The markets regulator is expected to ease rules on pricing preferential shares when its board meets on Thursday, two people aware of the matter said, in a relief for firms looking to raise funds through this route. The measure, first considered for stressed companies, will now apply to all publicly traded ones.
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.
The Securities and Exchange Board of India (Sebi) is now planning to remove the 26-week part by amending the Issue of Capital and Disclosure Requirement (ICDR) rules, the people cited above said on condition of anonymity.
Share prices have crashed since the coronavirus outbreak, and retaining the 26-week requirement would price the issues too high to attract any investors. On 22 April, Sebi had issued a discussion paper suggesting these relaxations only for stressed firms, to help cash-starved companies raise funds.
“This is based on the regulator’s primary market advisory committee (PMAC), which suggested that this pricing formula should be applied for all companies, instead of just stressed companies," said the first of the two people cited above.
“The amendment will enable promoters to provide necessary equity funds to their company without incurring an obligation of open offer. This is especially important as companies are finding it difficult to access alternative methods of funding such as debt financing, etc., or access equity funding from third-party investors. It will be interesting whether limited relaxation of only additional 5% will meet commercial requirements of firms," said Akila Agrawal, partner and head of mergers and acquisitions, Cyril Amarchand Mangaldas.
According to the first person cited above, this will be the first time the entire board of the regulator meets since the lockdown began in March. “The participation of part-time members will be ensured through a video-conferencing. The whole-time members and chairman would meet keeping in mind the social distancing norms," the person said.
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.
According to Yash Ashar, partner and head of capital markets at Cyril Amarchand Mangaldas, the change will be advantageous for promoters. “This is likely to help promoters who had a much higher formula price than other investors. So, for example, the two-weeks formula of a company’s share price maybe ₹200 but the 26-week price average could be ₹400, thus, putting the promoters at a disadvantage. If the company undertook a preferential allotment of up to five FPIs (foreign portfolio investors) or a QIP (qualified institutional placement), the floor price would be ₹200. Thus, at the present time, this formula is quite disadvantageous for the promoters," said Ashar.
Sebi has 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.
Sebi may also exempt acquirers from making an open offer if they are investing in a distressed firm, the people cited above said.
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.
The regulator will define a stressed firm as one which has made a disclosure of default on its financial obligations for two quarters and has an inter-creditor pact in place.
“Exemption from an open offer may be considered for the allottees of preferential issue in stressed firms if the acquisition is beyond the prescribed limit of 25%," said the second person.