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How Helpful Is SEBI’s Solution For Distressed Asset Deals?

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In a move welcomed by bankers and asset recovery companies, SEBI recently relaxed takeover norms for acquisition of stressed assets. But one aspect of the notification has market participants confused. How should these assets/companies be priced?

BloombergQuint had raised this question when, in June, the board of the Securities and Exchange Board of India, first decided to exempt the acquisition of stressed assets, if done via a Reserve Bank of India asset restructuring scheme, from the mandatory open offer requirement under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

The final notification is out but the confusion persists.

Takeover Code Exemption For Stressed Asset Deals

The market regulator has now amended its Takeover Code Regulations to exempt three types of transactions from the open offer requirement:

  • Acquisition as a result of a resolution plan approved by the National Company Law Tribunal under the Insolvency and Bankruptcy Code.
  • Acquisition of shares by lenders as a result of conversion of debt as part of a debt restructuring plan implemented as per the RBI guidelines.
  • And, primary infusion of funds in the company or secondary acquisition of shares from the lenders at the time of sale of their shareholding or enforcing change in ownership in favour of acquirer pursuant to a debt restructuring scheme.

The ‘Price’ Question

Besides exemption from open offer requirements, SEBI has also changed the pricing norms that ordinarily apply to acquisitions. While experts are clear on pricing mechanism for conversions from debt to equity, confusion persists for fresh allotment situations.

If a preferential allotment is made to existing lenders when they convert their debt to equity, the pricing will be as per the mechanism prescribed in the Reserve Bank of India’s Strategic Debt Restructuring Scheme (SDR) circular, Yogesh Chande, a capital markets partner at law firm Shardul Amarchand Mangaldas, told BloombergQuint.

RBI’s SDR circular lays down that the conversion of debt to equity for listed companies should be at fair value, subject to the floor of face value. As per the circular, the fair value should not exceed the average of the closing price of the instrument on a recognised stock exchange during the 10 trading days preceding the reference date i.e. date at which the restructuring decision was taken.

But since this RBI circular only covers debt to equity conversions by lenders, it’s not clear what pricing will apply to situations where a preferential allotment is made to a new investor when lenders sell their equity or when they enforce change in ownership in favour of the new investor.

In such situations too, pricing as per the SDR circular will be applicable, Chande said.

Although the RBI circular deals with conversion price of equity shares, but now even if you’re making an allotment to a new person, you’ll have to still follow the pricing mechanism laid down in the SDR circular. I think the intent is to still follow the yardstick prescribed by the RBI, even in the context of issuance.
Yogesh Chande, Partner, Shardul Amarchand Mangaldas

Additionally, section 53 of Companies Act, 2013 will have to be complied with that prohibits issue of shares at discount i.e. below the face value, he added.

An email to the market regulator, seeking clarification on the applicable pricing formula and relevant provisions of the Companies Act, 2013 that need to be complied with, remained unanswered.

If the pricing mechanism is per the SDR circular, it will not work for insolvency cases before the NCLT, Antony said. Under the SDR, an investor makes a strategic investment in an operational company, but the insolvency cases have an element of unsustainable debt, he added.

In most of the distressed cases, there is unsustainable debt. Where there is unsustainable debt, equity value should ideally be zero. If you see some of the listed cases that have gone into insolvency, still their shares are quoting a good price. In cases where we need to do primary acquisition of equity, both market value and a SEBI-determined value seem high. But the RBI-determined price doesn’t solve our issue either. 
Siby Antony, Managing Director, Edelweiss ARC
“The conversion should be allowed at par value or even below that,”says Antony.

It is possible that the pricing mechanism as per the SDR circular may not be acceptable to new acquirers who may argue that the commercials may not work for him since the pricing prescribed by the RBI is for conversion of debt while in his case, it’s an allotment, Chande said.

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