QIP mechanism: SEBI proposes discontinuing segregated offering of NCD, warrants

Markets regulator SEBI on Wednesday proposed discontinuing segregated offering of non-convertible debentures (NCDs) and warrants to institutional investors under the QIP mechanism.

Under the current framework, an investor can either subscribe to the combined offering of NCD instrument with warrants or to the individual securities (that is, either NCD or warrants). It depends upon the type of offering made by the issuer -- whether the issuer has offered staple or segregated product.

In the staple product, warrants are attached with NCDs, while in the segregated product, NCDs and warrants can be subscribed separately.

SEBI further suggested that stapled offering of NCDs along with warrants to institutional investors should be retained with ability to segregate the instruments after the allotment, according to the consultation paper.

Warrant portion

However, to curtail misuse of the product by way of issuing a tail warrant with NCDs, the regulator proposed that a minimum threshold should be prescribed for warrant portion.

It has been suggested that warrant portion should constitute minimum 40 per cent of the total issue size.

SEBI said there are apprehensions that the product ‘NCDs along with warrants’ may be misused where issuers try to stay away from the electronic book mechanism by issuing a tail warrant with NCDs to qualified institution buyers (QIBs).

Currently, listing of NCDs of Rs 200 crore or above in a year is possible only if such issuance is through the electronic book mechanism (EBP).

In the consultation paper, SEBI proposed “discontinuing segregated offering of NCDs along with warrants to QIBs through the QIP mechanism under the Sebi ICDR (Issue of Capital and Disclosure Requirements) Regulations“.

‘NCDs with warrants’ with segregated allotment, where an investor can subscribe either NCDs or warrants, are no longer a hybrid instrument. Thus, they deserve to be treated in terms of issuance in the respective regulations — NCDs issuance should be on EBP only in terms of ILDS (Issue and Listing of Debt Securities) norms and warrants under the ICDR Regulation.

The Securities and Exchange Board of India (Sebi) has sought comments from public till December 17 on the proposals.

The regulator also proposed that there should be guidelines on upfront payment, pricing and tenure of warrants in case of issuance of ‘naked warrants’ to institutional investors under the QIP (qualified institutional placement) mechanism.

Under the current norms, the tenure, pricing and upfront payment requirements for issuance of warrants under QIP, preferential issue and IPO, FPO and rights issue are different.

Warrants can be issued including to the QIBs through initial public offering (IPO), follow-on public offering (FPO), rights issue and preferential allotment route.

Though, in the case of IPO, FPO and rights issue, warrants can only be issued if attached with specified security; whereas in the case of preferential allotment, naked warrants can be issued including to the QIBs by the issuer company.