Introduction
When companies need money to grow, build factories, develop new products, or expand to new places, they often turn to the public for funds by selling shares. This process of selling shares to the public is very important for both companies and the economy, but it needs proper rules to make sure everything happens fairly. The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, commonly called ICDR Regulations, provide these rules in India. These regulations tell companies exactly what information they must share with the public, how they should price their shares, and what they can and cannot do during the whole process of raising money. The SEBI ICDR Regulations 2018 replaced the older 2009 regulations and brought many changes to make the process better, simpler, and safer for everyone. In this article, we will explore these regulations in detail, looking at what they say, how they work in practice, some famous cases related to them, and how they compare with similar rules in other countries. By the end, you will have a good understanding of how companies in India raise money from the public and how investors are protected during this process.
Historical Background and Evolution of SEBI ICDR Regulations 2018
The story of how India regulates companies raising money from the public goes back many decades and has seen many changes as the economy and markets have grown. Before 1992, the Controller of Capital Issues (CCI), which was part of the Finance Ministry, controlled this area through the Capital Issues Control Act, 1947. In those days, the government decided almost everything about public issues, including the price at which shares could be sold. Companies had very little freedom, and the whole process was slow and complicated. This old system was not working well for a growing economy that needed more investment and faster processes.
When economic reforms started in 1991, the government made big changes. The Capital Issues Control Act was cancelled, and the Securities and Exchange Board of India (SEBI), which had been created in 1988, was given legal powers in 1992 through the SEBI Act. SEBI then became the main organization responsible for regulating how companies raise money from the public. At first, SEBI issued various guidelines and instructions through different circulars. In 2000, it brought all these together into the SEBI (Disclosure and Investor Protection) Guidelines to make things more organized.
Then in 2009, SEBI took a big step by replacing these guidelines with the first ICDR Regulations, which made the rules more formal and legally stronger. These 2009 Regulations worked well for several years but eventually needed updating because markets change, new types of businesses emerge, and global standards evolve. After extensive discussions with market experts, companies, and investor groups, SEBI introduced the new SEBI ICDR regulations 2018. These new regulations were not just a small update but a complete overhaul that reorganized everything to make it more logical and user-friendly. They reduced the number of chapters from twenty to sixteen and made the language clearer. The 2018 Regulations kept the good parts of the earlier rules while adding new features to make the capital raising process more efficient and in line with global best practices.
Initial Public Offerings (IPO) Requirements
The most common way for a company to raise money from the public for the first time is through an Initial Public Offering (IPO). Chapter II of the ICDR Regulations deals specifically with IPOs and sets out detailed rules about which companies can do an IPO and what conditions they must meet. According to Regulation 6, a company must fulfill several conditions to be eligible for an IPO. It must have net tangible assets of at least three crore rupees in each of the previous three years. It also needs to have made an average operating profit of at least fifteen crore rupees during the previous three years, with profit in each year. The company must have a net worth (total assets minus total liabilities) of at least one crore rupees in each of the last three years. And if the company has changed its name within the last year, at least half of its revenue in the previous year should have come from the activity suggested by the new name. These requirements ensure that only companies with a proven track record can raise money from the public.
However, the regulations also provide alternative routes for newer companies, especially in technology sectors, that might not meet these traditional criteria but have strong growth potential. For example, Regulation 6(2) allows loss-making companies to do an IPO if they allocate at least 75% of the net public offer to Qualified Institutional Buyers (QIBs) like banks, insurance companies, and mutual funds. This provision has been particularly helpful for many technology startups and e-commerce companies that typically operate at a loss in their early years while building market share. The regulations also specify details about the minimum offer size, promoter contribution, lock-in periods, and pricing methods. For instance, promoters (founders or main shareholders) must contribute at least 20% of the post-issue capital and keep these shares locked in (not allowed to sell) for at least three years. These requirements ensure that promoters have “skin in the game” and remain committed to the company’s success even after raising money from the public.
Rights Issue and Preferential Issue Requirements
Beyond IPOs, the SEBI ICDR Regulations 2018 also cover other ways companies can raise money. Chapters III and V deal with rights issues and preferential issues, respectively. A rights issue is when a company that is already listed offers new shares to its existing shareholders in proportion to their current holding. This method respects the right of existing shareholders not to have their ownership percentage diluted. According to Regulation 60, a listed company making a rights issue must send a letter of offer to all shareholders at least three days before the issue opens. This letter must contain all important information about the company’s business, financial position, how the money will be used, and any risks involved. The company must also keep a specific portion of the issue for employees if they want to include them. The pricing of a rights issue is generally more flexible than an IPO, and companies often offer shares at a discount to attract shareholders to participate.
