SEBI’s 2025 Rights Issue Framework: Unlocking the Potential of Rights Issues
Introduction
On March 3, 2025, the Securities and Exchange Board of India (the “SEBI”) issued the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) (Amendment) Regulations, 2025 (the “2025 Amendments”) which amended the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018, as amended (the “ICDR Regulations”), and overhauled the rights issue framework for listed companies. The 2025 Amendments streamline and simplify the process for a rights issue.
Certain parts of the 2025 Amendments have received more attention - an efficient framework allowing completion of the rights issue process within 23 working days, eliminating the need to file draft letters of offer with the SEBI for approval and eliminating the need for appointment of various intermediaries. However, another significant implication of the 2025 Amendments is the unlocking of potential of a rights issue as a viable tool for receiving investment from identified investors (other than existing shareholders) in listed companies.
Prior to the 2025 Amendments, Indian listed companies had two options to conduct a rights issue: a fast-track and non-fast track rights issue. During financial years 2022 - 2024, according to data collected by the SEBI, rights issues took an average of 317 days (non-fast track) and 126 days (fast track) to complete. During the same period, listed companies undertook 1,492 preferential allotments and 183 rights issues.
Preferential allotments have been the preferred route to bring in new or strategic investors in Indian listed companies. While a preferential allotment does not require significant disclosures in an offering document, appointment of intermediaries or prior SEBI approval (as required under the pre-2025 regime for non-fast track rights issues), a preferential allotment requires prior shareholders’ approval and the pricing for a preferential allotment is subject to a minimum floor price.
On the other hand, a rights issue does not require shareholders’ approval and is not subject to regulatory pricing conditions.
KEY FEATURES OF RIGHTS ISSUES
Under Indian law, in a rights issue, each existing shareholder of a company is provided an opportunity to subscribe to additional shares of the company, in proportion to its existing shareholding in the company. Any shareholders who do not intend to subscribe to a rights issue can renounce their entitlement in favor of another shareholder or any other person. This process is referred to as a renouncement. Additionally, after accounting for the subscription received (including through renouncement in favor of other persons), if there remains any unsubscribed capital, such capital can be allocated at the discretion of the board of directors in a manner not disadvantageous to shareholders and the company.
Therefore, any issuance of shares to a new investor through a rights issue can be implemented in two ways: (i) renouncement by existing shareholders in favor of identified investors or (ii) allocation of the residuary unsubscribed capital by the board of directors. However, as a structuring tool, option (i) is the more viable of the two given that there is no certainty regarding any residual capital remaining unsubscribed in the issue.
ALLOTMENTS TO IDENTIFIED INVESTORS
The routes for allocation to identified investors in a rights issue as discussed above are not novel. Even under the earlier framework, shareholders could renounce their shares in favor of identified investors and the board of directors could allocate the unsubscribed portion of a rights issue in a manner not disadvantageous to shareholders and the company. The 2025 Amendments have brought in transparency in this process. Together with such transparency, the following aspects of the 2025 Amendments make a rights issue an attractive route for allotment to identified investors:
1. Streamlined Process. At just 23 working days, or around 30 calendar days, a rights issue is now an efficient fund raising method from a timing perspective, as compared to the previous framework.
2. No SEBI approval: Under the earlier framework, in a non-fast track rights issue, a draft letter of offer (a disclosure document) had to be submitted to SEBI for review – this is no longer required pursuant to the 2025 Amendments.
3. Renunciation taken into account for minimum subscription: Under the ICDR Regulations, a rights issue is subject to a 90% minimum subscription requirement in order to be completed. Subject to conditions on the use of proceeds, this requirement is not applicable provided that the promoters and promoter group undertake to subscribe to their entire entitlement. Pursuant to the 2025 Amendments, the promoter and promoter group undertaking requirement can be satisfied by renunciation to identified investors.
4. Selective Allotment: The ICDR Regulations were earlier silent on the board’s power to allocate the unsubscribed portion of a rights issue to identified persons. The 2025 Amendments address this gap by explicitly allowing listed companies to allot unsubscribed portions to identified investors at the issue price, subject to prior disclosure.
CONCLUSION
Following the 2025 Amendments, the rights issue is now a credible route for investment by new investors. Compared to other capital-raising options such as follow-on public offers, qualified institutions placements, and preferential allotments, rights issues offer significant advantages for issuers and investors. Not only is the rights issue process efficient from a timing perspective, it also provides greater flexibility in terms of pricing and does not require shareholders’ approval. It will be important for Indian listed companies to evaluate how the 2025 Amendments to the rights issue framework can be put to work on their behalf.