Securities and Exchange Board of India (SEBI) on i) 22 April 2020, has released a consultation paper to seek comments / views from all stakeholders on the pricing of preferential issues and exemption from making an open offer for acquisitions in listed companies having Stressed Assets, and on ii) 23 April 2020, has notified an amendment in SEBI (Buy-back of Securities) Regulations, 2018 for easing fund raising by listed companies. The key highlights of the same are mentioned as under:
I. Consultation Paper: Pricing of Preferential Issues and exemption from open offer for acquisitions in companies having Stressed Assets
It was observed that listed companies that are facing financial stress find it difficult to raise capital through conventional means. While certain exemptions are already in place with respect to preferential issue pricing and exemption from open offer for entities which are undergoing bankruptcy / insolvency proceedings under Insolvency and Bankruptcy Code, 2016, there are no specific exemptions / relaxations for entities which have stressed assets and are in need of funds to combat bankruptcy.
This consultation paper provides recommendations on the above matter from the Primary Market Advisory Committee (PMAC). The PMAC suggestions are primarily on providing i) an objective criterion for determining a company as ‘stressed,’ ii) a reasonable pricing for preferential allotment and iii) exemptions from open offer obligations.
Criteria for determining whether the company is “stressed”:
A listed entity satisfying any 2 out of the following 3 conditions shall be considered “stressed”:
- Any listed company that has made disclosure of defaults on payment of interest / repayment of principal amount on loans from banks / financial institutions and listed and unlisted debt securities for two consequent quarters
- Existence of inter-creditor agreement in terms of Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions 2019 dated 07 June 2019.
- Downgrading of credit rating of the listed instruments of the company to “D”
Pricing for preferential allotment by such stressed companies:
As per the existing SEBI (Issue of Capital and Disclosures Requirement) Regulations, 2018, if the equity shares of the issuer have been listed on a recognised stock exchange for a period of 26 weeks or more as on the relevant date, the price of the equity shares to be allotted pursuant to the preferential issue shall be not less than higher of the following:
- the average of the weekly high and low of the volume weighted average price of the related equity shares quoted on the recognised stock exchange during the 26 weeks preceding the relevant date
- the average of the weekly high and low of the volume weighted average prices of the related equity shares quoted on a recognised stock exchange during the 2 weeks preceding the relevant date.
In view of the continuous fall in prices for companies having stressed assets, the price derived based on the average of the weekly high and low of volume weighted average price for 26 weeks shall be higher than the similar price derived based for 2 weeks, leading to a wide gap in pricing between the price at the beginning of the 26 weeks and the current price when funds are required to be raised.
Though, the preferential issue to Qualified Institutional Buyers (QIB) can happen at a price not less than the average of the weekly high and low of the volume weighted average prices of the related equity shares quoted on a recognised stock exchange during the 2 weeks preceding the relevant date, but the same is restricted to 5 QIBs only.
To overcome such a wide gap, it is proposed that the price for preferential allotment by such stressed companies should not be less than the average of the weekly high and low of the volume weighted average prices of the related equity shares quoted on a recognised stock exchange during the 2 weeks preceding the relevant date. Further, the said pricing relaxation should apply to all types of investors and not restricted to QIBs.
Exemption from Open offer:
As per the existing SEBI (Substantial Acquisition Of Shares And Takeovers) Regulations, 2011, acquisition of substantial holding and control by any incoming investor, triggers the obligations to make open offer requiring the said investor to acquire 26% more shareholding in the said listed company from other investors. Such open offer requirement therefore creates substantial financial obligation on an incoming investor which is over and above the funds the investor desires to infuse in the stressed company.
It is therefore proposed to exempt the incoming investor from making an open offer, even if such preferential issue to the incoming investor in the aforesaid stressed company exceeds the limit prescribed in terms of Regulation 3(1) of SAST Regulations
Additional requirements for availing the above exemption by stressed companies
It is also proposed that the listed company which is under stress should comply with the below mentioned conditions in order to avail the relaxations of pricing of preferential issues and exemption from making an open offer:
- The preference issue is made to persons / entities that are not part of the promoter or promoter group on the date of the board meeting to consider the preferential issue
- Resolution for the preferential issue at the aforesaid pricing and exemption from open offer has been approved by the majority of minority shareholders (i.e. excluding the promoters, the promoter group and any proposed allottee in the preferential issue that may already hold specified securities in the listed company prior to the preferential issue)
- Proposed use of proceeds of such preferential issue will be disclosed in an explanatory statement sent for the purpose of shareholder resolution
- Monitoring agency will be appointed for monitoring use of the proceeds of such a preferential issue
- The shares issued to the investors in such an issue shall be locked in for a period of 3 years from the latest date of trading approval granted by all the stock exchanges where the specified securities are listed.
II. Amendments to SEBI (Buy-back of Securities) Regulations, 2018
As per the existing SEBI (Buy-back of Securities) Regulations, 2018 (“Buy-back Regulations”), companies which undertake buy-back of its securities are not allowed to raise further capital for a period of 1 year from the expiry of buy-back period, except in discharge of their subsisting obligations.
Considering the recent developments relating to the COVID-19 pandemic and to enable companies to raise funds relatively quickly from the securities market, the buy-back regulations have been amended to temporarily relax the above restriction of 1 year to 6 months.
The said relaxation is in line with provisions of the Companies Act, 2013. However, it will be applicable only till 31 December 2020.
BDO Comments
The consultation paper has come with a backdrop of difficulty faced recently by certain listed stressed companies to procure financial assistance and to ensure survival of companies that face financial stress during the coronavirus pandemic.
The proposed relaxation from pricing and open offer requirement will enable such stressed companies to find investors to great extent and act as a catalyst in fundraising, therefore preventing it from going under insolvency. Further, since investors will not be required to buy shares from the public on account of exemption from open offer, the investments made by way of preferential issue will entirely be used by the stressed company for the purpose of its business.
Also, the relaxation of period to 6 months for fund raising post buy-back will provide relief to listed companies which had bought back shares prior to the pandemic and are now in need of funds considering the damage done on account of COVID-19.
The above proposals and amendments will certainly make fund raising easier for listed companies in the current economic scenario.