INSITE - India - June 2024

MODIFICATION IN FRAMEWORK FOR OFFER FOR SALE (OFS) OF SHARES TO EMPLOYEES THROUGH STOCK EXCHANGE MECHANISM

Summary: The Securities and Exchange Board of India (SEBI) issued an important circular, SEBI/HO/MRD/MRD-PoD-3/P/CIR/2024/82, on June 14, 2024. This circular changes the rules for offering shares to employees through the stock exchange.

In Detail: SEBI’s circular updates previous guidelines from Master Circular No. SEBI/HO/MRD2/PoD-2/CIR/P/2023/171 and Circular No. SEBI/HO/MRD/MRD-PoD-3/P/CIR/2024/6. The main change is about the bidding process for employees in Offer for Sale (OFS). Employees used to bid on T+1 day using the previous day's cut-off price. Now, they will bid on T day itself using that day's cut-off price.

This update aims to make the process smoother and more aligned with market practices. It also seeks to improve transparency and fairness in share allocation. The circular keeps other rules the same and must be implemented within 30 days. SEBI directs all market infrastructure institutions, like stock exchanges and clearing corporations, to update their rules and ensure compliance. Market participants should review these changes on SEBI’s official website.

Conclusion: This recent circular enhances the OFS process by allowing employees to bid on the same day at the current cut-off price, improving transparency and fairness. This change aims to better align the process with market practices and investor interests.

Key Links: SEBI | Modification in Framework for Offer for Sale (OFS) of Shares to Employees through Stock Exchange Mechanism 

INTRODUCTION OF A SPECIAL CALL AUCTION MECHANISM FOR PRICE DISCOVERY OF SCRIPS OF LISTED INVESTMENT COMPANIES (ICS) AND LISTED INVESTMENT HOLDING COMPANIES (IHCS)

Summary: On June 20, 2024, the Securities and Exchange Board of India (SEBI) introduced a special call auction mechanism without price bands to determine the prices of listed Investment Companies (ICs) and Investment Holding Companies (IHCs).

The first auction will take place in October, using the latest audited financial statements of these companies. Future auctions will be held annually based on their audited financial statements. This mechanism will occur once a year.

In Detail: SEBI announced a special call auction mechanism for determining the prices of listed ICs and IHCs. These companies' shares are traded infrequently and often at prices much lower than their book value. Since these companies usually have no daily operations and hold various investments, this price difference affects liquidity, fair price discovery, and investor interest.

To address this issue, after discussions with stakeholders, public comments, and recommendations from SEBI's secondary market advisory committee, SEBI decided to implement a "special call auction with no price bands" framework for better price discovery of these companies' shares.

Criteria for identifying ICs or IHCs for special call auctions:

• ICs and IHCs shall be Identified based on stock exchanges' uniform industry classifications.

• The ICs and IHCs should have been listed and available for trading for at least 1 year without suspension.

• At least 50% of total assets should have been invested in shares of other listed companies.

• The 6-month average trading price (VWAP) should have been less than 50% of the book value per share based on current investments. If not traded in the last 6 months, the VWAP should be considered as zero.

Conclusion: This mechanism, designed for better price discovery, targets companies whose shares are infrequently traded and priced below their book value. The criteria for identifying eligible ICs and IHCs include being listed for at least a year, having significant investments in other listed companies, and meeting specific valuation metrics. This initiative aims to enhance liquidity, ensure fair pricing, and protect investor interests.

Key Links: SEBI | Introduction of a special call auction mechanism for price discovery of scrips of listed Investment Companies (ICs) and listed Investment Holding Companies (IHCs)