The Securities and Exchange Board of India (Sebi) suggested a number of steps to encourage rights issues as a preferred method of fundraising. These included eliminating the need to file a draft document and designating a merchant banker to expedite the process.

Additionally, the regulator has recommended eliminating the three categories of rights issues: less than Rs 50 crore, fast-track, and non-fast track. Instead, a more straightforward letter of offer with fewer disclosures on the issue's purpose, price, record date, and entitlement ratio should be used.

It follows that purchasing stock in a firm through a rights issue is similar to buying stock on the secondary market. Therefore, except for a few issue-related details, it appears that there is no need to aggregate material currently in the public domain when it comes to rights issues, according to a consultation document released by Sebi and open until September 10 for public feedback.

An invitation to buy more shares of a firm from its current shareholders is known as a rights issue.

Additionally, Sebi has suggested halving the process timescales, from T+20 (the date of board approval to issue closure) to T+3 (the date of issue closure to rights issue trading). Additionally, it proposed giving the promoters and promoter group the option to forfeit their interests in the rights issue in favor of certain investors who would get upfront disclosures.

"Sebi has added clarity on renunciation by the promoter and promoter group as well as permitting institutions to backstop the issue," stated Yash Ashar, senior partner at Cyril Amarchand Mangaldas. This would make rights issues the quickest and most popular way to raise funds in India and is consistent with international best practices."

The study also suggested that, with upfront disclosures, any unsold shares of a rights offering may be distributed to certain investors.

"Permitting allocation to specific investors might provide supplementary advantages including mitigating the risk of issue failure, decreasing the necessity for underwriting, and assisting the issuer in optimizing the pricing of the rights offer," according to the Sebi document.

The regulator has also suggested giving the issuer or stock exchanges the authority to act as intermediaries, such as merchant bankers and registrars, so businesses may move forward with a rights issue without having to designate such intermediaries.

Sebi further suggested that, within six months of the recommendations' implementation, stock exchanges and depositories create a mechanism for the real-time vetting of applications included in the document.

Kunal Sharma, a partner at Singhania & Co., noted that the proposals made by the markets regulator could put issuer convenience ahead of investor protection. He stated, "With regard to rationalizing disclosures, decreasing intermediary intervention, and permitting more elasticity in allotments, Sebi seems to be oriented in favor of the issuers." 

Sharma went on to say that the drive for expediency and shorter timescales can raise disclosure risks and reduce investor protections.

These suggestions are the result of research conducted by Sebi which revealed that in FY24, rights issues raised a total of Rs 15,110 crore, a much smaller amount than the Rs 68,972 crore raised through QIP and the Rs 45,155 crore raised through preferential allotments.