The regulations also specify timelines for rights issues, including the minimum and maximum period the issue should remain open (typically 7 to 30 days). A preferential issue, covered in Chapter V, is when a company issues new shares or convertible securities to a select group of investors rather than to all existing shareholders or the general public. This method is often used when companies want to bring in strategic investors or when they need money quickly. Regulation 164 specifies how to calculate the minimum price for preferential issues, which is generally based on the average of weekly high and low closing prices over a certain period. The regulations also impose a lock-in period of one year on shares issued through preferential allotment to ensure that these investors don’t quickly sell their shares for short-term profits. Additionally, preferential issues require shareholder approval through a special resolution, and the money raised must be used for the specific purposes mentioned in that resolution. These detailed rules for different types of capital raising methods ensure that regardless of how a company chooses to raise money, proper disclosures are made, and investor interests are protected.
Qualified Institutions Placement (QIP)
Chapter VI of the ICDR Regulations introduces a special method for listed companies to raise money quickly from institutional investors, known as Qualified Institutions Placement (QIP). This method was created to allow companies to raise money without the lengthy process required for public issues while still maintaining proper disclosure standards. QIP is only available to companies that are already listed and have been complying with listing requirements for at least one year. According to Regulation 172, in a QIP, shares can only be issued to Qualified Institutional Buyers (QIBs), which include institutions like banks, insurance companies, mutual funds, foreign portfolio investors, and pension funds. The minimum number of allottees in a QIP must be two if the issue size is less than or equal to ₹250 crores, and five if the issue size is greater than ₹250 crores.
No single allottee is allowed to receive more than 50% of the issue. This ensures that the shares are not concentrated in the hands of just one or two investors. The pricing of shares in a QIP is based on the average of the weekly high and low closing price during the two weeks preceding the “relevant date” (usually the date of the board meeting deciding to open the issue). Companies can offer a discount of up to 5% on this price, subject to shareholder approval. Regulation 175 mandates that the issue must be completed within 365 days of the special resolution approving it. The funds raised through QIP must be utilized for the purposes stated in the placement document, and any major deviation requires shareholder approval. QIPs have become increasingly popular for Indian companies looking to raise capital quickly. For example, in 2020 and 2021, many banks and financial institutions used the QIP route to strengthen their capital base during the COVID-19 pandemic. The streamlined process allowed these institutions to raise funds in challenging market conditions when traditional public issues might have been difficult to execute.
General Obligations and Disclosures
Regardless of the method a company uses to raise capital, the SEBI ICDR Regulations 2018 impose certain general obligations and disclosure requirements that apply to all types of issues. These are primarily covered in Chapter IX and are designed to ensure transparency and protect investor interests. One fundamental principle is that the offer document (whether a prospectus, letter of offer, or placement document) must contain all material information necessary for investors to make an informed decision. Regulation 24 states explicitly: “The draft offer document and offer document shall contain all material disclosures which are true and adequate so as to enable the applicants to take an informed investment decision.” The regulations define “material” as any information that is likely to affect an investor’s decision to invest in the issue. This includes details about the company’s business, its promoters and management, its financial position, risks and concerns, legal proceedings, and how the money raised will be used. The offer document must be certified by the company’s directors as containing “true, fair and adequate” information.
Making false or misleading statements in an offer document is a serious offense that can lead to penalties, including imprisonment in severe cases. The ICDR Regulations also require companies to make continuous disclosures even after the issue is completed. They must inform investors about how the money raised is being used through regular updates to stock exchanges. If there are any significant deviations from the stated use of funds, companies must explain these deviations and seek shareholder approval if necessary. Another important requirement is the appointment of a monitoring agency (usually a bank or financial institution) for issues above a certain size to oversee the use of funds. This agency must submit regular reports on whether the company is using the money as promised in the offer document. These general obligations ensure that the capital raising process remains transparent from beginning to end, with sufficient safeguards to protect investor interests.
Landmark Court Cases
Several important court cases have shaped how the ICDR Regulations are interpreted and applied. These cases have clarified unclear aspects of the regulations and established precedents for future issues. One of the most significant cases is DLF Ltd. v. SEBI (2015) SAT Appeal No. 331/2014. This case involved India’s largest real estate company, which was penalized by SEBI for not disclosing certain information in its IPO prospectus. DLF had not fully disclosed details about its subsidiaries and certain legal proceedings. When this came to light, SEBI barred DLF and its directors from accessing the capital markets for three years. DLF appealed to the Securities Appellate Tribunal (SAT), arguing that the undisclosed information was not material.
