1. INTRODUCTION
The Securities Exchange Board of India ("SEBI") recently significantly streamlined the rights issue process and introduced the concept of Specific Investors ("SI")1. Under the SEBI (Issue of Capital Disclosure Requirements) Regulations, 2018, as amended ("ICDR Regulations"), a SI is an investor eligible to participate in a proposed rights issue ("Issue") of the issuer, whose name is prominently included in the pre-issue advertisement for the Issue2. SIs have been positioned as a defined sub-category of eligible investors, accessing the Issue process through a structured and formal route. While the concept of SIs is introduced through the ICDR Regulations, the SIs who are non-residents ("NR" and such SIs, "NR SI") continue to be governed by the requirements on eligibility, sectoral caps, pricing along with the country's larger exchange control framework set out under the Foreign Exchange Management Act, 1999, as amended ("FEMA") and other applicable laws.
This article deep dives into the process and procedural requirements for SI participation in an Issue, including FEMA compliance for NR investors to implement the transaction in a manner that meets both regulatory regimes before allotment.
2. PROCESS OF PARTICIPATION IN RI
Under the ICDR Regulations, the SIs may participate in the Issue either as renouncees of the promoter of the issuer and members of the promoter group ("P&PG") 3, or in the under-subscription category4.
2.1 Pre-identified Renounce: P&PG Portion
Any of the promoter(s) of the issuer or the members of its promoter group may renounce within the P&PG or in favour of identified SIs. Regulation 86 of the ICDR Regulations mandates an Issue to have a minimum subscription of 90%, except where the object of the Issue involves (i) financing other than the financing of the capital expenditure for a project and (ii) P&PG undertake to fully subscribe to their respective RE portions, except for renunciation within the P&PG and/or the SIs.
When a SI is participating as a renouncee of the P&PG, the issuer and the P&PG are required to disclose their intent to renounce their rights entitlements ("RE") in favour of the SIs in the pre-issue advertisement.
The SIs shall, on the day of the Issue opening, submit the bid cum application and the issuer shall confirm such participation of the SIs to the stock exchange(s) for dissemination on the first day of the Issue opening itself.
2.2 Pre-identified Investor: Under-subscribed Portion
Except for the exceptions discussed above, Regulation 86 of the ICDR Regulations requires the issuer to meet the minimum public shareholding threshold. While in the past, the board of the issuer had the discretion to allot the under-subscribed portion to any investors; however, this was customarily subscribed to by the P&PG of the issuer. By virtue of the SI route, now the issuer may identify and disclose in the pre-issue advertisement that SIs may subscribe to the under-subscribed portion of the equity shares allotted pursuant to the Issue ("RI Equity Shares"), if any, to ensure full subscription and the success of the Issue.
The extended relaxation from the 90% minimum subscription requirement along with the flexibility of allotment of the under-subscribed portion in the Issue will act as a viable option to the issuers which are financially distressed and in instances where their P&PG are capital-constrained or opt not to participate in the Issue.
The regulatory intent of mandating the P&PG to subscribe to their respective portion of the REs or allowing the under-subscribed portion to be allotted to the P&PG was to demonstrate the confidence of the P&PG in the issuer. The said amendment and resultant extension of both these options to the SIs are consistent with the original regulatory objective to establish an existing and pre-identified investors' commitment in the Issue and, by extension, in the issuer itself. Such an upfront interest and inclination by pre-vetted investors may act as an indicator of the issuer's potential and markets perception- and may even have an impact on the broader investors' sentiment to the Issue.
3. PROCEDURE OF SUBMISSION OF BIDS
As discussed above, a SI may participate through either of two routes- (i) as a renouncee of the P&PG, or (ii) within the under-subscription category.
Regulation 77B of the ICDR Regulations lays down the procedure for such participation. For SIs participating as renouncees of the P&PG, bids must be submitted on the Issue opening day by 11:00 a.m., the issuer shall disclose the receipt of such bid application to the designated stock exchanges on the Issue opening day by 11.30 a.m. 5. This ensures early commitment and enables transparent allotment process for the issuer and the investors at large. For under-subscription participation, it is necessitated that the SIs' application, along with the application money, be submitted to the issuer before the finalisation of the basis of allotment6.
