Regulatory Insights
from India Tax & Regulatory Services
www.pwc.in
SEBI consultation paper proposing relaxation in pricing of preferential issues and exemption from open
offer for acquisition in companies having financial stress
April 23, 2020
In brief
On 22 April 2020, the Securities and Exchange Board of India (SEBI) issued a consultation paper1 to seek public comments on proposed amendments to the SEBI (Issue of Capital and Disclosures Requirement) Regulations, 2018 (ICDR) and SEBI (Substantial Acquisition of Shares and Ta keovers) Regulations, 2011 (SAST Regulations). The proposed amendments relate to relaxation in pricing of preferential issues under ICDR and exemption from making an open offer under SAST Regulations for acquisition in eligible listed companies in financial stress (listed stressed companies).
In detail
Background
• Listed stressed companies generally need fund infusions to avoid insolvency/ bankruptcy.
• However, such companies face difficulties in raising capital through
conventional means.
• Typically, listed stressed companies experience progressive fall in their share price, which may be aggravated due to
disclosures, such as their financial results and default in servicing debts.
• Such companies are often in urgent need of capital from willing financial investors, who can infuse capital through preferential issue
1 Consultation Paper-Preferential Issue in companies having stressed assets dated 22 April 2020
to help resuscitate the company.
• The ICDR prescribes guidelines for the
determination of minimum price for a preferential issue (pricing guidelines).
According to ICDR the pricing guidelines are not applicable to preferential issue made in terms of the resolution plan approved under the Insolvency and Bankruptcy Code, 2016.
• As per the pricing
guidelines, the price of the equity shares (listed on recognised stock exchange for 26 weeks or more as on the relevant date and which are considered to be frequently traded) to be allotted pursuant to the preferential issue shall not
be less than higher of the following:
- The average of the weekly high and low of the volume weighted average price (VWAP) of the related equity shares quoted on the
recognised stock exchange during the 26 weeks preceding the relevant date; or - The average of the
weekly high and low of the VWAP of the related equity shares quoted on a recognised stock exchange during the two weeks preceding the relevant date.
• It has been represented that the coverage of a large period of 26 weeks in the
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pricing period, especially given the deteriorating financial condition of the listed
companies, leads to a wide gap between the price at the beginning of the 26 weeks and the current price, when funds are required to be raised. This is more impactful in the case of listed stressed companies making it practically difficult, if not impossible, for such companies to raise funds through preferential issue.
• The ICDR allows preferential issue of specified securities to Qualified Institutional Buyers (QIBs), to a maximum of five QIBs, at “not lower than average of weekly high and low of the VWAP during the two weeks preceding the relevant date.” It is represented that in case of stressed listed
companies, such relaxation for only 5 QIBs is restrictive and excludes other financial investors who may like to participate in such a company with the above pricing
methodology.
• Investors desirous to have substantial holding or to take control to guide the company out of the stress are obligated to make an open offer to acquire at least 26% shares, pursuant to the SAST Regulations at price determined under that regulation.
• It has been represented that the open offer provisions create substantial financial obligation for an incoming investor, in addition to actual infusion in the listed stressed company and increases the cost of financial intervention to avoid insolvency. Thus, a case is made to relax the conditions of making an open offer.
Proposal
• Eligible listed stressed companies to be provided exemption from strict enforcement of pricing guidelines and in such cases, the pricing for preferential issues should not be less than the average of the weekly high and low of the related equity shares quoted on a recognised stock exchange during the two weeks preceding the relevant date.
• Exemption from the
applicability of provisions of Regulation 3(1) of the SAST Regulations to be provided to the allottees of the preferential issue by the eligible listed stressed companies.
Eligibility conditions
• A listed stressed company should be considered eligible for the proposed exemptions if it satisfies any two out of the following three conditions:
- The listed company has made disclosure of defaults on payment of interest/
repayment of principal amount on loans from banks/ financial
institutions and listed and unlisted debt securities for two consequent quarters in terms of SEBI circular dated 21 November 2019.
- Existence of inter-creditor agreement in terms of the Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions, 2019 dated 7 June 2019.
- Downgrading of credit rating of the listed instruments of the company to “D.”
• Eligible listed stressed
companies to ensure the following to avail the above- mentioned exemptions:
- The preferential issue is made to persons/ entities that are not part of the promoter or promoter group on the date of the board meeting to consider the preferential issue.
- Resolution for the preferential issue at the aforesaid pricing and exemption from open offer has been approved by the majority of minority shareholders (i.e.
shareholders excluding the promoters, the promoter group and any proposed allottee in the preferential issue that may already hold specified securities in the listed company prior to the preferential issue).
- Proposed use of the proceeds of such
preferential issue shall be disclosed in the explanatory statement sent for the purpose of shareholder resolution.
- Monitoring agency to be appointed to monitor the use of the proceeds of such a preferential issue.
- In case of preferential issue, shares issued to the investors shall be locked in for a period of three years from the latest of the dates of the trading approval granted by all the stock exchanges where the specified securities are listed.
The takeaways
The proposal, if adopted, is a welcome move by the capital market regulator for all the listed stressed companies
contemplating to raise capital
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through the preferential issue route, and for investors who seek to invest in such companies.
Public comments on the proposals in the consultation
paper are requested latest by 13 May 2020.
Let’s talk
For a deeper discussion of how
this issue might affect your business, please contact your local PwC advisor
Regulatory Insights
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