The market regulator eased preferential allotment norms to help listed companies raise capital to tide over economic stress caused by the pandemic.
Earlier this week, the Securities and Exchange Board of India had made way for more realistic pricing in such issues by companies with stressed assets. In its board meeting on Thursday, SEBI extended the benefit to all listed entities. The regulator also announced key changes to its Takeover Code and insider-trading regulations.
SEBI has been gradually easing the norms governing capital raising and acquisition of shares since the outbreak of Covid-19 in March this year. It recently relaxed norms for qualified institutional placements and creeping acquisition of shares by promoters.
According to a statement by the regulator, the key changes announced after the board meeting on Thursday include:
Preferential Issues: Pricing
The existing norms required companies to ensure that share issuance via preferential allotment is not done at a price lower than the average of weekly high and low of closing prices during the six months or two weeks before a relevant date, whichever is higher.
In its board meeting, SEBI has approved an additional pricing mechanism for preferential allotments made between July 1 till the end of this year, with a rider that such shares will have a lock-in of three years.
Listed companies will be allowed to issue shares at a price not less than the average of weekly high and low of closing prices during the preceding 12 weeks or two weeks before a relevant date, whichever is higher.
The new formula will allow issuers to raise money at more realistic prices and will reflect the post Covid-19 market price, Bhakta Patnaik, partner at Trilegal said. But, the requirement for a three year lock-in may be too restrictive, he said.
“Non promoter shareholders may want to come in as saviors for the time being and look for an exit once the company stabilises and the share price goes up. It seems, SEBI doesn’t want to allow investors to use the relaxed pricing to make profits in the short term,” he said. “This will keep away foreign portfolio investors and affect the ability of companies to take advantage of the new pricing option.”
According to Yash Ashar, partner and head, capital markets, at Cyril Amarchand Mangaldas & Co., the relaxation is primarily intended to benefit promoters.
“The lock in period introduced by the market regulator will balance short to medium term requirements of companies and ensure that there is no abuse by investors,” he told BloombergQuint. “Thus, in addition to a rights issue to maintain shareholding, promoters will also have this additional option.”
SEBI clarified that issuers can continue to use the existing pricing mechanism for preferential allotments.
Block Deals Allowed For Open Offers
The market regulator has also eased the takeover regulations to enable quicker acquisition of shares during an open offer.
Acquirers are prohibited from closing the underlying transaction until the open offer period expires. One of the exceptions to this provision allows acquirers to transfer shares before the open-offer process is completed if shares are kept in an escrow and voting rights are not exercised. And such transfers could only be made through a preferential issue or a stock exchange settlement.
Now, SEBI has allowed such share transfers via bulk and block deals, subject to the two restrictions of escrow and voting rights.
Prashant Gupta, partner at Shardul Amarchand Mangaldas & Co., said the proposal for allowing bulk or block deals will help an investor to directly acquire a significant stake in the target company through stock exchanges instead of negotiating through off-market route.
Akila Agrawal, partner at Cyril Amarchand Mangaldas & Co., explained that acquirers at present have to fully fund an escrow account if they want to take control of a company for a direct acquisition. In case of an indirect acquisition in India—where the offer process starts only after the global underlying transaction is complete and the acquirer has control over the parent entities—the acquirer funds the escrow basis the same slab as a direct acquisition, she said.
SEBI has fixed this anomaly and provided for fully funding of escrow for indirect acquisitions as the acquirer already has control at the time of commencing the offer process, she said.
The second change introduced by the market regulator pertains to indirect acquisition of shares after the open offer is announced. Under existing regulations, an acquirer has to deposit an amount equivalent to a certain percentage of the open offer size in an escrow account. Now, an acquirer will have to deposit 100% of amount payable two working days before making the public statement.
An acquirer will also have to pay interest at 10% if the open offer is delayed due to any action by the promoter.
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