Time to overhaul preferential issue norms

KS Badri Narayanan Chennai | Updated on July 17, 2021

18-month window to convert shares is too long; lock-in period can be done away with

There has been a lot of debate around preferential allotment issues, after the PNB Housing Finance board approved a preferential allotment of shares and warrants to investors including the Carlyle Group, General Atlantic, Salisbury Investments Private Ltd and Alpha Investments to raise ₹4,000 crore.

Questions were raised if the deal was unfair to PNB Housing Finance's minority shareholders and detrimental to PNB shareholders, as the bank, according to detractors, willingly surrendered control without extracting fair compensation. Following the hullabaloo, SEBI barred PNB Housing from going ahead with the preferential issue. The company moved Securities Appellate Tribunal against the SEBI fiat and was allowed to go ahead with shareholder voting on the preferential issue but was barred from declaring the results till its final order.

While the matter is sub-judice and will be decided by the best of legal brains, the time nevertheless has come for the regulator to revamp its current norms.

Preferential pricing issue

According to SEBI's current guidelines, preferential issue of equity shares or instruments convertible into equity shares to any select group of persons on private placement basis should be at higher of the average of the weekly high and low closing prices of shares during the six months preceding the relevant date or the average of the weekly high and low of the closing prices during the two weeks preceding it.

The relevant date is fixed at 30 days prior to the date on which the meeting of general body of shareholders is held.

Current mechanism

Allottees have to pay at least 25 per cent of the price fixed to receive preferential instruments. They have the right to forfeit the allotment in case they are not interested, but the initial 25 per cent paid will not be reimbursed.

Allottees have 18 months to convert the instrument into shares from the date of issue with a three year lock-in from the date of allotment.

Too liberal

These rules appear too liberal and most allottees forfeit their shares if the price is not conducive and make a killing if the price zooms in 18 months. The pricing rule can be tweaked so that the allotment price of later installments do not carry a discount of over 20 per cent to markets. The window of 18 months is also too long, which can be cut short to 6-9 months.

SEBI can also do away with or reduce the lock-in period for allottees.

This will not only ensure fund flows to the company but also cut the undue advantage preferential allottees get over the retail investors.

Published on July 16, 2021

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