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 |
164 | Pricing 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 |
167A | Pledge 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 Law | Erstwhile 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 Law | Erstwhile Law | CP 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 timeframe | In 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 shareholders | No specific timeframe.
Company to seek In-Principle approval anytime before making allotment of securities. |
III.Consideration other than cash: Reg 163(3)
New Law | Erstwhile Law | Remarks |
---|---|---|
|
|
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 Law | Erstwhile Law |
---|---|
|
|
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 Law | Erstwhile Law |
---|---|
Higher of:
|
Higher of:
|
CP REMARKS:
|
CASE 2: When allotment of > 5% of post issue fully diluted share capital, to an allottee either individually or acting in concert
New Law | Erstwhile Law |
---|---|
Higher of:
|
Higher of:
|
CP REMARKS:
|
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 Law | Erstwhile Law |
---|---|
|
|
CP REMARKS:
|
VII.Pricing in case of Change in Control: Reg 166A
New Law | Erstwhile Law |
---|---|
Higher of:
|
|
CP REMARKS:
|
VIII.Lock-in on Shares allotted on Preferential basis (Reg 167(1))
New Law | Erstwhile Law | |
---|---|---|
For Promoters |
|
|
For Non-Promoters | For a period of 6 months | The erstwhile lock in period was 1 year |
CP REMARKS:
|
IX.Pre- Preferential Lock-in (Reg 167(6)
New Law | Erstwhile Law |
---|---|
|
|
X.Pledge of locked-in shares held by Promoters: Reg 167A
New Law | Erstwhile Law | Remarks |
---|---|---|
|
|
|
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