Business, SEBI, Startup

The rights issue has been an essential medium for companies to raise funds for them. Big corporate houses and many listed companies desire to raise capital through rights issue. However, due to the Covid-19 pandemic, many such companies are facing severe challenges. Major representations were made to the ministry with a view to getting relaxation in laws. Pursuant to this, the MCA provided clarification on the mode of issue of notice.

Clarification by the MCA

The Ministry of Corporate Affairs (MCA) clarified that in case of inability to issue notice specified in Section 62 (a) (1) (i) of the Companies Act, 2013[1] for the right issue by a listed company to its shareholders by:

Then it won’t amount to the violation of the law. This relaxation is allowed for listed companies whose issue will be opening on or before July 31, 2020. Therefore the listed companies can issue the notice in any other mode but subject to the relaxation provided under the circular issued by the Securities Exchange Board of India) (SEBI) (SEBI/HO/CFD/DIL2/CIR/P/2020/78.

It is critical to note here that such relaxation is not applicable for unlisted public companies and private companies.

Relaxation in the procedural matter of rights issue

  • In case of failure of registered or speed post or courier service due to the pandemic, the dispatch of the abridged letter of offer, application form and other documents to shareholders can be done through an electronic medium. It shall not be considered as non-compliance.

The listed company is required to do the following:

  • Publication of the letter of offer, abridged letter of offer and application form on the websites of Company, registrar, stock exchange and the lead manager to the issue.
  • The company in association with the lead manager is required to undertake the steps in order to reach out to the majority of the shareholders through some other ways such as audio-video advertisement on television, digital advertisement on the internet, SMS and any other similar methods.

According to the regulation 84(1) of the ICDR (Issue of Capital Disclosure Requirements), the company is required to issue advertisement in three newspapers including one English, one Hindi and one regional language, where the registered office of the company is situated.

It may be noted that:

  • The above-mentioned advertisement must also contain additional information concerning the way of applying the issue for the shareholders who have not received the electronic notice.
  • The issuer may if needed, can also publish the advertisement in other newspaper in addition to the newspapers mentioned in regulation 84(1) of the ICDR.
  • Such advertisement must also be published on the websites of the company, registrar, lead manager and stock exchanges.
  • The advertisements may also be done on television, radio, internet etc. it can also be in the form of crawlers and tickers.

Due to the Covid-19 pandemic, many physical shareholders have not been able to open Demat accounts or are unable to communicate their details for the REs (Dematerialized Right Entitlement). Such shareholders can apply the rights issue if the following conditions are met:

  • The company, through the lead manager, develop such a mechanism that lets the physical shareholders apply in the rights issue and take appropriate steps to communicate such a mechanism to the physical shareholder.
  • The right to renounce is not available to these shareholders.
  • The shares under the right issue will be allotted only in the Demat form.

According to the regulation 76 of the ICDR (Issue of Capital Disclosure Requirements), the application for the rights issue shall be processed only through the ASBA (Application Supported by Blocked Amount) facility. Considering the impact of the Covid-19 pandemic, the company shall develop an optional mechanism (non-cash mode only) to accept the application by the shareholder. Such a mechanism will ensure that no third party payment is allowed with regard to any application.

Concerning the mechanism specified above, the following points must be kept in mind:

  • The developed mechanism will be considered as an additional option only and not as a substitute for the existing procedure. The existing procedures must be followed as much as possible.
  • The developed mechanism must be transparent and should not incur any additional costs to the investor.
  • There must be dedicated helpdesks and helpline put in place for the investors so that the difficulties are removed.
  • The Company with the lead manager, registrar and other recognised intermediaries will be held responsible for all investor compliant.

It may be noted that for filing of all offer documents the following relaxations are granted:

  • Authentication/ certification/ undertakings with regard to offer documents can be done through digital signature certifications.
  • The company with the lead manager will provide a procedure for inspection of material documents electronically.

Further, it may also be noted that the relaxations mentioned above by the Securities Exchange Board of India (SEBI) is effective from May 6, 2020, and will be applicable to all the listed companies whose issues will be opening on or before July 31, 2020.

Conclusion

The relaxations announced by the SEBI for rights issue by the companies are for a temporary period but were necessarily needed to ease the sourcing of funds from the capital markets due to the adverse impact of the Covid-19 pandemic. Apart from these measures, the SEBI has announced a host of compliance and regulatory relief for the companies in the past couple of months with a view to help them tide over the Covid-19 pandemic.

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Ashish M. Shaji

Ashish M. Shaji has done his graduation in law (BA. LLB) from CCS University. He has keen interests in doing extensive research and writing on legal subjects especially on criminal and corporate law. He is a creative thinker and has a great interest in exploring legal subjects.

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