However, the SAT upheld SEBI’s order, stating: “The duty of an issuer company while filing a prospectus is not only to make true and correct disclosures but also to ensure that such disclosures are adequate… Inadequate disclosures even if they are true would not meet the requirement of the ICDR Regulations.” This judgment established an important principle that the adequacy of disclosure is as important as its accuracy. Another landmark case is Sahara Prime City v. SEBI (2013), which dealt with Sahara’s attempt to raise money through an IPO. SEBI found that the Sahara Group was simultaneously raising money through other means (through instruments called OFCDs – Optionally Fully Convertible Debentures) without proper disclosures. The case eventually reached the Supreme Court, which ruled in favor of SEBI and ordered Sahara to refund the money collected through OFCDs. The Court emphasized the importance of disclosure and regulatory compliance, stating: “Disclosure isn’t only about telling the truth but telling the whole truth.” A more recent case is PNB Housing Finance v. SEBI (2021) in the Delhi High Court, which dealt with preferential allotment pricing. PNB Housing Finance had approved a preferential issue to certain investors, including Carlyle Group, at a price that some shareholders felt was too low. SEBI directed the company to halt the issue until a valuation was done by an independent registered valuer. The company challenged this in court, arguing that it had followed the formula prescribed in the ICDR Regulations. The case raised important questions about whether SEBI can impose additional requirements beyond what is specified in the regulations and the balance between letter and spirit of the law. These cases show how the courts have generally supported SEBI’s role in ensuring proper disclosures and protecting investor interests, even when it means interpreting the regulations strictly.
Comparative Analysis with Global Regulations
India’s SEBI ICDR Regulations 2018 share similarities with capital raising regulations in other major markets like the United States and the United Kingdom, but there are also significant differences reflecting India’s unique market conditions. In the United States, the Securities Act of 1933 and rules issued by the Securities and Exchange Commission (SEC) govern public offerings. Like India’s ICDR Regulations, the US system emphasizes disclosure through detailed registration statements (Form S-1 for IPOs). However, the US has more flexible criteria for company eligibility, focusing primarily on disclosure rather than prescribing minimum financial thresholds like the three-year profit track record required in India. The US also has special provisions for “emerging growth companies” under the JOBS Act of 2012, allowing smaller companies certain exemptions from disclosure requirements. The United Kingdom’s regulations, administered by the Financial Conduct Authority (FCA), are more principles-based compared to India’s more prescriptive approach.
The UK’s Premium Listing requirements for the main market are somewhat similar to India’s, requiring a three-year track record, but they focus more on the company’s ability to carry on an independent business rather than specific financial thresholds. One area where India’s regulations differ significantly is in the control of promoters (founders or main shareholders). Indian regulations mandate minimum promoter contribution (20% of post-issue capital) and longer lock-in periods (three years for promoters compared to typically six months in the US and UK). This reflects the predominance of promoter-controlled companies in India compared to the more dispersed ownership typical in the US and UK. India’s QIP mechanism is somewhat unique, although it shares features with private placements in other markets. It was specifically designed to address the challenges of the Indian market, where traditional rights issues and follow-on public offerings can be time-consuming. The 2018 ICDR Regulations incorporated several international best practices, such as stricter disclosure standards for group companies, enhanced corporate governance requirements, and better regulations for credit rating agencies involved in public issues. At the same time, the regulations retained certain India-specific features, such as the emphasis on promoter responsibility and detailed regulations on the use of issue proceeds. Overall, while India’s regulations draw inspiration from global standards, they are tailored to address the specific characteristics and challenges of the Indian market, including higher retail investor participation, the dominance of family-owned businesses, and the need for strong investor protection measures in a still-evolving market.
Recent Developments and Amendments
The ICDR Regulations haven’t remained static since 2018 but have continued to evolve through various amendments to address emerging issues and improve the capital raising process. One significant amendment came in April 2022, when SEBI modified the lock-in requirements for promoters and other shareholders in IPOs. The lock-in period for promoters’ minimum contribution (20% of post-issue capital) was reduced from three years to eighteen months for all issues opening after April 1, 2022. For the promoter holding beyond the minimum contribution and for pre-IPO shareholders who are not promoters, the lock-in period was reduced from one year to six months.