These procedural steps align with the Issue schedule provided under the SEBI circular titled 'Faster Rights Issue with a flexibility of allotment to Specific Investor(s)' dated March 11, 2025, as amended including the indicative timelines for (i) the credit of REs by T+9 (T being the date of the first board meeting approving the Issue), (ii) opening of trading in REs by T+14, and (iii) closure of RE by T+17 and at least three working days before Issue closing date7. The framework ostensibly aims to provide SIs with structured and time-bound mechanisms for participation, while maintaining markets transparency and regulatory compliance.
4. FEMA-SEBI INTERPLAY IN SI ALLOTMENTS
The Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, as amended ("NDI Rules") defines Foreign Direct Investment ("FDI"), as an investment through equity instruments by a NR in an unlisted Indian company, or in 10% or more of the post-issue paid-up equity capital on a fully diluted basis of a listed Indian company, with the note that if such investment falls below 10%, it shall continue to be treated as FDI, where 'fully diluted basis' refers to the total number of shares outstanding if all outstanding conversions are exercised as on date8. NDI Rules defines Foreign Portfolio Investment ("FPI"), as an investment by an NR through equity instruments where the holding is less than 10% of the post-issue paid-up share capital on a fully diluted basis of a listed Indian company or less than 10% of the paid-up value of each series of equity instruments of a listed Indian company9.
Under the renunciation route, the REs will be required to be transferred to the SIs from the P&PG at least a day prior to Issue opening date, enabling the SIs to submit their application on the first day of the Issue opening. The issuance of RI Equity Shares constitutes a primary issuance; both the application and allotment occur directly between the investor and the issuer and not through market trades. Thus, both the transfer of the REs and the issuance of RI Equity Shares are off-market transactions. Consequently, the holding of REs, the transfer of the consideration to the P&PG, submission of application money to the issuer and upon successful allotment, the holding of securities must be executed offline through an Authorised Dealer Bank and/or custodian banks even in the case of an investor having a registration as a foreign portfolio investor, which can in turn introduce additional procedural complexities. The ICDR Regulations states that the applicants to the Issue shall do so only through the Applications Supported by Blocked Amount facility, except that payment through any other electronic banking mode shall be permitted in respect of an application made for any Freserved portion outside the Issue period10. There is no clarity on whether the SIs participation under one of the two aforementioned routes is to be treated as a reserved portion.
The FEMA and corresponding rules govern all cross-border transactions, including the transfer and issuance of securities, including renunciation of REs between a resident of India ("Resident") and a NR and issuance of RI Equity Shares to a NR, to ensure that the pricing is fair and compliant with applicable laws. The NDI Rules, provide that: (i) the issuance of equity instruments to NRs pursuant to an Issue shall not be subjected to the pricing guidelines specified thereunder; and (ii) any transfer or renunciation of REs in favour of a NR shall be at a price not less than the fair market value ("FMV") determined in accordance with the NDI Rules. In accordance with Rule 21 of the NDI rules, FMV must be determined using an internationally accepted valuation methodology on an arm's length basis and certified by a chartered accountant, SEBI-registered merchant banker, or cost accountant11.
Rule 7 of the NDI Rules states that in case of a listed Indian company, the issuance of RI Equity Shares to NR shall be at a price determined by the issuer i.e., exempts the RI Equity Shares from the pricing norms12. Furthermore, the Rule was recently amended to expressly state that any renunciation of equity instruments from a Resident to a NR REs shall be carried out at FMV13.
Thus, it can be concluded that while the primary issuance of RI Equity Shares may be freely priced, however any transfer of REs by a Resident existing investor to a NR SI must adhere to FMV norms, ensuring compliance even when the subsequent rights shares are issued at a price determined by the issuer.
The overlap between FEMA and the SI framework under ICDR Regulations therefore involves two key considerations; (i) the valuation of the underlying securities i.e., REs for renunciation by an existing Resident investor to the NR SI, which are mandatorily required to adhere to the FEMA's FMV requirements and (ii) the classification and treatment of the SI transaction as either FPI or FDI, which further is contingent on both the existing and resultant percentage of shareholding and the transaction route.
