Markets regulator Securities and Exchange Board of India (SEBI) has made it easier for listed, stricken companies to raise money from potential investors.
SEBI has relaxed the pricing norms for preferential allotment by such companies while also exempting investors in such issuances from making open offers if they acquire a substantial stake in the listed entity.
“It has been represented that the pricing guidelines are too onerous for any financial investor to consider investments in a stressed company,” stated the SEBI discussion paper.
The regulator has proposed that preferential allotment can be done at a price that is not less than the average of the weekly high and low of the volume weighted average prices of the shares during the two weeks preceding the relevant date.
Erosion in share value
Typically, a preferential allotment is priced on the preceding 26 weeks share price movement which is practically difficult for stressed companies since the shares see massive erosion in their value. Further, the regulator has proposed that if an investor had acquired more than 25% in the company by way of preferential allotment, he will be exempted from making an open offer for further 26% shares.
However, as a safeguard, SEBI has proposed that the allotment can only be made to entities that are not part of the promoter group and the resolutions related to the allotment and the exemption from making an open offer will have to be approved by a majority of minority shareholders.
Lock-in period
Further, the shares allotted will have a three-year lock-in period. Meanwhile, for a company to qualify as a stressed entity, it should comply with at least two of the three criteria, namely default on its payment obligations for two consecutive quarters, credit rating of listed securities downgraded to D and existence of inter-creditor agreement in terms of Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions 2019 dated June 7, 2019.
