SEBI Proposes Easing Offer-for-Sale Rules, Extending Exemption on One-Year Holding Period

The Securities and Exchange Board of India (SEBI) has proposed amendments to ease the norms governing the Offer for Sale (OFS) mechanism. The OFS process allows promoters to sell their holdings in a company through a public issue, facilitating better liquidity and broadening investor participation in the stock market.

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Current OFS Norms and Their Limitations

Under existing regulations, promoters are required to hold their shares for at least one year before they can be sold through an OFS. However, an exception exists for shares obtained through schemes approved by a judicial or governmental authority, such as a High Court, a tribunal, or the Central Government. This exemption was introduced to provide flexibility in corporate restructuring and ensure that businesses undergoing mergers, demergers, or other restructuring processes are not unduly restricted.

Despite this exemption, there has been some uncertainty regarding its applicability to equity shares received through the conversion of fully paid-up compulsorily convertible securities that were initially acquired under such approved schemes. SEBI has now proposed an amendment to explicitly extend this exemption to these converted shares, ensuring consistency with the Minimum Promoters’ Contribution (MPC) norms.

Key Regulatory Provisions

Holding Period Requirements Under ICDR Regulations

As per Regulation 8 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations):

• Only fully paid-up equity shares that have been held for at least one year before the filing of the draft offer document can be offered for sale to the public.
• In cases where shares are received upon conversion of fully paid-up compulsorily convertible securities, including depository receipts, the holding period of both the original securities and the resulting equity shares is considered for meeting the one-year requirement.
   

Existing Exemptions to the Holding Period Rule

An exemption from the one-year holding requirement is granted if:

• The equity shares offered for sale were acquired through a scheme sanctioned by a High Court, a tribunal, or the Central Government under Sections 230-234 of the Companies Act, 2013.
• The acquired equity shares replaced business assets or invested capital that had existed for over a year before the scheme’s approval.
   

SEBI’s Proposal for Amendments

To provide greater clarity and remove any ambiguity, SEBI has proposed modifying the proviso under Regulation 8. The revised regulation would explicitly state that equity shares obtained through the conversion of fully paid-up compulsorily convertible securities—provided they were initially acquired under an approved scheme—will also be exempt from the one-year holding requirement.

This proposed change aims to align the OFS framework with the principles governing the MPC norms, ensuring consistency in regulatory treatment. The move is expected to streamline compliance requirements for companies undergoing restructuring and promote ease of doing business in India’s capital markets.

Implications of the Proposed Amendment

Greater Clarity and Regulatory Consistency: By explicitly covering converted equity shares under the exemption, SEBI aims to eliminate any ambiguity in the interpretation of the rules, reducing legal and procedural uncertainties for promoters and investors.

Enhanced Market Liquidity: The relaxation of holding period norms would allow promoters to offload their stakes more efficiently, increasing the availability of shares in the market. This, in turn, could lead to better price discovery and higher participation from institutional and retail investors.

Encouragement for Corporate Restructuring: Companies undergoing mergers, demergers, or other corporate restructuring activities will benefit from the relaxed norms, as they will have greater flexibility in managing their shareholding structure without being bound by a rigid one-year holding requirement.

Alignment with Global Best Practices: SEBI’s move aligns India’s regulatory framework with international standards, where similar exemptions exist to facilitate business restructuring while maintaining market integrity.

Conclusion

SEBI’s proposal to relax the OFS norms marks a significant step toward enhancing regulatory flexibility and improving capital market efficiency. By extending the exemption to equity shares obtained through the conversion of compulsorily convertible securities, SEBI aims to provide a level playing field for companies engaged in restructuring. This move is expected to enhance investor confidence, promote ease of business, and contribute to the overall development of India’s securities market.

The consultation paper is currently open for public feedback, and SEBI will likely incorporate industry suggestions before finalizing the amendments. If approved, the revised regulations will simplify the OFS process, benefiting promoters, investors, and the broader financial ecosystem.