The Securities and Exchange Board of India (SEBI) has relaxed the pricing norms for preferential issuances by Indian listed companies having stressed assets and also exempted such issuances from open offer obligations.

SEBI had issued a consultation paper in April 2020 in this regard, and recently, on June 22, 2020, notified the amendments to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 and SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

1.     Relaxation in Pricing and Exemption from Open Offer

The minimum price for a preferential issuance undertaken by a listed company having ‘stressed assets’ is now the average of weekly high and low for the two weeks preceding the relevant date,[1] instead of being the higher of: (i) the average for two weeks; or (ii) the average of twenty-six weeks preceding the relevant date (as per the regulations prior to this amendment). This mechanism is similar to the prevailing pricing norms applicable to preferential issuances to qualified institutional buyers.

Any acquisition of shares or voting rights pursuant to such a preferential issuance by stressed companies will be exempted from making an open offer under both of the following situations (subject to prescribed eligibility conditions, as summarized in Paragraph 3 below):

•     Regulation 3(1) of the SEBI Takeover Regulations, which provides for a mandatory open offer to public shareholders in case of acquisition of 25% or more of the voting rights in the listed company; and

•     Regulation 4 of the SEBI Takeover Regulations, which provides for a mandatory open offer to public shareholders in case of acquisition of direct/indirect control over the listed company.

2.     What are Stressed Assets

The exemptions under the amendments can only be availed by listed companies that satisfy any two out of the following three conditions:

•     The company has disclosed defaults on payment of interest/ repayment of principal amount on debt securities or loans from banks, financial institutions, non-deposit taking non-banking financial companies, and such default is continuing for at least 90 calendar days;

•      Existence of inter-creditor agreement in terms of Reserve Bank of India’s directions; and

•      The downgrading of credit rating to “D” for the financial instruments (listed or unlisted), credit instruments / borrowings (listed or unlisted) of the listed company.

3.     Eligibility Conditions

•     Eligible Allottees: Preferential issue can only be made to persons/entities which are not forming part of the promoter and promoter group. Further, certain other persons including an undischarged insolvent, wilful defaulter, fugitive economic offender, any person disqualified to act as director, prohibited by SEBI from trading in securities or accessing the securities market, will also be ineligible;

•      Lock-in: Equity shares allotted will be subject to a three-year lock-in instead of the current one-year lock-in;

•     Majority of Public Shareholders: The votes cast by public shareholders for resolution for such preferential issuance and exemption from open offer should be more than the votes cast against it. The proposed allottee should abstain from voting. In case there is no identifiable promoter, then the resolution will be passed if the votes cast in favour are not less than three times the votes cast against it; and

•     Restrictions on Proceeds of Preferential Issue and Monitoring the Use of Proceeds: The proceeds of such preferential issue will not be used for any repayment of loans taken from promoters/ promoter group/ group companies and will be disclosed in the explanatory statement sent for shareholders’ Further, the company would be required to appoint a monitoring agency for monitoring the use of such proceeds, and the audit committee of the company would also need to monitor the utilization.

4.     Way Forward

•     Given the current volatility in the stock prices, the price that is the average of the weekly high and low for the past twenty six weeks could be unviable and the average for the past two weeks for stressed companies is likely to be much lower. The relaxations in pricing and the open offer exemption will ease fund-raising by stressed companies.

•     At the same time, given the significant open offer exemption, SEBI has prescribed adequate balances against misuse, such as the longer lock-in period, the requirement of approval of the public shareholders, disclosure requirements, monitoring utilization of proceeds and eligibility conditions. These will go a long way in ensuring that such preferential issuances are made in the best interest of the company and the shareholders.

[1] Relevant Date is the date which is 30 days prior to the shareholders meeting approving the preferential issuance, usually this ends up being the date of the board meeting approving the preferential issuance.