Amendments in Preferential Issue Norms

Amendments in Preferential Issue Norms 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. 159(1) 159(4)

Amendment in provision Eligibility of the allottees w.r.t sale of pre issue holdings 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 Approval 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 Preferential issue of specified securities shall not not be made to any person/ Promoter or be made to any person who has sold or promoter group, as the case may be, who has transferred any equity shares of the issuer during sold or transferred any equity shares of the the 6 months preceding the relevant date issuer during the 90 trading days 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 ))

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New Law Erstwhile Law  The entire pre preferential No specific timeframe holding of the proposed allottees must be in Dematerialised form before the In Principle Application is made to the stock exchange(s)  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

III.

No specific timeframe.

Company to seek In-Principle approval anytime before making allotment of securities.

Consideration other than cash: Reg 163(3)

New Law Erstwhile Law  Only Share Swaps to be  Any form of permitted as a form of consideration other than consideration for preferential cash was permitted. issues, for consideration other than cash.  Valuation required only in case when  Valuation Report to be obtained preferential issue was from an independent registered made for consideration valuer. in the form of any asset.

IV.

CP Remarks 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.

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.

Compliance Certificate to be placed before shareholders: Reg 163(2)

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New Law  The issuer shall place a copy of the certificate of a practicing company secretary” before the general meeting of the shareholders. 

V.

Erstwhile Law The issuer shall place a copy of its Statutory Auditors before the general meeting of the shareholders.

Such Certificate to be hosted on the Issuer Company’s website and a link for the same is to be provided in the notice for the general meeting.

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 Higher of: i. 90/10 trading days’ volume weighted average price (VWAP) of the scrip preceding the relevant date, whichever is higher, or

Erstwhile Law Higher of: 26/2 weeks’ volume weighted average price (VWAP) of average of weekly high and low of the scrip preceding the Relevant Date.

ii. any stricter provision in the Article of Association (AOA) of the issuer company.

CP REMARKS:  In many cases, it had been observed that there used to be significant difference in pricing of 26 weeks and 2 weeks, the erstwhile pricing period. So, in the new pricing will enable preferential issues to happen at comparatively recent pricing trends, being 90/10 trading days. 

However, in a situation, if the AOA of any Company contain any stricter pricing provision, the same shall be needed to be followed.

CASE 2: When allotment of > 5% of post issue fully diluted share capital, to an allottee either individually or acting in concert New Law Higher of: i. 90/10 trading days’ volume weighted average price (VWAP) of the scrip preceding the relevant date, whichever is higher, or

Erstwhile Law Higher of: 26/2 weeks’ volume weighted average price (VWAP) of average of weekly high and low of the scrip preceding the Relevant Date.

ii. any stricter provision in the Article of Association (AOA) of the issuer company iii. Valuation Report from a registered Independent Valuer CP REMARKS:  The erstwhile Reg 164 of SEBI ICDR Regulations did not envisage a condition w.r.t., the additional parameter for valuation in cases when preferential allotment of more than 5% was proposed to be made to any allottee singly or along with persons acting in concert.

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 

The requirement of valuation report has been added, to take into account the control premium that such controlling allottees will get in the issuer company.

This 5% threshold is in line with the Creeping Acquisition limit of 5%, as available under the SEBI SAST Regulations and this 5% is to be checked on fully diluted basis.

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 “Frequently traded shares” means the shares of Frequently traded shares” means the shares of the issuer, in which the traded turnover on any the issuer, in which the traded turnover on any recognised stock exchange during the 240 recognised stock exchange during the 12 calendar trading days preceding the relevant date, is at months preceding the relevant date, is at least least 10% of the total number of shares of such 10% of the total number of shares of such class of class of shares of the issuer shares of the issuer.

CP Remarks: This new criteria of 240 trading days will give more realistic status of trading in the shares of the Company.

VII.

Pricing in case of Change in Control: Reg 166A

New Law Erstwhile Law Higher of: No provision relating change in control. i.90/10 trading days’ volume weighted average price (VWAP) of the scrip preceding the relevant date, whichever is higher, or ii. any stricter provision in the Article of Association (AOA) of the issuer company iii. Valuation Report from Independent Valuer  



a

registered

the separate meeting of a committee of Independent Directors is required to be mandatorily held; Such Committee to provide a reasoned recommendation along with their comments on all aspects of preferential issuance including pricing.

The voting pattern of the committee shall also be disclosed to shareholders/public.

CP REMARKS:  These provisions have been added in line with SEBI Takeover Regulations. 

On approval of the proposal of preferential issue by the Board of Directors of the Company,

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the Separate committee of Independent directors shall also give recommendation on the rationale for such issue and pricing thereof, in case if change of control of issuer company pursuant to preferential issue.

VIII.

Lock-in on Shares allotted on Preferential basis (Reg 167(1))

For Promoters

New Law Upto 20% of the post issue paid up capital: For 18 months Above 20% of the post issue paid up capital: For 6 months

Erstwhile Law Upto 20% of the post issue paid up capital: For 3 years Above 20% of the post issue paid up capital: For 1 year

For NonFor a period of 6 months The erstwhile lock in period was 1 year Promoters CP Remarks: Lock-in periods are reasonably reduced in line with lock-in requirements in case of IPOs. This may encourage more Strategic Investors in the preferential issues.

As generally, the promoters don’t offload their shares, so this provision may not have much of an impact on them.

IX.

Pre- Preferential Lock-in (Reg 167(6)

New Law Entire pre-preferential allotment shareholding of the allottees, to be locked-in from the relevant date up to a period of 90 trading days from the date of trading approval/ date of allotment, in case of equity share/ convertible security.

X.

Erstwhile Law Pre-preferential allotment shareholding to be locked in for 6 months from the date of trading approval/ date of allotment, in case of equity share/ convertible security.

Pledge of locked-in shares held by Promoters: Reg 167A

New Law Erstwhile Law ICDR was silent  Promoters permitted to pledge the shares locked-in pursuant to a preferential issue;  Provided, such pledge of specified securities is one of the terms of sanction of the loan granted by certain financial institutions;  The said loan is to be sanctioned to the issuer company or its subsidiary(ies) for the purpose of financing one or more of the objects of the preferential issue.

Remarks Practically, as a part of rules and procedures of Depositories, the lock-in shares can be pledged with banks/ financial institutions by the Promoters, with the condition that they shall remain under lock-in.

Now, the same has been specifically incorporated in ICDR with end use restriction on the loan so

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obtained by the Issuer Company.

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

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