SEBI makes raising funds easier for stressed companies

Regulator to relax pricing methodology for preferential issues by listed firms

A preferential issue, however, cannot be made to entities that are part of the promoter group. Paul Noronha

The Securities and Exchange Board of India (SEBI) has relaxed the norms for preferential allotment for companies that have stressed assets, thereby making it easier for such entities to raise funds.

“SEBI has decided to relax the pricing methodology for preferential issues by listed companies having stressed assets and exempt allottees of preferential issues from open offer obligations in such cases, with immediate effect,” the regulator said in a release on Tuesday.

The capital markets regulator said listed entities with stressed assets can make preferential allotment at a price that is “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.”

Further, the watchdog has exempted allottees in such issuances from having to make an open offer even if the quantum of acquisition triggers an open offer or there is a change in control in terms of Takeover Regulations.

A company would be eligible to be called stressed if it has defaulted on its payment obligations for more than 90 days or if the credit rating agencies have downgraded its securities to ‘D’.

An entity, which has an inter-creditor agreement in terms of Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions 2019, will also be identified as stressed.

SEBI also included certain checks to ensure the relaxations are not misused. The preferential issue cannot be made to entities that are part of the promoter group or those that have been identified as undischarged insolvent, wilful defaulter or fugitive economic offender.

The resolution for such a preferential allotment and the exemption from an open offer will have to be passed by the majority of minority shareholders and the proposed end-use of proceeds of such preferential issue will have to be disclosed.

‘Not for loan repayment’

Also, the proceeds cannot be used for repayment of any loans taken from the promoter group/ or group companies.

A three-year lock-in will also be applicable on the shares allotted in such a preferential allotment.