5. CRITICAL ANALYSIS OF THE UNDERLYING RATIONALE AND MARKET PRACTICE CONSIDERATIONS
In essence, a SI is a strategically introduced participant who can either acquire REs, assist the promoters in ensuring their portion is fully subscribed to avoid triggering the 90% requirement, or fill in the gap left by subscribing with the under-subscription bucket, thereby providing the issuer with a higher degree of certainty and control over the outcome of the Issue.
It is well worth discussing the age-old argument that renunciation is being used as a tool to circumvent the requirement to pass a shareholder resolution as is required in a preferential allotment. This line of argument may have been further reinforced by the option to select pre-identified investors as SIs, as renouncees by the P&PG of the issuer. However, there are limits to this argument, it's critical to highlight that the Companies Act, 2013 recognises right to renounce REs (and by extension the RI Equity Shares) as an integral right of every shareholder, unless specifically carved out by articles of the issuer. This right lies with the shareholder, i.e., the P&PG and not the issuer. The issuer only has discretion to identify SIs for the under-subscription portion, if any, which is itself a conditional and uncertain position.
This dual framework provides SIs with multiple avenues to invest and meet the capital requirements of the issuer while maintaining the balance between the regulatory compliances and market norms. This strategic approach offers a bridge over troubled waters, enabling the issuer to pursue more efficient and less cumbersome fundraising methods in terms of invested time, resources applied, and procedures followed.
While the specific investor route is a recent addition in rights issue, certain interpretational ambiguities may arise regarding the treatment of the securities, investors and process to be followed for the issuance of RI Equity Shares to SIs. For NR SIs valuation of the underlying securities i.e., REs and the classification and treatment of the SI transaction as either FPI or FDI are substantial issues from which procedural challenges may mushroom up thus necessitating closer coordination amongst regulators and intermediaries. Any non-compliance or delay in meeting regulatory requirements arising from such lack of clarity and varied market practices, particularly in relation to the submission of prescribed forms such as FC-GPR and FC-TRS poses a significant concern for issuers and SIs, as FEMA violations carry not only monetary penalties but also potential criminal consequences. SEBI's initiative to introduce aptness and ease the capital raising process for cash-strapped issuers through the SI route risks losing its intended impact if such challenges persist.
6. CMS INDUSLAW VIEW
The SI route, if executed in the envisaged manner, shall facilitate targeted investment from outside the P&PG, ensure subscription and timely funding support, from the board's approval of the proposal to the final closure. This mechanism positions SIs as strategic partners, enhancing the efficiency and speed of capital mobilisation. This approach provides a clear, dependable pathway for securing funds precisely when they are most impactful.
The potential concern of this route developing into a circumventing tool for the shareholder requirement has been addressed above and should be analysed keeping in mind that if the promoter, having the statutory right to renounce, wishes to renounce in favour of specific investors- which are mutually identified by the P&PG and the issuer, then this is a flexibility made available by the law and is not to the detriment of the investors at large.
The SI framework represents a strategic evolution in India's capital-raising toolkit, providing issuers with certainty of subscription and flexibility in investor selection. Addressing these grey areas will further enhance the framework's effectiveness, enabling companies to leverage SIs with greater confidence in both domestic and cross-border contexts. This is undoubtedly a progressive step and may be premature to assess its shortcomings or effectiveness in the long run. The anticipation is that this route will be utilised to its fullest potential, with robust market practices evolving to ensure it stands the test of time.
Footnotes
1 Regulation 77(B) of Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) (Amendment) Regulations, 2025, dated March 8, 2025.
2 Regulation 77B (1), SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.
3 Regulation 86(1)(b), SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.
4 Regulation 90, SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.
5 Regulation 77B (2), SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.
6 Regulation 77B (4), SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.
7 Faster Rights Issue with a flexibility of allotment to specific investor(s), SEBICircular No. SEBI/HO/CFD/CFD-PoD-1/P/CIR/2025/31, 'Faster Rights Issue with a flexibility of allotment to specific investor(s)' dated March 11, 2025
8 Rule 2(r), Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.
9 Rule 2(t), Foreign Exchange Management (Non- Debt Instruments) Rules, 2019.
10 Regulation 76, SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.
11 Rule 21, Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.
12 Rule 7(d), Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.
13 Rule 7(A), Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.
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