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Jan 5, 2022

SEBI’s Mixed Bag of Goodies for the New Year!!

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The Capital Market Regulator, SEBI, in its Board Meeting held on December 28, 2021 has inter-alia, approved the revised framework for preferential issues. These changes have been brought in line with the suggestions and recommendations received from the market/ industry participants on its Consultation Paper Dated November 26, 2021.

SEBI, on one hand has relaxed the lock in provisions and at the same time has plugged in the loopholes revolving around the pricing norms therein.

A comparative of the Changes so approved by SEBI in Chapter V of SEBI (ICDR) Regulations, 2018 have been enumerated below. These shall become effective from the date of their Notification in the Official Gazzette.

Determination of Minimum Issue Price: For Frequently Traded Shares: Reg 164 (1)

CASE 1: When No Change in control/ allotment of < 5% of post issue fully diluted share capital

NEW LAW

Higher of:
i. 90/10 trading days’ volume weighted average price (VWAP) of the scrip preceding the relevant date, whichever is higher, or
ii. any stricter provision in the Article of Association (AOA) of the issuer company

EXISTING  LAW

Higher of:

26/2 weeks’ volume weighted average price (VWAP) of average of weekly high and low of the scrip preceding the Relevant Date.

CP REMARKS:

  • In many cases, it had been observed that there used to be significant difference in pricing of 26 weeks and 2 weeks, the erstwhile pricing period. So, in the new pricing time periods will enable preferential issues to happen at comparatively recent pricing trends, being  90/10 trading days.
  • However, in a situation, if the AOA of any Company contain any stricter pricing provision, the same shall be needed to be followed.   

 

CASE 2: When there is Change in control/ allotment of > 5% of post issue fully diluted share capital, to an allottee either individually or acting in concert

NEW LAW

Higher of:
i. 90/10 trading days’ volume weighted average price (VWAP) of the scrip preceding the relevant date, whichever is higher or
ii. any stricter provision in the Article of Association (AOA) of the issuer company
iii.
Valuation Report from a registered Independent Valuer

EXISTING LAW

Higher of:

26/2 weeks’ volume weighted average price (VWAP) of average of weekly high and low of the scrip preceding the relevant date

CP REMARKS:

  • The existing Reg 164 of SEBI ICDR Regulations doesn’t envisage a condition w.r.t., the additional parameter for valuation in cases wherein there has been a change in control pursuant to Preferential issue or when preferential allotment of more than 5% is proposed to be made to any allottee.
  • The requirement of valuation report has been added, to take into account the control premium that such controlling allottees will get in the issuer company.
  • This 5% threshold is in line with the Creeping Acquisition limit of 5%, as available under the SEBI SAST Regulations.

 

CASE III: In case of Infrequently traded shares

New Law as well as existing law: The provisions remain unchanged, Valuation Report from an Independent Valuer is needed to be obtained.

III. Meeting of Independent Directors:

NEW LAW

  • In case of a change in Control, the separate meeting of a committee of Independent Directors is required to be mandatorily held;
  • Such Committee to provide a reasoned recommendation along with their comments on all aspects of preferential issuance including pricing.
  • The voting pattern of the committee shall also be disclosed to shareholders/public.

OLD LAW

Committee of Independent Directors and meeting thereof was not required.

CP REMARKS:

  • Such provision has been added in line with SEBI Takeover Regulations.
  • On approval of the proposal of preferential issue by the Board of Directors of the Company, the Separate committee of Independent directors shall also give recommendation on the rationale for such issue and pricing thereof, in case if change of control of issuer company pursuant to preferential issue.

III. Lock-in on Shares allotted on Preferential basis:

 

New Law

Existing Law

CP Remarks

For Promoters

Upto 20% of the post issue paid up capital: For 18 months

Above 20% of the post issue paid up capital: For 6 months

Upto 20% of the post issue paid up capital: For 3 years

Above 20% of the post issue paid up capital: For 1 year

Lock-in periods are reasonably reduced in line with lock-in requirements in case of IPOs.

This may encourage more Strategic Investors in the preferential issues.

As generally, the promoters don’t offload their shares, so this provision may not have much of an impact on them.

For Non-Promoters

For a period of 6 months

The existing lock in period is 1 year.

IV. Pledge of locked-in shares held by Promoters

New Law

Existing Law

Remarks
  • Promoters permitted to pledge the shares locked-in pursuant to a preferential issue;
  • Provided, such pledge of specified securities is one of the terms of sanction of the loan granted by certain financial institutions;
  • The said loan is to be sanctioned to the issuer company or its subsidiary(ies) for the purpose of financing one or more of the objects of the preferential issue.

ICDR was silent

Practically, as a part of rules and procedures of Depositories, the lock-in shares can be pledged with banks/ financial institutions by the Promoters, with the condition that they shall remain under lock-in.

Now, the same has been specifically incorporated in ICDR with end use restriction on the loan so obtained by the Issuer Company.

V. Consideration other than cash: Reg 163(3)

New Law

Old Law

Remarks
  • Only Share Swaps to be permitted as a form of consideration for preferential issues, for consideration other than cash
  • Valuation Report to be obtained from an independent registered valuer
  • Any form of consideration other than cash was permitted
  • Valuation required only in case when preferential issue was made for consideration in the form of any asset

In order to curb the undue benefits to be availed by the preferential allottees.
The form of consideration other cash has been restricted only to Share Swaps.
Now, the permitted form consideration will be:

  • Cash
  • Conversion of loans
  • Share Swaps

VI. Timeline for seeking In-Principle Approval: (Reg 28 of SEBI Listing Regulations, 2015)

New Law

Old Law

CP Remarks

In-Principle Application to stock exchanges to be filed on the same day as the date of dispatch of notice for AGM/ EGM to shareholders

No specific timeframe.

Company to seek In-Principle approval anytime before making allotment of securities.

Practically, this may be little challenging for the Companies, because in most of the cases, by the time the Shareholders’ Notices are dispatched, the lock in incorporations are not in place. The Companies may have to be pro-active in arranging all the certificates as mentioned in the formats for seeking In-principle approval. 

To conclude, although from the Regulator’s perspective, the changes in the pricing norms were the need of the hour, but the Preferential Issues may lose their sheen, in view of the process simplicity that was there. In a Preferential Issue, any Strategic Investor comes with a limited time horizon of 2-3 years and then taking an exit, but the requisite of the pricing to be computed by a  Registered Valuer, may make them disinterested in the issue. This would hold true, in both the situations, if the Valuer’s price is more than the running MP, the Investor may not be keen in investing, since it may not be in a position to garner the expected Exit Value and inversely, if the Valuer’s Price is less than the running MP, then also the Investors may decline since the intrinsic value of the scrip, in that case would be coming lower. Having said that, these amendments have been triggered by the practices that were prevalent in the market and to avoid the market abuse.     

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