This change was made to align Indian regulations more closely with global practices and to provide more liquidity to early investors, particularly in startup companies. Another important amendment related to the Objects of the Issue section in offer documents. Companies are now required to provide more specific details about how they intend to use the money raised, especially for general corporate purposes. If more than 35% of the issue proceeds are allocated for acquiring unidentified companies (inorganic growth), specific disclosures about the target industry and types of acquisition targets must be made. This change was prompted by concerns that some companies were raising money without clear plans for its use. In response to the growing trend of loss-making technology companies going public, SEBI introduced additional disclosure requirements for such companies in November 2021. These companies must disclose key performance indicators, detailed unit economics, and comparison with listed peers, giving investors better tools to evaluate their business models and growth potential. SEBI also amended the regulations related to price bands in IPOs, requiring companies to provide sufficient justification for the price range, especially when valuations appear high relative to industry peers. These changes were particularly relevant for new-age technology companies with unconventional valuation metrics. The regulator has also been working on reducing the time taken from IPO closure to listing, with the aim of eventually moving to a T+3 timeline (listing within three days of issue closure). These ongoing amendments reflect SEBI’s responsive approach to regulation, adapting the framework as market conditions change and new types of companies seek to access public markets.
Practical Impact and Market Response
The SEBI ICDR Regulations 2018 have had a profound impact on how companies raise capital in India and how the primary market functions. One of the most visible impacts has been on the quality and quantity of information available to investors. Compared to the pre-ICDR era, offer documents today contain much more comprehensive information, allowing investors to make more informed decisions. This improved disclosure regime has particularly benefited retail investors, who previously had limited access to company information. The regulations have also influenced the types of companies that come to the market. The clear eligibility criteria have ensured that mostly companies with established track records access public funds through the main board IPOs. At the same time, the alternative investment routes and specialized platforms like the SME Exchange have provided avenues for smaller or newer companies to raise capital with appropriate safeguards. Market participants have generally responded positively to the 2018 regulations and subsequent amendments. Investment bankers appreciate the clearer structure and language of the regulations, which make compliance easier. Companies value the more streamlined processes, especially for rights issues and QIPs, which allow them to raise capital more quickly when market conditions are favorable. Institutional investors have welcomed the enhanced disclosure requirements, particularly those related to group companies and litigation, which provide greater transparency about potential risks. However, some challenges remain. Companies sometimes find the disclosure requirements onerous, especially smaller firms with limited resources. The requirements for financial information (three years of restated financial statements) can be challenging for companies that have undergone significant restructuring. Some market participants also argue that certain provisions, such as the minimum promoter contribution, may not be suitable for all types of companies, particularly those with professional management rather than promoter control. Despite these challenges, the capital market activity since 2018 suggests that the regulations have struck a reasonable balance between facilitating capital raising and protecting investor interests. The years 2020 and 2021 saw record IPO activity in India despite the pandemic, with many new-age technology companies successfully going public. This wouldn’t have been possible without a regulatory framework that was both robust and flexible enough to accommodate different types of companies while maintaining investor confidence.
Conclusion
The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, represent a significant milestone in the evolution of India’s capital market regulations. By providing a comprehensive framework for various types of capital raising activities, they have played a crucial role in balancing the dual objectives of facilitating business growth and protecting investor interests. The regulations have successfully addressed many of the challenges that existed in earlier frameworks, such as excessive complexity, outdated provisions, and lack of clarity. By streamlining processes, enhancing disclosure requirements, and introducing greater flexibility for different types of issuers, the SEBI ICDR Regulations 2018 have made capital raising more efficient while maintaining robust investor protection. The ongoing amendments to the regulations demonstrate SEBI’s commitment to keeping the regulatory framework relevant and responsive to changing market conditions. This adaptive approach is essential in a dynamic environment where new business models emerge and global best practices evolve continuously. As India aims to become a $5 trillion economy, efficient capital markets will be crucial for channeling savings into productive investments. The SEBI ICDR Regulations 2018 provide the foundation for this by ensuring that companies can access public funds in a transparent and orderly manner. For companies seeking to raise capital, understanding these regulations is not just about compliance but about appreciating the principles of transparency, fairness, and investor protection that underpin them. For investors, the regulations provide assurance that companies coming to the market meet certain minimum standards and disclose all material information. Looking ahead, the regulatory framework will likely continue to evolve, perhaps becoming more principles-based in certain areas while maintaining prescriptive standards where necessary for investor protection. As more diverse companies seek to access public markets, finding the right balance between facilitating innovation and maintaining market integrity will remain a key challenge for regulators. The ICDR Regulations, with their comprehensive coverage and adaptable framework, provide a strong foundation for meeting this challenge.
References
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