Mar 26, 2020

Supporting Investors’ Amid Covid 19 Scare and Fallen Markets

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“I can’t change the direction of the wind, but I can
adjust my sails to always reach my destination.”– Jimmy Dean

COVID-19 has done damage to financial markets no less than Tsunami. Trust and stability are being washed away from the stock markets, globally. And what we see is a nose-dive low, unprecedented in last 3 decades.

While March 2020, shall be evoked as a hapless month in Indian capital market’s history. Even in this forbidding occurrence, entrepreneurs and businesses should vigorously brace for a U shape or even V shape recovery.

Following are certain options available to businesses, amidst scare of pandemic and falling markets, which would aid onward march towards recovery, inoculate confidence in investors and conciliate the blood bathing markets.

A. Providing Exit to the Public Shareholders
  1. Buy back of Equity Shares:

    Companies with cash reserves can come out with Buyback offer. Buybacks help in improving price recognition and stabilising overall Earning Per Share. It will also help in encouraging faith in the mind of the shareholders at this time of slump in the market.

      Pros: a. Pacifies distressed investors, builds positive rapport and stabilizes Earning Per Share.

      b. Increase in voting rights pursuant to Buyback, is exempt from Takeover open offer.

  2. Voluntary Open Offer:

    Promoters holding more than 25% but less than 75% voting rights, can acquire more than 5% voting rights in a financial year and can opt for making a Voluntary Open Offer which is considerably of smaller size i.e. of 10% (instead of commonly prevalent open offer of 26%) and will pose lesser financial obligations.

    Pros : Provides exit opportunity to public shareholders with lesser monetary impact.

  3. Takeover Open Offer:

    In fallen markets, Open Offers are powerful catalyst to takeover businesses, increase control, and give exit to the public shareholders. With businesses eyeing speedy recovery both organically and inorganically, Takeovers would be conducive.

    Pros : Aids entrepreneurs to leap via inorganic growth, aids promoters in increasing control and provides exit to public shareholders.

B. If Promoters wish to acquire more than 5% voting rights in a listed company
  1. Acquisition of shares from Open Market:

    Too boost investors’ confidence and stabilize the tumbling share prices, the promoters can acquire upto 5% additional shares/voting rights in the current financial year from the open market, subject to requisite compliances of SEBI (Prohibition of Insider Trading) Regulations and SEBI (Substantial Acquisition of Shares and Takeovers) Regulations.

    Pros : This reflects Promoters’ confidence in the Company.

  2. Acquisition of shares by conversion of debt into equity:

    Promoters can opt for conversion of outstanding loans / convertible securities and/or warrants into equity. This would improve the debt equity ratio and would out-turn in increased profitability, Earning Per Share and higher valuation for the investors.

    Pros : Improves debt equity ratio of company & overall earnings of the investor.

  3. Preferential allotment through fresh infusion of funds:

    In this distress situation, who else but the Promoters will bail out the Companies. They can infuse fresh funds into the Company and acquire the shares, warrants and other convertible securities by way of preferential allotment.

    Pros : Fund-bringing Corporate Actions appease distressed investors. Also, brings fresh lease of life to the Company.

Note: The above-said acquisitions shall not entail open offer obligation.

C. Stock Options – Motivate employees even in tough times

    Companies may incentivize their Employees by granting Stock Options at today’s price (when markets are lying low) and the employees can exercise those Options in future (when markets charge up) at higher returns.

    Pros : (i) No burden in the books of Company;

    (ii) Heavy monetary outflows not involved;

    (iii) Performance of company’s scrip incentivizes employees. Hence, motivates employees to give their 100%.

The above-said actions/measures would be subject to the Capital Market’s legal framework, and would involve careful study of facts, financial analysis, strategic planning, legal risk mitigation and hand-holding in procedures & compliances.

We would be pleased to render you, cutting edge end to end advisory on all your issues/queries spanning across Capital Markets and Securities Law Transactions. For further discussion and assistance, please get in touch with Ms. Anjali Aggarwal (+91-9971673336) or Mr. Manoj Kumar (+91-9910688433) or Ms. Mohini Varshney (+91-9971673332).

DISCLAIMER: The abovesaid note is not a recommendation or opinion, should not be interpreted as such. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of the note.

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