Rights Issue - Part 2

CHAPTER III. RIGHTS ISSUE

PART II: ISSUE OF CONVERTIBLE DEBT INSTRUMENTS AND WARRANTS

Regulation 63. Additional requirements for issue of convertible debt instruments

63(1).

• These conditions apply to an issuer making a rights issue of convertible debt instruments.

  1. The issuer must comply with all other requirements prescribed under the regulations.

  2. In addition to those general requirements:

• The issuer must also satisfy certain specific conditions applicable to rights issues of convertible debt instruments.

• These additional conditions are specified in the following provisions:

• (a).

  1. Credit Rating Requirement

     1. The issuer must obtain a credit rating from at least one credit rating agency.

     2. Therefore, a minimum of one credit rating agency must provide a credit rating to the issuer.

     3. The regulation does not require ratings from multiple agencies; one agency is sufficient.

• (b).

  1. Appointment of Debenture Trustee

     1. The issuer must appoint at least one debenture trustee.

     2. The debenture trustee must be appointed in accordance with:

        1. The Companies Act, 2013.

        2. SEBI (Debenture Trustees) Regulations, 1993.

     3. Therefore, the appointment must satisfy the requirements of both the Companies Act and the applicable SEBI regulations.

  2. Example:

     1. The issuer is making an issue involving debt securities.

     2. It appoints a debenture trustee who meets the requirements under the Companies Act, 2013 and SEBI (Debenture Trustees) Regulations, 1993.

     3. This satisfies the requirement of having at least one debenture trustee.

• (c).

  1. Creation of Debenture Redemption Reserve

     1. The issuer must create a Debenture Redemption Reserve (DRR).

     2. The DRR must be created in accordance with:

        1. The Companies Act, 2013.

        2. The rules made under the Companies Act, 2013.

     3. The purpose of the DRR is to provide a reserve for meeting the redemption obligations relating to debentures.

• (d).

• Security Requirements for Secured Convertible Debt Instruments

  1. If the issuer proposes to create a charge or security over its assets for secured convertible debt instruments, the following conditions must be satisfied.

  2. (i). Assets must be sufficient:

     1. The assets offered as security must be sufficient to discharge the principal amount of the convertible debt instruments at all times.

     2. This means the value of the secured assets must adequately cover the principal amount throughout the period.

     3. The issuer cannot allow the security cover to become insufficient during the life of the instruments.

  3. (ii). Assets must be free from encumbrance:

     1. The assets offered as security must be free from any encumbrance.

     2. In simple terms, the assets should not already be subject to another charge, lien or similar restriction.

     3. This ensures that the investors have clear security over the assets.

  4. (iii). Consent where an existing charge or leasehold land is involved:

     1. If a charge already exists over the assets in favour of an existing lender or security trustee, their consent must be obtained.

     2. The same requirement applies where the convertible debt instruments are proposed to be secured by creating security over leasehold land.

     3. The relevant lender, security trustee or lessor must consent to:

        1. A second charge.

        2. A pari passu charge.

        3. This consent must be submitted to the debenture trustee before the issue opens.

  5. (iv). Calculation of security cover for a second/subsequent charge:

     1. Where the convertible debt instruments are secured by a second or subsequent charge, liabilities having a first or prior charge must first be deducted.

     2. Only the remaining value of the assets is considered for calculating the security or asset cover available to the convertible debt instruments.

     3. This prevents the same asset value from being treated as fully available to both the prior lender and the convertible debt investors.

63(2).

• Redemption of Convertible Debt Instruments

  1. The issuer must redeem the convertible debt instruments according to the terms specified in the letter of offer.

  2. The letter of offer contains the agreed terms and conditions relating to redemption.

  3. The issuer must therefore follow the redemption terms disclosed to the investors.

  4. These terms may specify matters such as:

     1. The redemption date or period.

     2. The amount to be redeemed.

     3. The manner and conditions of redemption.

  5. The issuer cannot arbitrarily change the redemption terms after issuing the convertible debt instruments.

Regulation 64. Roll over of non-convertible portion of partly convertible debt instruments

64(1).

• A listed issuer may roll over the non-convertible portion of partly convertible debt instruments.

  1. This facility is available where the value of the non-convertible portion exceeds ₹10 crore.

  2. The rollover must comply with the applicable provisions of the Companies Act, 2013.

• In addition, the issuer must satisfy the specific conditions prescribed under the SEBI regulations.

• The rollover cannot be carried out merely on the issuer’s decision; the prescribed statutory and regulatory conditions must be fulfilled.

(a).

• Approval for Rollover of Convertible Debt Instruments

  1. A rollover of convertible debt instruments requires approval from at least 75% of the holders in value.

  2. “75% of the holders in value” means the approval is based on the value/amount of convertible debt instruments held, and not merely the number of holders.

