Underwriting under SEBI ICDR Regulations

Surge in Investment by Retail Investors and the Concept of Underwriting

In recent years, India has witnessed an extraordinary surge in retail participation in the capital markets, and IPOs are riding the wave of this transformation. From FY20 to FY24, the number of demat accounts in India has skyrocketed from around 4 crore to a staggering 15 crore and the numbers continue to rise. This remarkable growth in investor participation is reshaping the landscape of public offerings and capital raising in the country. As India’s capital markets evolve, so too must the frameworks that support them. One such change is the overhaul of the underwriting landscape under the SEBI (Securities and Exchange Board of India) regulations.

In 2023, SEBI introduced significant amendments to the Issue of Capital and Disclosure Requirements (ICDR) regulations that are set to redefine underwriting practices in the Indian capital markets. These regulatory updates clarify the underwriting process, strengthen investor protection, and ultimately foster a more resilient capital market environment.

Let's explore what these changes mean for issuers, investors, and underwriters.

Understanding Underwriting in ICDR: A Critical Pillar of Public Offerings

Underwriting is one of the foundational mechanisms that enables Issuers to raise capital in public offerings. It provides a safety net, ensuring that the offering proceeds even in volatile market conditions. The recent amendments introduce two distinct types of underwriting, and it’s the discretion of the Issuer to determine the type of underwriting agreement he wants to enter into:

1. Underwriting Covering Demand Shortfall This type guarantees that underwriters will subscribe to any unsold portion of the offering, ensuring that the Issuer meets its capital raising goals despite market fluctuations.
2. Underwriting Covering Risk of Technical Rejections This underwriting type addresses potential technical rejections that could occur after the book-building process but before the final prospectus is filed. It safeguards the process against unforeseen technical complications.

Key Pointers to the ICDR Regulations:

The amended ICDR regulations bring about several key pointers that have far-reaching implications for all stakeholders in the public offering ecosystem:

• Mandatory Underwriting Agreements Requirement for Issuers, if they desire to have the issue underwritten to cover under-subscription, to enter into underwriting agreements with registered Lead Managers and Syndicate Members prior to filing their Red Herring Prospectus (RHP). These agreements must specify the maximum number of specified securities the underwriters will commit to subscribing, either by themselves or by procuring subscriptions, at a price that is no less than the issue price and the same obligations shall be fulfilled by the Lead Manager if the Syndicate Member fails to do so.
• Enhanced Disclosure Requirements Transparency is paramount, and this regulatory update places emphasis on it. Issuers must now disclose the existence of underwriting agreements in the RHP, offering investors valuable insight into how the offering is being supported. This move aims to increase investor confidence by providing a clearer picture of the capital raising process.
• Increased Obligations upon Underwriters In the event of an undersubscribed issue that is underwritten, the lead manager(s) are now required to furnish information to SEBI regarding any underwriters who have failed to meet their underwriting commitments. This must be done in a specified format and ensures that underwriters are held accountable for their obligations. By enforcing this transparency, SEBI aims to safeguard the integrity of the underwriting process and ensure that Issuers are supported in case of an unsatisfactory subscription outcome.

Implications for Stakeholders: What Does This Mean for Issuers, Investors, and Underwriters?

These regulatory amendments have profound implications for Issuers, investors, and underwriters alike. Let’s take a closer look at how each stakeholder group stands to benefit:

• For Issuers: The requirement for underwriting agreements provides Issuers with greater certainty and confidence when launching a public offering. By securing underwriting commitments in advance, Issuers can mitigate the risk of an under-subscribed offering, thereby ensuring that their capital raising goals are met. This, in turn, reduces the pressure to rely solely on market conditions, making the process smoother and more predictable.
• For Investors: Greater transparency is a win for investors. The mandatory disclosure of underwriting agreements in the RHP ensures that investors are better informed about how their investments are supported. The introduction of “hard underwriting,” which guarantees subscription for any shortfall, acts as a safety net, giving investors increased confidence to participate in IPOs even during periods of market volatility.

Conclusion: A New Chapter for India’s Capital Markets

The ICDR regulations mark a pivotal moment in the evolution of India’s capital markets. By introducing clearer guidelines, enhancing transparency, and increasing flexibility for all parties involved, SEBI has laid the groundwork for a more resilient and robust public offering ecosystem. These changes are expected to drive greater participation from both Issuers and investors, making capital raising smoother and more predictable for companies while enhancing investor confidence in the IPO process.

This new phase in India’s capital markets signals a promising future, with significant potential for growth and innovation ahead—and being a part of this transformative era is truly exciting.