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SEBI (Issue of Capital and Disclosure Requirement) Regulations, 2009 (SEBI ICDR Regulations)

SEBI ICDR Regulations deal with issue of specified securities through initial public offering by a new issuer or through a further offering by a listed issuer. SEBI ICDR Regulations contain various chapters dealing inter alia with the following :-

Public Issue
Rights Issue
Preferential Issue
Qualified Institution Placement (QIP)
Bonus Issue
Issues by SMEs
IDR Issues
General Obligation of Issuer and Merchant Banker in Public Issue/ Right Issue

However, the following issues have been left out of the purview of ICDR, which are regulated by other regulations as mentioned : -

Public Issue of Debt Securities (Regulated by SEBI (Issue and Listing of Debt Securities) Regulations 2008)
Issue of ADR/ GDR (Regulated by Government's Issue of FCCBs and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993)
Issue of FCCBs (Regulated by Government's Issue of FCCBs and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993)
Issue of Shares pursuant to ESOPs (Regulated by SEBI (Employees Stock Option Plan and Employees Stock Purchase Scheme) Guidelines, 1999)
SEBI ICDR Regulations as Applicable to SMEs

With a view to facilitate the necessary provisions needed for SME Exchange, amendments have been made to the SEBI ICDR Regulations and a separate Chapter X-A has also been inserted therein. The regulations emphasized on the following:

Salient features:

Reduced paid up Capital threshold : An issuer company whose post-issue paid-up capital is not more than INR 10 Crore shall be eligible to list its securities on the SME exchange. Those issuer companies, whose post-issue paid-up capital lies between INR 10 Crore and up to INR 25 Crore, have the option to list their securities either under the provisions of this Chapter XB, i.e. on SME Exchange or on Main Board by complying with the relevant terms and conditions prescribed under the SEBI ICDR Regulations. As per the provisions of the SEBI ICDR Regulations, a minimum paid up capital of INR 10 Crore is required for listing of securities on any Main Board of BSE / NSE.

Filing of the offer document : The offer document is required to be submitted to the merchant banker who, in turn, will file it with SEBI along with the new Form H. A prospectus in relation to the issue shall also be filed with the SME Exchange and the jurisdictional Registrar of Companies. It has been specifically mentioned that SEBI will not scrutinize the offer document of an SME IPO.

Underwriting : Underwriters to the issue under Chapter XA shall ensure that the issue is 100% underwritten and that a disclosure to that effect is made to SEBI, a day prior to the opening of the issue. A minimum of 15% of the issue size is mandated to be underwritten by the merchant bankers. Certain Nominated Investors may be permitted to enter into contractual arrangements with the merchant bankers to share the burden of devolvement of underwriting obligations; however such contractual arrangements shall be subject to the prior approval of the SME Exchange. In case the underwriters or the Nominated Investors fail to achieve the minimum subscription, the merchant banker shall be required to fulfill its underwriting obligations.

Minimum Application Size and Number of Investors : Minimum application size in an SME IPO is fixed at INR 100,000 per application as opposed to the minimum application value ranging from INR 10,000 to INR 15,000 per application under Main Board IPO. Further, the minimum number of allotees in an SME IPO should be at least 50.

Migration to SME Exchange : A listed issuer whose post-issue paid-up capital is less than INR 25 Crore has an option to migrate to the SME Exchange, subject to the approval of its shareholders and compliance with the eligibility criteria laid down by the SME Exchange.

Migration from SME Exchange : Companies listed on the SME Exchange shall compulsorily migrate to the Main Board of the Stock Exchanges if their post-issue share capital is in excess of INR 25 Crore. Upon the performance of any rights issue/ preferential issue/ bonus issue which results in triggering of the above limit, then such company would have to compulsorily migrate to the Main Board. Such companies shall, therefore, be required to comply with the provisions of the Listing Agreement of the Main Board and all regulatory requirements including compliance with SEBI ICDR Regulations for the purposes of the same.

Market-making : The merchant banker to the issue shall bear the responsibility of compulsory market making for a minimum period of 3 years. The securities being bought and sold as part of the market making shall ultimately get transferred to the Nominated Investor. During the compulsory market-making period, the market makers are restricted from buying any securities from the promoters/ promoter group of the issuer or any other acquirer. The promoters may, therefore, be allowed to dilute their shareholding either through offer for sale or to an acquirer. However, the promoters' shareholding which is not locked-in may be traded with the prior permission of the SME Exchange. In case, the value of the shareholding of the Nominated Investors falls below INR 1 lakh, for any reason whatsoever, the market maker is obligated to buy the entire shareholding of such investor in a single lot. Acquisitions of shares by the merchant bankers / market makers are exempted from the SEBI Takeover Code, provided that such merchant bankers/ market makers do not have the intention of taking over the management and there is no resultant change in control (direct or indirect) of the issuer company.

Market Makers Obligation

SEBI has compulsorily mandated market making for all scripts listed and traded on the SME exchange. The obligations of market makers are as follows:

The merchant bankers to the issue will undertake market making through a stock broker who is registered as market maker with the SME exchange.
The merchant bankers shall be responsible for market making for a minimum period of 3 years.
The market makers are required to provide two way quotes for 75% of the time in a day. The same shall be monitored by the exchange.
There will not be more than 5 market makers for scrip.
Market makers will compete with other market makers for better price discovery.
The exchange shall prescribe the minimum spread between the bid and ask price.
Market Maker shall be allowed to deregister by giving one month notice to the exchange.
Trading system may be either quote driven or hybrid.
Market Maker SEBI Guideline SEBI ICDR Amendmends for SME Exchange
Standardized lot size for SME Exchange SEBI ICDR Updated October 2012
SEBI Circular Inventory management for MM SEBI setting up sme platform
SEBI Circular Amendments to the Equity, IDR and SME Equity Listing     Agreements SEBI framework for sme platform
SME Listing Agreement

SEBI in order to encourage promotion of dedicated exchanges and/or dedicated platforms of the exchange for listing and trading of securities issued by Small and Medium Enterprises ("SME"), and in order to facilitate listing of specified securities in the SME Exchange, has facilitated a separate Model Listing Agreement" to be executed between the issuer and the stock exchange.

SME listing agreement is similar to the Main Board equity listing agreement. However, certain relaxations are provided to the issuers whose securities are listed on SME Exchange in comparison to the listing requirements in Main Board, which inter-alia include the following:

Companies listed on the SME Exchange may send their shareholders, a statement containing the salient features of all the documents (in abridged form), as prescribed in proviso to section 219(b)(iv) of the Companies Act, 1956 instead of sending a full annual report.

Periodical financial results may be submitted on "half yearly basis", instead of "quarterly basis" under Clause 41 and
SMEs need not publish their financial results in newspapers, as required in the Main Board equity listing agreement.
Model SME Listing Agreement