Is SEBI a Capricious Regulator? A Review of the Ruchi Soya FPO and the LIC IPO
[Praveen and Sakshi are students at Maharashtra National Law University, Mumbai.]
The Securities and Exchange Board of India (SEBI) is the regulatory body entrusted with promoting the Indian securities market and the protection of investor interests. In pursuance of these objectives, the SEBI must appropriately consider other related matters concerning the Indian securities market, along with the interests of non-investor participants. The power bestowed upon SEBI must be exercised with great care and caution to maintain market stability.
This post highlights two recent instances wherein the SEBI acted in an 'unprecedented' and 'uncertain' manner, raising questions concerning its procedural accountability. These actions further implied a compromise of rationale and transparency while exercising its ‘discretionary powers’ – thus possibly costing the faith instituted in it as a regulator.
The Ruchi Soya FPO Case
Ruchi Soya, a listed entity, and Patanjali Ayurved’s subsidiary came out with a Follow on Public Offer (Ruchi Soya FPO) to comply with the SEBI's regulation of minimum public shareholding of 25% for a listed entity as prescribed in Rule 19(2)(b) of the Securities Contracts (Regulation) Rules 1957. On 28 March after the trading hours, SEBI decided to allow all the investors except the anchor book participants who participated in the FPO to withdraw their bids. This was based on an unscrupulous SMS sent to prospective investors urging them to invest in the FPO. SEBI stated the contents were "misleading/fraudulent" and not in compliance with the SEBI Issue of Capital and Disclosure Requirements Regulations (ICDR Regulations). Accordingly, Patanjali’s bankers were directed to inform the investors of the withdrawal option and circulated unsolicited SMSs in view of this development. The withdrawal window was kept open for three days. Consequently, nearly 97 lakh bids were withdrawn.
SEBI would have been justified in opening a withdrawal window for three consecutive days only if it had some evidence associating the promoters with the unscrupulous messages. Although ‘protection of investors’ is one of the primary objectives of SEBI, being a regulated entity itself, it cannot act on mere suspicion. The direction implied the existence of actual fraud and manipulation in the FPO. It cast doubts in the minds of the investors, resulting in a massive withdrawal of bids. A similar move could be made to disrupt any IPO or FPO in the future.
Further, as per Regulation 179(1) of the ICDR Regulations, qualified institutional buyers are not allowed to withdraw their bids after the closure of the issue. This is to prevent any possible manipulation; however, there was non-compliance with this requirement under the SEBI framework.
Moreover, the stock exchanges were not fully equipped to smoothly carry out the withdrawal action. The FPO disclosure webpage was shut down by both the exchanges as simultaneous updates of the withdrawals could not be calculated. Thereby, the investors were kept uninformed throughout the process. Accordingly, as per the principles of natural justice, the transparency of the process was compromised. Putting together the basis of the direction, its execution, and its future implications - it may be concluded that this was not a calculated move.
The LIC IPO Case
State-owned LIC’s initial public offering (LIC IPO) was the biggest-ever public listing and was dubbed India’s Aramco moment. The interesting points in the LIC IPO were the instances wherein SEBI chose to bend its rules to streamline the initial public offer (IPO) process for LIC. Before February 2021, it was standard procedure for companies to divest at least 10% of their stock in a public offering. The Indian government went ahead to amend the Securities Contracts (Regulations) Rules 1957 (SCRR), through a notification on 19 June 2021, to change the divestment rules. After this amendment, companies with a market valuation of more than INR 1 lakh crore at the time of listing, were allowed to hold up to 5% of their shares. The government anticipated the market would not be able to absorb the entire offer, thus this adjustment was designed with LIC in mind.
Further, after 30 days from the date of allotment, anchor investors were allowed to sell only 50% of the shares allotted under the ICDR Rules . However, in the case of LIC, according to news reports, after 30 days from the date of assignment, LIC anchor investors were permitted to sell 100% of their allotted shares.
What becomes a point of concern here is not only the exemptions provided but the loss borne by the participating investors. Almost $17 billion has been wiped out since the LIC listing and in fact, it has been termed Asia’s biggest wealth destroyer. With the exemptions provided, already setting a ‘wrong precedent’, the huge losses suffered by the investors creates greater responsibilities for the SEBI, in view of the expedited and streamlined the IPO process.
These exemptions granted to LIC imply that in the future, if a company requests an exemption from specific ICDR Regulations, it can rely on the exemptions granted to LIC. In essence, following natural justice principles, every company seeking to list should now be permitted to set aside a quota of IPOs for their consumers. When there is a national or global crisis that impacts the market, relaxation of the lock-in term for anchor investors may be sought based on the same considerations.
SEBI’s Execution of Discretionary Powers: An Analysis
It may be argued that SEBI’s actions are ‘discretionary’ coming under the ambit of Sections 11 and 11B of the SEBI Act 1992 (SEBI Act). The Securities Appellate Tribunal (SAT) has often directed the SEBI on the bits of power and discretion under these provisions. For instance, in Videocon International v. SEBI, the SAT observed that the power under these sections is remedial and not punitive. Further in Manu Finlease Limited v. SEBI, the SAT defined “remedial action” as an action to correct, remove or lessen a wrong and not to impose a penalty. Notably, Pancard Clubs Limited v. SEBI, the SAT stated that the discretion bestowed upon SEBI under Section 11(1), 11(4), and 11B of the SEBI Act, could not be exercised in a disorderly manner.
During a time when the SEBI has been planning to introduce tougher pricing norms for startup IPOs, giving leeway to a state-owned company such as LIC may send out the wrong message. With India breaking into the world's top five clubs in terms of stock market capitalization, SEBI’s onus increases before taking any major regulatory steps. Such unprecedented and hasty actions may hamper the SEBI’s public perception. The exemptions and adjustments made for, what may be, LIC’s convenience may have long-term implications for the Indian capital market.
Thus, while taking any (remedial) discretionary action, the SEBI should ensure that it has a strong rationale and is guided by sound principles of natural justice and fair play in action. In the Ruchi Soya FPO and the LIC IPO, there is no doubt that the SEBI was statutorily empowered to exercise ‘discretion’ for its actions. However, the-after-effects of such actions could be that in the future, market participants could contest similar treatment from the regulator on the grounds of natural justice.
In view of the above arguments, SEBI may need to consider its overall objectives and regulatory actions in the Indian securities market. In the future, SEBI will have to take immediate discretionary actions to maintain market stability and protect all its participants. Therefore, there should be an established procedure with fixed parameters – and adherence to this procedure should be mandatory. This procedure could include, for instance, iterating the criteria guiding the decision and intended objectives for such decisions. This would ensure compliance with the principles of natural justice and transparency.