The market regulator has eased its preferential allotment rules to help stressed companies raise capital.
Such allotments meeting the eligibility criteria will also be exempted from the open offer requirement under the Takeover Code, according to a notification.
In April, the Securities and Exchange Board of India had floated a proposal on this issue for stakeholder consultation. The final version is almost along the same lines.
Realistic Pricing, Narrow Scope
SEBI had pointed out that existing framework to determine pricing—a period of 26 weeks or more for frequently traded shares—for preferential allotment is too onerous. Given the steep fall of the market, the regulator has made way for a more realistic pricing framework. It can’t be less than two-week average of the weekly high and low of the volume weighted average price.
But not all listed companies benefit from it. The scope is limited to only those who fulfill any two of the following three criteria:
- There’s been a disclosure of defaults on payment of interest/principal amount of loans from banks/financial institutions and listed and unlisted debt securities. Such default must be continuing for at least 90 days from the date of disclosure. In the proposal, SEBI had recommended a period of two quarters.
- Existence of inter-creditor agreement—a pact between all lenders of a defaulting borrower that outlines a resolution plan—as per Reserve Bank of India’s guidelines.
- Credit rating of the listed/unlisted financial or credit instruments of the company has been downgraded to “D”. The universe of instruments indicative of stress in the company has been expanded from what was proposed in April. Earlier, the regulator had recommended considering only the credit rating of the listed instruments as a sign of stress.
The Riders
A preferential allotment under this relaxed framework cannot be made to a person who is a promoter or part of the promoter group. In this final version, SEBI has expanded the list of ineligible entities to include:
- An undischarged insolvent under the insolvency law.
- Wilful defaulter as per RBI guidelines.
- Person disqualified to act as a director under company law.
- Person debarred from accessing the securities market by SEBI.
- A fugitive economic offender.
- Person convicted for any offence punishable with imprisonment.
- Person who has executed a guarantee in favour of a lender of the issuer and such guarantee has been invoked by the lender and remains unpaid in full or part.
Any preferential allotment that gives an investor 25% or more voting rights or control will not need to make an open offer. The votes cast in favour of such a resolution by the public shareholders shall be more than the number of votes cast against it. Any proposed allottee in the preferential issue who already holds specified securities shall not be included in the category of “public” for this purpose, SEBI said.
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