SEBI Regulations Guide for Securities Valuation and Financial Assets

The Securities and Exchange Board of India (SEBI) establishes the regulatory framework governing the issuance, trading, and delisting of securities in India. For registered valuers, understanding these regulations is critical as they dictate valuation triggers, methodologies for determining exit prices, and compliance requirements for various corporate actions.

1. SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR)

The SEBI (ICDR) Regulations, 2018, notified on 11 September 2018, superseded the 2009 version to simplify the structure and language governing capital issuance. These regulations apply to public issues, rights issues (exceeding fifty lakh rupees), preferential issues, bonus shares, qualified institutions placements, and Indian Depository Receipts.

Conditions for Preferential Issues (Chapter V)

A preferential issue involves the issuance of equity shares or convertible securities under Section 62(1)(c) of the Companies Act, 2013. It is often used by companies as a rapid method to raise equity capital. Key conditions for a listed issuer include:

Fully Paid Shares: Only fully paid-up equity shares may be allotted.
Shareholder Approval: A special resolution must be passed by the shareholders.
Dematerialisation: All equity shares held by proposed allottees must be in dematerialised form.
Listing Compliance: The issuer must comply with conditions for continuous listing specified in the listing agreement.

Exit Opportunity for Dissenting Shareholders (Schedule XX)

When a company changes its objects for which funds were raised, it must provide an exit opportunity to dissenting shareholders if less than 75% of the amount raised is utilised for the original objects.

Process for Providing Exit:

Notice: The proposal must include information regarding the exit offer.
Explanatory Statement: Promoters must provide a statement detailing the exit opportunity.
Voting Results: After the special resolution, results are submitted to the stock exchange.
Merchant Banker Appointment: Promoters must appoint a merchant banker to finalise the Exit Price.
Escrow Account: An escrow account must be created, and the aggregate consideration deposited at least two working days before the tendering period opens.
Tendering Period: This must start within seven working days of the special resolution.
Final Disclosures: Within two working days of payment, the issuer must disclose the number of shares accepted and the post-offer shareholding pattern.

2. SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT)

The 2015 PIT Regulations provide strict legal provisions to prevent trading based on Unpublished Price Sensitive Information (UPSI).

Restrictions on Communication and Trading

Communication Prohibition: No insider shall communicate or provide access to UPSI to any person unless required for legitimate purposes or legal obligations.
Procurement Prohibition: No person shall procure UPSI from an insider.
Trading Restriction: Insiders are prohibited from trading in listed (or proposed to be listed) securities while in possession of UPSI.
Trading Plans: Insiders may formulate a trading plan for approval by the compliance officer, which allows for future trading under specific public disclosures.

Key Terms and Disclosure Requirements

UPSI Categories: Examples include financial results (quarterly/annual), dividend declarations, public/rights/bonus issues, and expansion plans or new projects.
Trading Window: This window must remain closed when UPSI is present and can only open 24 hours after the information is made public.
Example: An executive buying shares based on a pending, unannounced demerger is engaging in illegal insider trading; trading is only legal once the announcement is public.

3. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (SAST)

The SAST Regulations govern the acquisition of significant stakes in listed companies to ensure transparency and fair treatment of minority shareholders.

Exemptions from SAST Procedures: Certain acquisitions are exempt from specific requirements, including:

Acquisitions pursuant to schemes under the Sick Industrial Companies Act, 1985.
Reconstructions involving amalgamation, merger, or demerger ordered by a court or competent authority.
Acquisitions under the SARFAESI Act, 2002.
Acquisitions via transmission, succession, or inheritance.
Acquisitions under SEBI Delisting Regulations.

4. SEBI (Delisting of Equity Shares) Regulations, 2009

Delisting refers to the permanent removal of a company’s securities from a stock exchange. Common reasons include gaining complete control, reducing compliance costs, or corporate restructuring.

Types of Delisting

Type	Description	Exit Requirement
Compulsory	Punitive measure by SEBI for non-compliance with LODR, investor complaints, or malpractices.	Directors/Promoters restricted from market access for 10 years.
Voluntary (All Exchanges)	Removal from all recognized exchanges.	Exit Opportunity required for shareholders.
Voluntary (Some Exchanges)	Remains listed on at least one exchange with nationwide terminals.	No Exit Opportunity required; requires board resolution and public notice.

Special Provisions for Small Companies

A "Small Company" for delisting purposes is defined by:

Paid-up capital not exceeding Rs. 10 Crore.
Net worth not exceeding Rs. 25 Crore.
Less than 10% of shares traded in the last 12 months.
No suspension for non-compliance in the last year.
Simplified Process: Requires only Board approval and a special resolution via postal ballot.

5. SEBI (Share-Based Employee Benefits) Regulation, 2014

These regulations provide guidelines for various employee benefit schemes involving company shares.

Types of Schemes

Employee Stock Option Schemes (ESOS): Options granted to employees to purchase shares at a future date at a pre-determined price.
Employee Stock Purchase Schemes (ESPS): Shares offered to employees as part of a public issue or otherwise.
Stock Appreciation Rights (SAR) Schemes: Rights entitling employees to receive the appreciation in share value, settled in cash or shares.
General Employee Benefits Schemes (GEBS) & Retirement Benefit Schemes (RBS): Schemes dealing in shares for broader employee welfare or retirement.

Implementation and Trust Requirements

Trust Requirement: If a scheme involves secondary market acquisitions, it must be implemented through a trust.
Share Limits: The total number of shares under all schemes in aggregate must not exceed 5% of the paid-up capital.
Lock-in Period: Shares acquired through secondary acquisition by the trust must be held for a minimum of six months.

Key Takeaways for Valuers

Exit Price Determination: Valuers must follow SEBI-specified mechanisms for dissenting shareholders and voluntary delisting.
Pricing Guidelines: For preferential allotments or transfers to non-residents, pricing must adhere to SEBI formulas or internationally accepted methodologies certified by a merchant banker or CA.
Compliance Triggers: Corporate actions like changing "objects of issue" or delisting necessitate formal valuation to protect minority interests.

Important Terms

Exit Price: The price payable to dissenting shareholders or those tendering shares in a delisting offer.
UPSI: Information not generally available which, upon becoming public, is likely to materially affect the price of securities.
Preferential Issue: A rapid capital-raising method involving the issuance of shares to a select group of persons.
Small Company (Delisting): A company meeting specific low capital and trading volume thresholds, allowing for a simplified delisting process.

Chapter 9: SEBI Regulations Guide for Securities Valuation and Financial Assets