THE E-NEWSLETTER Vol. XI | July 2020 – September 2020 Welcome to this issue of CLD NUALS Securities Law e-Newsletter In this issue, as the lead article, we have a Any feedback or suggestions would be special interview with Mr. Abhinav valuable in our constant pursuit to improve Kumar, Partner, Cyril Amarchand the e-newsletter and ensure its continued Mangaldas, in which he shares his insights success among the readers. on varied topics and contemporary matters Please feel free to send any feedback, of importance. suggestions or comments to us at Accompanying the aforementioned we [email protected]. have literary contributions from other Regards professionals and students. In this edition, we have also captured the key regulations Editorial Team and circulars issued by the SEBI for the Securities Law e-Newsletter period under review. SECURITIES LAW The e-Newsletter Securities Laws: Vol. XI, October 2020 All views expressed are those of the authors. 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Index THE INTERVIEW ............................................................................................................................................... 2 THE PROBLEM OF MICROCAP STOCK FRAUD IN INDIA..................................................................... 5 OBLIGATIONS OF CONTINUOUS DISCLOSURE: ANALYSIS OF GLOBAL TREND & LESSONS FOR THE INDIAN SECURITIES MARKET .................................................................................................. 8 MYSTERY BEHIND SEBI ORDER: WHATSAPP LEAK CASE ............................................................... 11 SEBI REGULATIONS ...................................................................................................................................... 14 SEBI CIRCULARS ............................................................................................................................................ 18 1 SECURITIES LAW E-NEWSLETTER THE INTERVIEW Abhinav Kumar, Partner, CAM has over 10 years of experience and focuses on a variety of capital markets transactions, including initial public offerings, follow-on offerings, rights issues, QIPs and preferential issues. Chambers and Partners 2018 has recognized Abhinav as an “up and coming” capital markets lawyer and noted that he is “extremely responsive and gives nuanced advice”. Indian Business Law Journal (2017-18) has recognized Abhinav for his “constant and careful explanation, and strong Mr. Abhinav Kumar advice on negotiations and legal requirements”. He is also recognized as a notable practitioner by IFLR 1000. 1. What changes do you expect in the Indian capital markets ecosystem from investment perspective in light of the Covid-19 pandemic and the policies of Government? I think SEBI has taken a proactive and holistic approach in assisting Indian corporates and business trusts in raising capital during challenging times of Covid-19. Further, SEBI has actively engaged with market players including intermediaries in addressing challenges faced by them in meeting regulatory compliances and requirements and has promptly provided relaxations. Going forward, we expect SEBI to continue to be active in easing accessing capital markets and extending relaxations in meeting regulatory compliances and requirements. Some of the exciting developments like framework for foreign listing, further easing of ITP framework are also expected to happen in the near future which would broaden the contours of the Indian capital markets. 2. What is your take on recent amendments by SEBI to Issue of Capital and Disclosure Requirements Regulations 2018 in respect of the Preferential Issues and Rights Issues? As discussed earlier, SEBI has taken a proactive and holistic approach in assisting Indian corporates and business trusts in raising capital during challenging times of Covid-19. I have set out below quick summary of amendments and my thoughts: a) Rights issue related relaxations: In April itself, SEBI had provided certain significant relaxations with respect to fast track and minimum subscription related requirement to enable companies to undertake rights issue in a timely manner in the most equitable manner. Subsequently, in May, SEBI also relaxed requirements to allow participation by non-ASBA applicants and participation by shareholders holding shares in physical form in addition to certain procedural requirements. Due to such relaxations, 8 companies have raised INR 592,920 million from April 1, 2020 and September 1, 2020. Further, recently, SEBI has overhauled disclosure requirements for rights issues and has also relaxed various substantive requirements minimum subscription which I think will encourage listed companies to raise capital through rights issue. 2 SECURITIES LAW E-NEWSLETTER b) QIP related relaxations: In June, SEBI reduced the time period gap required between two consecutive QIPs by listed entities from 6 months to 2 weeks. Unlike other relaxations, this is not a temporary relaxation and we are certain that some of the companies which have already accessed QIP route during the period between April and September 2020 would avail of this relaxation to meet their additional funding requirements and in the long term, large number of companies would avail of this relaxation as QIP is the fastest mode to access large number of sophisticated investors. c) Preferential issue related relaxations: Due to resultant depressed valuation and stock price consequent to Covid-19 and challenges faced by companies having stressed assets, in June, SEBI relaxed the pricing requirements for companies having stressed assets and allowed such companies to price shares on the basis of volume weighted average price during 2 weeks (and not considering 26 weeks) preceding the relevant date subject to certain conditions. Further, in July, SEBI provided an option to companies with frequently traded shares to choose volume weighted average price during 12 weeks preceding the relevant date (instead of 26 weeks preceding the relevant date) for determination of floor price for preferential issues. Both of the aforesaid relaxations are subject to lock-in of 3 years. These relaxations have enabled 3 listed companies to raise INR 74,540 million between July 1, 2020 and August 31, 2020. The aforesaid relaxations have allowed listed companies to explore preferential issue as a viable option on the basis of realistic floor price. d) Public issue related relaxations: In June, SEBI extended some of the rights issue related relaxations for fast track requirements to FPOs as well. Due to these relaxations, Yes Bank Limited raised INR 15,000 crore through the further public offering in July 2020. Prior to the FPO by Yes Bank, the FPO route has been used by very few companies with a majority of FPOs being undertaken by public sector companies. 3. In August 2020, SEBI released a consultation paper which proposed to recalibrate thresholds for minimum public shareholding in companies which undergo Corporate Insolvency Resolution Process (CIRP). What are your views on the SEBI's proposals in the consultation paper? I partially agree with option 2 proposed in the consultation paper which is that the company, relisting after CIRP or on a continuous basis, should have minimum 5% public holding on the day of listing and on a continuous basis, it should have minimum public shareholding of 5%. However, the current Regulation 19A(5) of the SCRR should continue to apply which will require meeting 10% requirement in 18 months and 25% in 36 months. I also agree with the proposal in consultation paper to relax the one year post listing lock-up on the acquirer as it would also help in meeting 10% and 25% requirement. The rationale for the above is that the companies under CIRP are already treated differently from other listed companies and accordingly, there are already extensive carve outs for such companies under SEBI and other laws. 3 SECURITIES LAW E-NEWSLETTER In relation to minimum public shareholding requirements, Regulation 19A(5) of the Securities Contracts (Regulation) Rules, 1957 (“SCRR”) introduced in July 2018 already provides a relaxation for companies under CIRP to bring back public shareholding to 10% in 18 months (no such provision for other listed companies) and 25% in three years (one year for other listed companies) which was introduced keeping in mind the peculiar challenges of CIRP. I believe that SEBI’s concerns highlighted in the consultation paper is fair as one of the companies under CIRP, post relisting, has seen significant volatility which could potentially be due to very low public holding. Whilst this may not necessarily be a norm for all such companies in the future, however, a suitably low public shareholding threshold may still be required for such companies given the background of such companies and to protect existing public shareholders of such companies. Two of the options proposed under the consultation paper for companies under the CIRP entail achieving or maintaining 10% public shareholding on the date of relisting and within 6 months of relisting/date of falling below 10% respectively. We believe that the companies under CIRP will genuinely struggle to have 10% public shareholding from the date of relisting or in a short period post relisting especially in cases where a single acquirer acquires majority of shares under the CIRP including large number of shares held by public under the delisting offer. Also, new public investors may not have confidence to invest in companies under CIRP and they