SEBI Removes Mandatory Security Deposit for Public Issues

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SEBI Removes Mandatory Security Deposit for Public Issues

SEBI has removed the 1% mandatory security deposit requirement with exchanges before a public issue to ease the process for issuer companies.

November 23rd, 2024 News

In a significant step towards easing the public issue process for issuer companies, the Securities and Exchange Board of India (SEBI) has abolished the 1% mandatory security deposit requirement. This move, announced on November 21, aims to make the capital-raising process smoother and more efficient.

Overview of the Changes

Previously, companies planning to launch public or rights issues were required to deposit an amount equal to 1% of the issue size with stock exchanges. This deposit served as a safeguard to address potential investor grievances. After the completion of the public issue, the amount was refunded to the issuing company.

The regulator’s decision follows a consultation paper published in February 2024, where SEBI proposed the removal of this requirement.

Rationale Behind the Decision

The 1% security deposit rule was initially introduced to ensure issuers promptly addressed investor concerns, including:

Refunding application money in cases of oversubscription.
Allotting securities to eligible investors.
Dispatching physical certificates of securities.

However, with advancements in technology and regulatory reforms, these risks have significantly reduced. Key measures include:

ASBA (Application Supported by Blocked Amount): Ensures funds remain in the applicant’s account until allotment.
UPI Payment Integration: Simplifies and secures payment processes for IPOs.
Mandatory Dematerialized Allotment: Eliminates issues related to physical certificates.

These developments have addressed concerns that previously necessitated the 1% security deposit.

Impact on Issuer Companies

Ease of Operations: Removing this financial burden will reduce upfront costs for companies raising funds.
Encouraging New Entrants: Smaller companies and startups planning IPOs will benefit significantly.
Streamlined Processes: With investor protection measures already in place, the public issue process becomes more efficient.

SEBI’s Proactive Approach

This reform underscores SEBI's commitment to adapting regulatory frameworks to evolving market dynamics. By removing redundant processes, the regulator fosters a more conducive environment for businesses while maintaining investor trust.

Conclusion

The removal of the 1% mandatory security deposit is a welcome change, reflecting SEBI’s responsiveness to industry needs and technological advancements. This move is expected to boost participation in the capital markets, particularly from smaller and mid-sized companies, driving overall growth in the economy.

Disclaimer: This blog is for educational purposes only. The securities mentioned are examples and not recommendations. It is based on secondary sources and may be subject to changes. Please consult a financial expert before making any investment decisions.