Sebi’s New Rules: Simplifying Rights Issues And Launch Of Mutual Funds Lite Framework

At a recent board meeting, the Securities and Exchange Board of India (Sebi) approved significant measures aimed at enhancing capital raising processes. It also launched a Mutual Funds Lite framework for passively-managed mutual funds.

Streamlined Rights Issue Process

Sebi has significantly decreased the time necessary for corporations to conduct rights issues, which allow current shareholders to buy more shares at a set price. Following board approval of a rights issue, the average completion time has been reduced from around 317 days to only 23 working days. This modification makes rights issues a more appealing alternative to preferred allotments, which generally require 40 working days.

Companies will no longer be required to file a Draft Letter of Offer with Sebi, thus greatly streamlining the procedure. Rather, they will apply immediately for in-principle approval to stock markets. The Letter of Offer has been simplified to highlight important information, such as the issue price and the record date.

Moreover, the requirement to appoint a merchant banker has also been made optional, thereby allowing companies to manage the rights issue process themselves as long as they meet the 23-day timeline. The new rules also permit promoters to renounce their rights entitlements to specific investors to ensure that all shares are effectively allocated.

Also, Sebi has called for a monitoring agency to be designated for all rights matters in order to supervise the use of money obtained. Companies would follow streamlined requirements for rights offers valued at less than Rs 50 crore.

Introduction Of Mutual Funds Lite Framework

In a separate initiative, Sebi has introduced the Mutual Funds Lite (MF Lite) framework specifically for passively-managed schemes, such as exchange-traded funds (ETFs) and index funds. Given that these funds operate under a defined investment strategy with minimal active management, Sebi has relaxed certain regulatory requirements to foster greater participation in this sector.

Under the MF Lite framework, the eligibility criteria for sponsors have been eased, including minimum net worth and profitability requirements. This move is intended to lower the entry barrier for new companies, thereby expanding investment choices for the public.

Existing asset management companies (AMCs) managing both active and passive schemes have the option to segregate their passive funds into separate entities or continue managing them under the current regulations while benefiting from the new, streamlined requirements.