  3. The holders must approve the rollover through a resolution.

  4. The resolution must be passed through postal ballot.

  5. Therefore, the issuer cannot rollover the convertible debt instruments unless holders representing at least 75% of their total value approve the rollover.

• Example:

  1. Total value of convertible debt instruments = ₹100 crore.

  2. Holders representing ₹80 crore approve the rollover through postal ballot.

  3. Since ₹80 crore represents 80% of the total value, the 75% requirement is satisfied.

(b).

• Auditor’s Certificate Before Rollover Approval

  1. Before seeking approval for the rollover of convertible debt instruments, the issuer must send certain information to all holders.

     1. The issuer must send an auditors’ certificate along with the notice for passing the rollover resolution.

     2. The certificate must provide information on the issuer’s cash flow.

     3. The auditors must also give their comments on the liquidity position of the issuer.

  2. Therefore, holders must receive an independent assessment of the issuer’s cash flow and liquidity before voting on the rollover.

• Example:

  1. The issuer proposes to rollover its convertible debt instruments.

  2. It sends the notice for the resolution to all holders.

  3. Along with the notice, it provides an auditors’ certificate covering:

     1. The issuer’s cash flow.

     2. The auditors’ comments on the issuer’s liquidity position.

  4. Holders can then consider this information before voting through postal ballot.

(c).

• Redemption of Non-Convertible Portion

  1. The issuer must redeem the non-convertible portion of the partly convertible debt instruments held by holders who do not agree to the rollover resolution.

  2. This applies to holders who have not given their consent to the resolution.

     1. The issuer undertakes to repay the non-convertible portion to such dissenting holders instead of forcing them to continue with the rollover.

     2. The redemption covers only the non-convertible portion of their partly convertible debt instruments.

• Example:

  1. A holder has a partly convertible debt instrument of ₹1,00,000, consisting of ₹60,000 convertible portion and ₹40,000 non-convertible portion.

  2. If the holder does not agree to the rollover resolution, the issuer must redeem the ₹40,000 non-convertible portion.

(d).

• Credit Rating Before Rollover

  1. The issuer must obtain a credit rating from at least one credit rating agency registered with SEBI.

  2. The credit rating must be obtained within one month before the due date of redemption of the convertible debt instruments.

     1. The issuer must communicate this credit rating to all holders of the convertible debt instruments.

     2. The rating must be communicated before the rollover takes place.

     3. This gives the holders an updated assessment of the issuer’s creditworthiness before they decide whether to continue with the rollover.

64(2). Not there in the Act.

64(3).

• Continuation of Existing Security

  1. The issuer does not have to create a fresh security if the existing security continues until the secured convertible debt instruments are fully redeemed.

  2. The issuer also does not have to execute a fresh trust deed if the existing trust deed already provides for such continuation.

     1. The existing trust deed or security documents must specifically provide that the security will remain in force until redemption.

     2. Therefore, a fresh security and fresh trust deed are required only when the existing documents do not provide for continuation of the security.

• Decision by the Debenture Trustee

  1. The debenture trustee decides whether the issuer needs to create fresh security and execute a fresh trust deed.

  2. Even if the existing documents provide for continuation of security, the final decision rests with the debenture trustee.

     1. The debenture trustee therefore examines the existing trust deed and security documents before deciding.

     2. If the trustee considers fresh security or a fresh trust deed necessary, the issuer must comply with that requirement.

Regulation 65. Conversion of optionally convertible debt instruments into equity shares

65(1).

• Conversion of Optionally Convertible Debt Instruments

  1. The issuer cannot convert optionally convertible debt instruments into equity shares without the positive consent of the holders.

  2. The holders must expressly communicate their consent to the issuer for the conversion.

     1. Mere silence or failure to respond to the issuer’s notice cannot be treated as consent.

     2. Therefore, the issuer cannot assume that a holder agrees to conversion simply because the holder does not reply.

     3. Only an affirmative response from the holder can be treated as consent for conversion.

• Example:

  1. The issuer sends a notice asking holders whether they agree to convert their debt instruments into equity shares.

  2. Holder A sends a written confirmation agreeing to the conversion. The issuer can proceed with conversion for Holder A.

  3. Holder B does not respond to the notice. The issuer cannot treat this silence as consent and convert Holder B’s instruments.

65(2).

• Option Not to Convert

  1. If and when the issuer has issued listed convertible debt instruments:

     1. The value of the convertible portion must be more than ₹10 crore.

     2. At the time of issuing these instruments, the issuer must not have determined the conversion price.

     3. In such a case, the holders must be given an option to choose not to convert the convertible portion into equity shares.

     4. Therefore, the holder cannot be forced to convert the convertible portion into equity shares when the conversion price was not fixed at the time of issue.

