Now, company promoters are allowed to hike stake to 10% via preferential issue

For those promoters who see value in their company shares, now there is another means to hike stake. Dull market has prompted a gazetted tweak in SEBI’s takeover code. So far the promoters were allowed to pick up 5 per cent stake in a company annually, but now that has been hiked to 10 per cent for the financial year 2020-2021.

The changes mean that promoters can hike their stake in the company to 10 per cent through preferential issue of equity shares in one year. Preferential issue means issuing new shares but it has to be done via SEBI approved formula at an average price of the last 15 days or past 26 weeks, whichever is higher. The only advantage is that in an open market the prices move up when promoters try to buy but that may not happen if done via a preferential route. But the preferential issue shares cannot be sold in the markets for three years,

“Provided that the acquisition beyond five per cent but up to ten per cent of the voting rights in the target company shall be permitted for the financial year 2020-21 only in respect of acquisition by a promoter pursuant to preferential issue of equity shares by the target company,” the new notification said.

This will also make voluntary open for promoters to acquire shares from the market easy, experts said.

Open offer is when a promoter announces intention to pick-up shares mainly giving an exit route to shareholders. It is a method that promoters also use to shore up their holding in the company. But even when the share prices were low, company promoters could not make open offer due to restrictive SEBI rules earlier.

"The move of allowing promoters hiking stake from 5 per cent to 10 percent should be reviewed permanently. It was implemented in 2011 and nine years have passed so there is a need to make some takeover norms future ready," said P K Nagpal, SEBI's former ED and currently a legal consultant.

 “The current situation demands that promoters are allowed to pump in money into the company. Lot of businesses are suffering due to low liquidity and companies are in urgent need of money. Therefore, as a one time move to allow promoters preferential allotment to hike stake their company is positive."  said J N Gupta, founder of proxy advisory firm SES. 

As per a legal expert, one of the disqualifications for making a voluntary open offer under Regulation 6 of the Takeover Code was that where an acquirer or any person acting in concert with him had acquired shares of the target company in the preceding 52 weeks without attracting the obligation to make a public announcement of an open offer, he was not eligible to voluntarily make a public announcement of an open offer for acquiring shares. As per the change, the disqualification has been relaxed till March 31, 2021, experts say.

COMMENT NOW