The Securities and Exchange Board of India (Sebi) is considering a proposal to scrap the mandatory security deposit that issuers have to pay to the stock exchanges before launching a public issue. This could lower the cost of raising funds from the capital market and make it more attractive for companies.
The proposal was made by an expert committee formed by Sebi to review the framework for public issues, which submitted its report on Friday. The committee, headed by former Sebi executive director Sandeep Parekh, also suggested several other measures to simplify and streamline the public issue process.
According to the current norms, issuers have to deposit 1% of the issue size as security with the stock exchanges before opening the issue. This is done to ensure that the issuers comply with their obligations and do not default on their payments to investors. However, the committee observed that this requirement is redundant and imposes an unnecessary burden on the issuers.
The committee noted that there are adequate safeguards in place to protect the interests of investors, such as escrow accounts, underwriting agreements, grading and rating mechanisms, and post-issue monitoring by Sebi and stock exchanges. Moreover, the security deposit does not cover the entire risk of default by the issuer, as it is only a fraction of the issue size.
The committee also pointed out that no other major jurisdiction requires such a security deposit for public issues. Therefore, it recommended that this requirement should be abolished, which would reduce the cost of capital for issuers and make public issues more competitive with other modes of fund raising.
The committee also suggested several other changes in the public issue framework, such as reducing the listing time from six days to three days, allowing anchor investors in all types of issues, rationalising the eligibility criteria for issuers, simplifying the disclosure requirements, and enhancing the role of intermediaries.
The committee’s report is open for public comments till February 15. Sebi will take a final decision on the recommendations after considering the feedback from stakeholders.