SEBI has eased preferential allotment rules for fund-raising by stressed companies and granted an exemption to them from making an open offer. Importantly, the pricing norms have been relaxed for stressed companies. 

“Eligible listed companies having stressed assets will be able to determine pricing of their preferential allotments at not less than the average of the weekly high and low of the volume weighted average prices of the related equity shares during the two weeks preceding the relevant date,” SEBI said.

The framework so far has been 26 weeks or more to determine the pricing for frequently-traded shares. But the new proposal will help prevent value erosion by reducing that period. Companies can now raise funds through the preferential allotment route even if their share price has fallen sharply recently. But the allotment cannot be made to the promoter or promoter group, according to SEBI. Also, the listed firms will have to fit criteria to avail the relaxation.

To protect minority shareholders’ interest, SEBI has said that the newly allotted shares will remain locked-in for a period of three years from the last date of trading approval.

Further, SEBI, in another notification, said that any acquisition of shares or voting rights or control of the target company by way of a preferential issue under the new regulation will also be exempt from the obligation to make an open offer. Under SEBI’s current takeover rules, an acquirer has to compulsorily come out with an open offer where the other shareholders can tender their shares. SEBI has said that companies would have to meet two of the three criteria laid down to be eligible under Regulation 164.

Disclosure of defaults

First, the issuer should have disclosed all the defaults relating to the payment of interest/ repayment of the principal amount on loans, and such payment default should be continuing for a period of at least 90 calendar days. Second, an inter-creditor agreement must be in place under the RBI’s June 7, 2019, circular on a Prudential Framework for Resolution of Stressed Assets. Third, the credit rating of the financial instruments (listed or unlisted), credit instruments/borrowings (listed or unlisted) of the company should have been downgraded to ‘D’.

Any uncharged insolvents, wilful defaulters, fugitive economic offenders and the like will also not be eligible. The proceeds from such an allotment cannot be used to repay any loans taken by the promoter or promoter group, and the purpose of its use would have to be disclosed in the explanatory statement. According to market analysts, the move will not only benefit the beleauguered company but also the lenders, which face default risk. PSU banks and some NBFCs gained because of this move, they added.

 

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