The Securities and Exchange Board of India (Sebi) on Thursday relaxed rules on pricing shares in preferential allotments, in a relief for companies struggling to raise funds amid the coronavirus upheaval. Separately, the market regulator also amended the takeover code, a move that helps investors get a higher price when an open offer is delayed.
Mint had first reported on 22 June that Sebi will amend the preferential allotment norms.
Currently, under Sebi’s Issue of Capital and Disclosure Requirement (ICDR) rules, a firm that seeks to sell preferential shares has to consider two share price figures—the average of weekly high and low for 26 weeks, and the average of weekly high and low for two weeks preceding the share issue. The preferential share price has to be at least the higher of these two figures.
Sebi has now added a new option to consider the previous 12 weeks’ average price and two weeks’ average price, whichever is higher. This relaxation is applicable till the end of the year and the buyer cannot sell these shares for three years.
The 12-week duration covers almost the entire lockdown period, a period when stock prices were extremely volatile, rendering compliance with the 26-week pricing rule impossible.
“These conditional relaxations are helpful for companies as they are in urgent need for funds and preferential issue is the easiest and quickest way to raise cash at this moment. Any other fundraising options such as public offers would require a longer period of preparation and related compliances,” said Sheshashayee S. Nandagudi, head capital markets, Fox Mandal, a law firm.
Yash Ashar, partner and head of capital markets at Cyril Amarchand Mangaldas, said the change is primarily intended to benefit company promoters as otherwise, they would have had to pay a much higher price. “Very interestingly, and arguably fairly, Sebi has imposed this additional lock-in on such subscribers under this formula. This will balance short to medium term requirements for companies and ensure there is no abuse by investors. Thus, in addition to a rights issue to maintain shareholding, promoters also will have this additional option,” he added.
The change is based on a recommendation of Sebi’s primary market advisory committee and representations from stakeholders for a temporary relaxation of fund-raising norms. These are in addition to the relaxation in preferential share sales for distressed firms, announced on 23 June. The regulator has exempted acquirers from making an open offer if they are investing in a distressed firm. These firms have to consider the share price of only the two weeks preceding the preferential allotment.
The Sebi board also tweaked the Substantial Acquisition of Shares and Takeovers (SAST) or takeover code. A 10% interest will be added to the open offer price if the offer is delayed due to acts of omission or commission of the acquirer. This is based on a 3 February discussion paper, which suggested a 10% interest levy if open offer is delayed due to disputes relating to valuation, related parties, investor complaints and delay in payments by the acquirer, among others. Currently, some acquirers compensate shareholders for delays, though it is not mandatory.
Sebi also proposed to allow the completion of open offer purchases through stock exchange settlement for all types of transactions, including bulk deals and block deals, by which the acquirer will be able to directly acquire significant stake in the target company through stock exchanges instead of negotiating through the off-market route.
Sebi tweaked these norms as there is still lack of clarity on whether the completion of acquisition through stock exchange settlement process is permitted for bulk and block deals.
In case of indirect acquisitions, 100% of the open offer amount must be deposited in an escrow account, two days before the announcement.
In the wake of increasing number of insider trading cases, the regulator increased the onus on firms to maintain a digital database of price-sensitive information and who has access to it, and who has shared the details to make it easier to trace leakage of price-sensitive information.
