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Sebi has amended the takeover code to allow promoters to buy as much as 10% through a preferential allotment.  (Photo: Mint)
Sebi has amended the takeover code to allow promoters to buy as much as 10% through a preferential allotment. (Photo: Mint)

Sebi eases norms for preferential sale of shares for FY21

The relaxation of preferential allotment norms will also protect companies from the threat of takeovers

The markets regulator on Tuesday relaxed norms for preferential sale of shares to make it easier for publicly traded companies to raise funds amid widespread financial pain because of the devastation caused by coronavirus.

The Securities and Exchange Board of India (Sebi) amended the takeover code for the financial year 2020-21 to allow promoters to buy as much as 10% through a preferential allotment. Till now, promoters could buy only up to 5% through a preferential issue.

The Sebi relaxation will help promoters bring more capital into their companies at a time when other investors may not be too comfortable to invest given the economic uncertainties arising out of the covid-19 pandemic.

“There are many discussions going on in the market where promoters want to bring in money into the company and this move will aid those discussions. These are difficult times for companies, as there is a lot of uncertainty on what the financial numbers for FY21 will look like. So if in this market, the promoter puts in money into the company then that sends a strong signal to the market and gives comfort to other investors to put money in that stock," said Ajay Garg, managing director, Equirus Capital.

A preferential issue is a sale of shares or convertible securities by listed or unlisted companies to a select group of investors. It is considered to be the fastest way of raising capital.

This relaxation of preferential allotment norms will also protect companies from the threat of takeovers.

“The markets have fallen because of covid-19 and many companies have cash flow issues and are looking at raising capital. The increase in limits provides a good opportunity for promoters to put in money into the company through new subscription of shares while also increasing their stake at lower prices. Further, this protects against any takeover threats," said Girish Vanvari, founder, Transaction Square.

In a separate gazette notification, the markets regulator also reduced the time gap between two qualified institutional placements (QIPs) from six months to two weeks.

“This is an important relaxation as it will allow companies to regularly access investment from institutional investors through QIPs which is a faster and more efficient manner of raising capital, without having to wait for a fixed period of time before approaching investors. This is unlikely to anyway be every two weeks as markets and investors would not be very happy with such a narrow time gap. However, companies are now enabled to raise within a few months of the previous deal," said Yash Ashar, partner and head-capital markets, Cyril Amarchand Mangaldas.

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