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New Norms For Listing Pref Shares

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With an aim to bring in more transparency in raising of funds through non-convertible preference shares, market regulator Sebi announced a new set of regulations to govern issuance and listing of such securities on 8 March, 2013.

The Securities and Exchange Board of India (Sebi) has introduced regulations overseeing the public sale of preference shares and will allow hybrid securities, which debt and equity components, to be listed on exchanges.

Sebi said non-convertible redeemable preference shares sold by Indian issuers must have a minimum rating of "AA-minus" and a tenure of at least three years, according to its statement late on Friday, 8 March.

Although Indian companies have previously issued preference shares, Sebi had not unveiled specific regulations covering the sale of these securities, which provide dividends and priority over stock investors in recouping investments in cases of defaults, but do not confer voting rights.

Private placements of preference shares will also be allowed to be listed in exchanges, Sebi said, a move that is intended to create a market for the trading of these securities.

Domestic banks will also be allowed to count some preference shares and perpetual debt instruments as part of their Tier I capital, after SEBI adopted the Basel III recommendations on the subject as part of the measures announced on Friday.

Sebi additionally simplified the registration process for stock brokers, allowing them to obtain a single certificate from an exchange to trade across all equity instruments.

Previously brokers had to register separately for each category of equity products, such as derivatives.

To safeguard the interest of small investors from such high-risk securities, Sebi also said that the listing of privately placed non-convertible redeemable preference shares would require a minimum application size of Rs 10 lakh for each investor.

Besides, the public issuance of such shares would require a minimum three-year tenure for the instruments and a minimum rating of 'AA-' or equivalent investment grade, the market regulator Sebi said in a statement after its board meeting in Mumbai.

There have been many instances of public investors being taken for a ride through sale of such shares, as there have been ambiguity about regulations governing them.

At the same time, a defined framework for issuance and listing of such shares would also make it easier for banks and infrastructure companies to garner funds through this route.

Preference share is an equity security with properties of both an equity and a debt instrument. It usually carries no voting rights, but may carry a dividend.

Sebi said that its board has approved the SEBI (Issue and Listing of non-convertible redeemable preference shares) Regulations, 2013 to provide a comprehensive regulatory framework for issuance and listing of non-convertible redeemable preference shares.

Sebi said that the new regulations would be applicable to issuances by banks of non-equity instruments such as Perpetual Non-Cumulative Preference Shares and Innovative Perpetual Debt Instruments, which are in compliance with the specified criteria for inclusion in Additional Tier I Capital.

Such instruments can be issued by banks to meet Basel III norms.

Indian companies have raised over Rs 25,000 crore through preference share issuance in the last three years.

(Agencies)