     5. The choice belongs to the holder, who may decide whether or not to convert.

• Exception Where an Upper Conversion Price Is Disclosed

  1. The issuer may avoid giving holders the option not to convert if an upper limit on the conversion price has been determined.

     1. The upper limit must be disclosed to investors at the time of making the issue.

     2. The issuer must also disclose the justification or basis for fixing that upper limit.

     3. In such a case, holders can be required to convert the convertible portion into equity shares within the disclosed upper price limit.

  2. The option not to convert is therefore not necessary when investors already know the maximum conversion price and the reason for fixing it.

65(3).

• Redemption When Holders Choose Not to Convert

  1. Where the option under 65(2) is available, holders can choose whether to convert their convertible debt instruments into equity shares.

  2. The conversion price is determined in a general meeting of the shareholders.

     1. If one or more holders choose not to exercise the conversion option, the issuer must redeem the portion of the instruments that they have not converted.

     2. This redemption must be completed within one month from the last date available for exercising the conversion option.

     3. The redemption price cannot be less than the face value of the instruments.

     4. Therefore, the issuer cannot redeem these instruments at a price below their face value.

• Example:

  1. Face value of the convertible debt instrument = ₹1,000.

  2. Shareholders determine a conversion price in their general meeting.

  3. Holder A chooses to convert, but Holder B chooses not to convert.

  4. The issuer must redeem Holder B’s relevant instruments within one month from the last date for exercising the option.

  5. The redemption price must be at least ₹1,000.

Regulation 66. Issue of convertible debt instruments for financing

• Restriction on Financing Promoter Group or Group Companies

  1. An issuer cannot issue convertible debt instruments for financing any person who is part of the promoter group or group companies.

  2. The issuer also cannot use such instruments for providing loans to a promoter group member or group company.

     1. The issuer cannot issue them for acquiring shares of any person belonging to the promoter group or group companies.

     2. This restriction covers financing, lending, and share acquisition involving the promoter group or group companies.

• Exception for Fully Convertible Debt Instruments

  1. An issuer can issue fully convertible debt instruments for these purposes if they satisfy the prescribed conversion period.

  2. The debt instruments must be fully convertible into equity shares.

     1. The conversion period must be less than 18 months from the date of issue.

     2. Therefore, the restriction does not apply where the instruments are fully convertible within this period.

• Example:

  1. An issuer wants to provide financing to a group company through convertible debt instruments.

  2. If the instruments are fully convertible and will convert within 18 months from the date of issue, the issuer can issue them for this purpose.

  3. If the conversion period is 18 months or more, this exception is not available.

Regulation 67. Issue of warrants

• Conditions for Issue of Warrants

• An issuer can issue warrants in a rights issue, but the warrants must satisfy specific conditions relating to their:

• Validity period, attachment to securities, exercise price, upfront payment, and consequences of non-exercise.

  1. (a). Tenure of Warrants

     1. The tenure of the warrants cannot exceed 18 months from the date of their allotment.

        1. The 18-month period starts from the actual date on which the warrants are allotted to the investor in the rights issue.

        1. The warrant therefore gives the holder a limited period within which the right to acquire equity shares can be exercised.

        2. The issuer cannot structure the warrant with a tenure exceeding 18 months from the allotment date.

     2. The holder must exercise the warrant within the permitted tenure; otherwise, the right attached to the warrant will lapse in accordance with the applicable terms.

  2. Example:

     1. Warrants are allotted on 1 January 2027.

     2. Their maximum tenure can extend only up to 30 June 2028.

     3. The issuer cannot provide a warrant tenure extending beyond this 18-month period.

  3. (b). One or More Warrants May Be Attached to a Specified Security

     1. A specified security may have one or more warrants attached to it.

     2. Therefore, the regulations do not restrict the issuer to attaching only one warrant to each specified security.

        1. The issuer can structure the issue so that a particular specified security carries multiple warrants.

        2. Each warrant will represent a right to acquire equity shares according to the terms disclosed for that warrant.

  4. Example:

     1. One specified security may have two warrants attached to it.

     2. Each warrant may independently carry a right to acquire a specified number of equity shares.

     3. Thus, the holder could potentially acquire equity shares through both warrants if the conditions for exercise are satisfied.

  5. (c). Exercise Price Must Be Determined Upfront

     1. The exercise price is the price that the warrant holder must pay to obtain the equity shares when the warrant is exercised.

     2. The issuer must determine this exercise price upfront at the time of the issue.

     3. Instead of fixing one specific price, the issuer may prescribe a formula for determining the exercise price.

        1. The exercise price or the formula for calculating it must be disclosed in the letter of offer.

        2. Investors must therefore know in advance how the amount payable for exercising the warrant will be determined.

        3. The issuer cannot leave the exercise price completely open-ended without providing a predetermined price or formula.

  6. 25% Consideration Must Be Received Upfront

     1. At least 25% of the consideration amount based on the exercise price must be received upfront.

     2. The holder therefore cannot obtain the warrant without making the prescribed initial payment.

     3. The remaining consideration can be paid when the warrant is subsequently exercised, according to the terms of the issue.

