In all forms of fundraising from capital markets, one principle is followed: all information required for investors to make a well-informed decision about the securities (shares, non-convertible bonds, convertible bonds, etc) should be disclosed to them before the issuance. Since rights issues are a form of fundraising from capital markets, the same principle applies.
Globally, there are two methods to disseminate info to investors:
- Disclose info in letter of offer (LoF) and make the document available to investors ahead of the rights issue subscription.
- Incorporate the info out there in the public domain by reference into LoF to ensure that the document is not unduly information-heavy for investors. Under this process, only incremental info is expected to be disclosed in LoF for rights offering.
Sebi’s proposed guidelines have embraced the latter approach regarding the rights issues process, like practices in the US and other regions. This allows issuers to prepare LoF more swiftly, cutting months off timelines. It’s assumed that the investing community is aware of material events and circumstances disclosed by the issuer through the stock exchange mechanism and, accordingly, not repeated in the rights issue LoF to avoid duplication.Although this is a step in the right direction, it must be carefully examined to ensure the original construct of a well-informed investment decision isn’t diluted. Under listing guidelines, Sebi has prescribed a robust mechanism for existing equity-listed companies to report all material events, ensuring that the investing community is made aware of all relevant matters concerning the listed company as they arise.
New guidelines seem to utilise this info through material events disclosure, ensuring it isn’t repeated in LoF and that only incremental details, such as terms of the rights issue, are included.
While financial statements, major litigations and other relevant information is largely covered under the listing guidelines for disclosure on a continuous basis, what it does not cover is financial trends information or risk information of the issuer all at one place for easy understanding by potential investors, including the retail public.
In all offering circulars for capital markets issuances in India and internationally, one of the most important sections of a public company’s annual report or quarterly filing is ‘Management discussion and analysis of financial conditions and results of operations’. This section sets out the historical financial trends of the issuer.
While this is an analysis of historical financial results and not forward-looking, it demonstrates the issuer company’s ability to produce results. As a result, the investing community considers this section important while making an investment decision. This is not a requirement under the Indian listing guidelines, unlike jurisdictions such as the US, where every corporation with its shares listed on the US exchanges must periodically (quarterly, semi-annually and annually) prepare and disclose its financial trend analysis and risk profile, among others. Investors consider this section important while making decisions.
While the proposed changes underscore Sebi’s commitment to fostering a dynamic and agile financial market, enabling companies to access capital quickly, it’s crucial to assess how these reforms will balance efficiency with investor protection, while ensuring transparency and accountability.
These changes are welcome and aim to streamline the process and reduce timelines. But they also present significant risks regarding transparency, due diligence and potential misstatements. One hopes these gaps will be addressed in due course when the actual regulations are enacted.
