Markets regulator, Securities and Exchange Board of India (Sebi), on Tuesday eased rules for pricing preferential shares issued by distressed firms to raise funds. The measure was first proposed on 22 April through a discussion paper.
Currently, a preferential share issuer 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 among these two figures.
Sebi removed the 26-week part by amending the Issue of Capital and Disclosure Requirement (ICDR) rules for distressed firms, the government notified amendments via a gazette notification.
Sebi has defined a stressed firm as one which has made a disclosure of default on its financial obligations for at least 90 days, has an inter-creditor agreement in place and is an entity with a default rating.
Share prices have crashed since the coronavirus outbreak, and retaining the 26-week requirement would price the issues too high to attract any investors. This move is expected to help these cash-starved companies raise funds.
Sebi also exempt acquirers from making an open offer if they are investing in a distressed firm. This will ensure the acquiring entity does not incur additional financial liability, which typically happens when they have to make an open offer to other investors.
Exemption from an open offer will be considered for the allottees of preferential issue in stressed firms if the acquisition is beyond the prescribed limit of 25%.
As per the gazette for the pricing relaxation the preference issue cannot be made to a promoter or promoter group, wilful defaulters, economic offenders among others. For these exemptions the resolution of issuance of preferential shares needs to be approved by more than 50% of the public shareholders. In case of companies with no identifiable promoter the votes in favour of the preferential issue must be three times of vote cast against the proposal.
Separately on Thursday when the board of the regulator meets it will consider the suggestion of its primary market advisory committee (PMAC), which suggested that this relaxed pricing formula should be applied for all companies, instead of just stressed companies.
To be sure, even now, the 26-week criterion does not apply in preferential allotments made to a maximum of five foreign portfolio investors, or five investors in a qualified institutional placement.
Sebi last week had exempted promoters from triggering open offer if they acquire more than 5% and less than 10% in a financial year pursuant to a preferential issue. The exemption is applicable till the end of this fiscal.
This article was first published on livemint.com.