In a significant regulatory update, the Securities and Exchange Board of India (SEBI) has announced the abolition of the 1% security deposit requirement for issuer companies launching public issues of equity shares on November 21, 2024, this decision is part of SEBI’s continued efforts to streamline market processes, reduce unnecessary compliance burdens, and enhance the ease of doing business in the capital markets.

Overview of the Change

Previously, under Regulation 38(1) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations), companies were mandated to deposit 1% of the total issue size with the designated stock exchange before launching public offerings. This deposit served as a safeguard for addressing investor complaints post-issue. However, in light of recent amendments to the ICDR Regulations, SEBI has recognized the redundancy of this requirement, given the evolving regulatory framework.

Key Changes Introduced by SEBI

1. Abolition of the 1% Deposit Requirement

With immediate effect, companies no longer need to deposit 1% of the total issue size with the stock exchanges. The deposit, previously intended to facilitate the smooth processing and release of the issue amount, has now been dispensed with to reduce operational burdens on issuer companies and enhance the capital-raising process.

2. Withdrawal of the Master Circular (SEBI/HO/OIAE/IGRD/P/CIR/2022/0151)

As a result of the amendment to the ICDR Regulations, SEBI has withdrawn its Master Circular issued on November 7, 2022, which outlined the process for issuing No Objection Certificates (NOCs) for the release of the 1% security deposit. The withdrawal of this circular eliminates one of the procedural hurdles companies previously faced in their capital raising activities.

3. Procedure for Existing Deposits

For companies that had already deposited the 1% security amount before the changes, SEBI has instructed the stock exchanges to develop a joint Standard Operating Procedure (SoP) for the release of these existing deposits. This ensures that such companies can recover their security deposits in an efficient manner.

4. Immediate Effect

The changes outlined by SEBI are effective immediately, marking an important step in simplifying the regulatory framework and facilitating smoother business operations for issuer companies.

Implications for Stock Exchanges

SEBI has directed stock exchanges to:

• Notify Listed Companies: Stock exchanges must inform all listed companies about the withdrawal of the 1% deposit requirement and ensure they are aware of the changes to adjust their processes accordingly.
• Amend Bye-Laws and Regulations: Exchanges are also required to update their existing bye-laws, rules, and regulations, as necessary, to implement these changes effectively.

SEBI’s Objective: Investor Protection and Market Development

The abolition of the 1% deposit requirement is in line with SEBI’s mandate to protect the interests of investors and promote the growth and regulation of the securities market. By simplifying the compliance process for issuer companies, SEBI aims to foster an environment where businesses can raise capital more efficiently, without the burden of redundant procedural steps.

Conclusion

The withdrawal of the Master Circular and the removal of the 1% security deposit requirement represents a positive shift toward reducing regulatory burdens on issuer companies. With immediate effect, this change is expected to enhance the ease of doing business in India’s capital markets and encourage greater participation in public offerings. This move is part of SEBI’s ongoing efforts to modernize and streamline market regulations, ensuring a more efficient and investor-friendly ecosystem.

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