Feb 28, 2022

Amendments in Preferential Issue Norms

Share on

SEBI’s MIXED BAG OF GOODIES!

The Capital Market Regulator, SEBI, vide its Circular dated January 14, 2022 has inter alia amended the provisions of Chapter V of SEBI ICDR Regulations, 2018. These changes pertain to the Preferential Issues of Equity Shares/ Convertible Securities (the Specified Securities). The said changes have become effective from January 14, 2022.

The amendments are a mixed bag of goodies from the Issuers/ the Allottees point of view. SEBI, on one hand has relaxed the pre and post issue lock in provisions and at the same time has plugged in the loopholes revolving around the pricing norms therein.

Glossary of amended provisions is as follows:

Reg. No.Amendment in provision
159(1)Eligibility of the allottees w.r.t sale of pre issue holdings
159(4)Eligibility of the issuer in case of outstanding dues pending with Stock Exchange or Depositories
160(c)Demat of holding of allottees prior to seeking In-Principle Approva
160(f)Filing of In-Principle Application
162(2)Allotment of equity shares on conversion of convertible securities
163(2)Compliance certificate from PCS to be placed before shareholders’ meeting
163(3)Issue of shares for consideration other than cash
164Pricing of frequently traded shares
164(5)Criteria for frequently traded shares
166(A)Pricing in case of change of control in listed issuer
167(1)Post issue lock-in of shares allotted to promoters and non-promoters
167(6)Pre-preferential lock-in provisions
167APledge of locked-in specified securities

A gist of the comparative of the Changes so approved by SEBI in Chapter V of SEBI (ICDR) Regulations, 2018 have been enumerated below:

I.Eligibility of the allottee w.r.t sale of pre issue holdings: Reg 159(1) & Explanation thereto

New LawErstwhile Law
Preferential issue of specified securities shall not be made to any person/ Promoter or promoter group, as the case may be, who has sold or transferred any equity shares of the issuer during the 90 trading days preceding the relevant date.Preferential issue of specified securities shall not be made to any person who has sold or transferred any equity shares of the issuer during the 6 months preceding the relevant date
CP Remarks:
Since, pre-issue sale period is reduced from almost 180 days to 90 trading days, the preferential issue turnaround time to any particular allottee who has sold his shares is likely to be reduced.

II.Timeline for seeking In-Principle Approval: (Reg 160 ( c) & (f ))

New LawErstwhile LawCP Remarks
The entire pre preferential holding of the proposed allottees must be in Dematerialised form before the In Principle Application is made to the stock exchange(s)No specific timeframeIn few cases, companies were applying for IP approval as much as after 20-25 days, thus making the mockery of the entire provisions. So, this provision has been introduced. But, practically, these may be little challenging for the Companies, because in many 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.
In-Principle Application to stock exchanges to be filed on the same day as the date of dispatch of notice for AGM/ EGM to shareholdersNo specific timeframe.

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

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

New LawErstwhile LawRemarks
  • 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.
SEBI observed that for preferential allotment for consideration other than cash, there were no specific safeguards/ valuation parameters. Thus, this restriction has been promulgated. In our view, restricting Preferential Allotments for consideration other than cash, to only Share Swaps, may act as a hurdle in may strategic transactions, wherein the allottees may not be having sufficient cash to pay for the shares, but are having an asset.
The form of consideration other cash has been restricted only to Share Swaps.

IV.Compliance Certificate to be placed before shareholders: Reg 163(2)

New LawErstwhile Law
  • The issuer shall place a copy of the certificate of a practicing company secretary” before the general meeting of the shareholders.
  • Such Certificate to be hosted on the Issuer Company’s website and a link for the same is to be provided in the notice for the general meeting.
  • The issuer shall place a copy of its Statutory Auditors before the general meeting of the shareholders.

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

CASE 1: When allotment of < 5% of post issue fully diluted share capital

New LawErstwhile Law
    Higher of:

  • 90/10 trading days’ volume weighted average price (VWAP) of the scrip preceding the relevant date, whichever is higher, or
  • any stricter provision in the Article of Association (AOA) of the issuer company.
    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 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 allotment of > 5% of post issue fully diluted share capital, to an allottee either individually or acting in concert

New LawErstwhile Law
    Higher of:

  • 90/10 trading days’ volume weighted average price (VWAP) of the scrip preceding the relevant date, whichever is higher, or
  • any stricter provision in the Article of Association (AOA) of the issuer company.
  • Valuation Report from a registered Independent Valuer
    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 erstwhile Reg 164 of SEBI ICDR Regulations did not envisage a condition w.r.t., the additional parameter for valuation in cases when preferential allotment of more than 5% was proposed to be made to any allottee singly or along with persons acting in concert.
  • 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 and this 5% is to be checked on fully diluted basis.

CASE III: In case of Infrequently traded shares

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

VI.Criteria for Frequently traded shares: Reg 164 (5)

New LawErstwhile Law
  • “Frequently traded shares” means the shares of the issuer, in which the traded turnover on any recognised stock exchange during the 240 trading days preceding the relevant date, is at least 10% of the total number of shares of such class of shares of the issuer
  • Frequently traded shares” means the shares of the issuer, in which the traded turnover on any recognised stock exchange during the 12 calendar months preceding the relevant date, is at least 10% of the total number of shares of such class of shares of the issuer.
    CP REMARKS:

  • This new criteria of 240 trading days will give more realistic status of trading in the shares of the Company.

VII.Pricing in case of Change in Control: Reg 166A

New LawErstwhile Law
    Higher of:

  • 90/10 trading days’ volume weighted average price (VWAP) of the scrip preceding the relevant date, whichever is higher, or
  • any stricter provision in the Article of Association (AOA) of the issuer company
  • Valuation Report from a registered Independent Valuer
  • 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.
  • No provision relating change in control.
    CP REMARKS:

  • These provisions have 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.

VIII.Lock-in on Shares allotted on Preferential basis (Reg 167(1))

New LawErstwhile Law
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
For Non-PromotersFor a period of 6 monthsThe erstwhile lock in period was 1 year
    CP REMARKS:

  • 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.

IX.Pre- Preferential Lock-in (Reg 167(6)

New LawErstwhile Law
  • Entire pre-preferential allotment shareholding of the allottees, to be locked-in from the relevant date up to a period of 90 trading days from the date of trading approval/ date of allotment, in case of equity share/ convertible security.
  • Pre-preferential allotment shareholding to be locked in for 6 months from the date of trading approval/ date of allotment, in case of equity share/ convertible security.

X.Pledge of locked-in shares held by Promoters: Reg 167A

New LawErstwhile LawRemarks
  • 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.
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 intends to take 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.

For any discussions, feel free to contact:
Anjali Aggarwal

Partner & Head – Capital Market Services
Corporate Professionals
E: anjali@indiacp.com
M: +91 9971673336

AUTHORED BY

Ms. Anjali Aggarwal

Partner & Head-Capital Market & Stock Exchange Services

FCS

anjali@indiacp.com

+91 11 40622230

Request a Call
Scroll