     4. The 25% requirement ensures that the holder has already committed a portion of the amount payable for acquiring the equity shares.

  7. Example:

     1. Suppose a warrant gives the holder the right to acquire one equity share at an exercise price of ₹200.

     2. The total consideration for exercising the warrant is ₹200.

     3. At least 25% of ₹200, i.e. ₹50, must be received upfront.

     4. The remaining ₹150 would be payable when the warrant is exercised, according to the issue terms.

  8. Formula-Based Exercise Price

     1. The regulation also permits the exercise price to be determined through a formula rather than through a fixed amount.

     2. The formula must be disclosed in the letter of offer.

        1. At least 25% of the consideration calculated using that formula must be received upfront.

        2. For this calculation, the record date is treated as the reference date.

        3. Therefore, where the final exercise price depends on information available around the record date, the formula is applied with the record date as the specified reference point.

  9. (d). Forfeiture Where the Warrant Is Not Exercised

     1. The warrant holder receives a right to take equity shares by exercising the warrant.

     2. The holder must exercise this right within 3 months from the date of payment of the consideration.

        1. If the holder does not exercise the option within this 3-month period, the amount already paid in respect of the warrant is forfeited.

        2. The issuer is entitled to retain the forfeited consideration.

        3. The forfeiture acts as a consequence for a holder who pays the upfront amount but does not exercise the warrant within the prescribed period.

  10. Example:

      1. A warrant holder pays ₹60 as the required upfront consideration on 1 January.

      2. The holder must exercise the warrant within 3 months from the date of this payment.

         1. If the holder fails to exercise it within the prescribed period, the ₹60 paid in respect of that warrant is forfeited by the issuer.

         2. The holder cannot subsequently claim repayment of that forfeited amount merely because the warrant was not exercised.

PART III: RECORD DATE

68(1).

• Record Date for Rights Issue

  1. The issuer must announce a record date for the proposed rights issue.

  2. The record date is used to identify the shareholders who are eligible to apply for the specified securities offered through the rights issue.

     1. Only shareholders whose names are eligible as on the record date will be entitled to participate in the rights issue.

     2. The issuer must determine and announce the record date in accordance with the period prescribed under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

     3. The record date therefore acts as the cut-off date for determining the shareholders who receive the right to participate in the issue.

     4. A person acquiring shares after the relevant cut-off cannot claim rights merely because they become a shareholder after the record date.

• Example:

  1. An issuer announces 10 June as the record date for its rights issue.

  2. The shareholders eligible as on that record date will be identified for the purpose of making the rights issue.

  3. The issuer then offers the specified securities to those eligible shareholders in accordance with the terms of the rights issue.

68(2).

• Withdrawal of Rights Issue After Record Date

  1. Once the issuer has announced the record date for the rights issue, it cannot withdraw the rights issue.

  2. The record date is important because it identifies the shareholders who are eligible to participate in the rights issue.

  3. Therefore, after creating this entitlement for shareholders, the issuer is not permitted to simply cancel or withdraw the proposed rights issue.

• Consequence of Withdrawal After Record Date

  1. If the issuer nevertheless withdraws the rights issue after announcing the record date, a restriction is imposed on the issuer.

  2. The issuer will not be eligible to apply for listing of any of its specified securities on any stock exchange for 12 months.

  3. This 12-month restriction is calculated from the record date announced 68(1).

  4. The restriction is not limited only to the securities proposed to be issued under the withdrawn rights issue.

  5. It covers an application for listing of any of the issuer’s specified securities during that 12-month period.

• Example:

  1. Record date announced: 1 January 2027.

  2. The issuer subsequently withdraws the rights issue after announcing this record date.

  3. The issuer becomes ineligible to make an application for listing of its specified securities for 12 months from 1 January 2027.

  4. Therefore, the restriction operates until the completion of the 12-month period from the announced record date.

Exception for Securities Issued Before the Record Date

• The 12-month restriction does not prevent the issuer from seeking listing of certain equity shares.

• The exception covers equity shares allotted through:

  1. Conversion of convertible securities.

  2. Exchange of convertible securities.

  3. Exercise of ESOPs.

  4. Exercise of warrants.

• These convertible securities, ESOPs or warrants must have been issued before the announcement of the record date.

• The equity shares must be allotted pursuant to those pre-existing securities, ESOPs or warrants.

• The issuer can seek listing of such equity shares on the stock exchange where its securities are already listed.

• Therefore, the restriction does not block listing of equity shares arising from rights or instruments that were already issued before the record date was announced.