Preferential Issue of Equity Shares & Convertible Securities | CA 2013 & SEBI (ICDR)

Preferential Issue of Equity Shares And Convertible Securities Under Companies Act 2013 And SEBI (Issue of Capital Disclosure Requirements), Regulations 2018 {SEBI(ICDR)}

Preferential issue means an issue of specified securities by a listed issuer to any select person or group of persons on a private placement basis and does not include an offer of specified securities made through a public issue, rights issue, bonus issue, employee stock option scheme, employee stock purchase scheme or qualified institutions placement or an issue of sweat equity shares or depository receipts issued in a country outside India or foreign securities 

Before knowing Compliance of preferential issue we need to understand the non-applicability of some provisions of Preferential issue and some important terms which are mentioned below: 

Non Applicability as per SEBI (ICDR)

1. The provisions shall not apply where the preferential issue of equity shares is made pursuant to:

> conversion of a loan or an option attached to convertible debt instruments in term of section 62(3) and 62(4) of Companies Act, 2013;

> Merger or Amalgamation under Companies Act, 2013 except pricing provision in case of allotment of shares only to a select group of shareholders or shareholders of unlisted companies pursuant to such schemes ;

> a qualified institutions placement;

2. where the preferential issue of specified securities is made in terms the resolution plan approved under IBC except the lock-in provisions

3. The provisions of this Chapter relating to pricing and lock-in shall not apply to equity shares allotted to any financial institution within the meaning of sub-clauses (i) and (ii) of clause (h) of section 2 of the Recovery of Debts due to Banks and Financial Institutions Act, 1993 (51 of 1993)

4. If the exemption is given by SEBI Under SAST to make an open offer and if adequate disclosures about the plan are given in the explanatory statement to notice for the general meeting of the shareholders The provisions of regulation 163[Disclosure to shareholders} and sub-regulations (1), (2), (3) and (4) of regulation 164(Pricing) shall not apply to a preferential issue of equity shares and compulsorily convertible debt instruments, whether fully or partly

5. The provisions of issuing securities under preferential issue even if the person who has sold or transferred any equity shares of the issuer during the six months preceding the relevant date { and lock in period shall not apply to a preferential issue of specified securities where the If the proposed allottee is a mutual fund registered with the Board or insurance company registered with Insurance Regulatory and Development Authority of India or a scheduled commercial bank or a public financial institution.

6. Where the preferential issue of equity shares and convertible securities is made to the lenders pursuant to conversion of their debt, as part of a debt restructuring implemented in accordance with the guidelines specified by the Reserve Bank of India, subject to the following conditions mentioned under regulation 159(6) of SEBI (ICDR ) 2018

Relevant date

Explanation: Where the relevant date falls on a weekend or a holiday, the day preceding the weekend or the holiday will be reckoned to be the relevant date.

ISSUER

Issuer” means a company or a body corporate authorized to issue equity share and convertible securities under the relevant laws and whose equity share and convertible securities are being issued and/or offered for sale in accordance with SEBI  (ICDR) regulation

PERSONS NOT ELIGIBLE FOR PREFERENTIAL ISSUE AS PER SEBI (ICDR)

PERSONS ELIGIBLE FOR PREFERENTIAL ISSUE EVEN IF TRANSFERRED ANY EQUITY SHARES OF THE ISSUER DURING THE SIX MONTHS PRECEDING THE RELEVANT DATE AS PER SEBI(ICDR)

VALUATION REQUIRED FOR PREFERENTIAL ISSUE

LISTED SECURITIES AS PER SEBI (ICDR)

1. The price of shares to be issued on a preferential basis by a listed company shall not be required to be determined by the valuation report of a registered valuer

2. Where the equity share or convertible securities are issued on a preferential basis by a listed entity  for consideration other than cash, the valuation of the assets in consideration for which the equity shares are issued shall be done by an independent valuer, which shall be submitted to the stock exchanges where the equity shares of the issuer are listed:

3. If the stock exchange(s) is not satisfied with the appropriateness of the valuation, it may get the valuation done by any other valuer and for this purpose it may seek any information, as deemed necessary, from the issuer

4. Where the shares of an issuer are not frequently traded, the price determined by the issuer shall take into account the valuation parameters and the issuer shall submit a certificate stating that the issuer is in compliance of SEBI(ICDR)Regulations, obtained from an independent valuer to the stock exchange where the equity shares of the issuer are listed.

UNLISTED SECURITIES AS PER COMPANIES ACT 2013

1. The price of the shares or other securities to be issued on a preferential basis, either for cash or for consideration other than cash, shall be determined on the basis of valuation report of a registered valuer;

2. Where convertible securities are offered on a preferential basis with an option to apply for and get equity shares allotted, the price of the resultant shares pursuant to conversion shall be determined-

> either upfront at the time when the offer of convertible securities is made, on the basis of valuation report of the registered valuer given at the stage of such offer, or

> at the time, which shall not be earlier than thirty days to the date when the holder of convertible security becomes entitled to apply for shares, on the basis of valuation report of the registered valuer given not earlier than sixty days of the date when the holder of convertible security becomes entitled to apply for shares:

> Company shall take a decision for above valuation at the time of offer of convertible security itself and make such disclosure in the explanatory statement at time of mentioning the relevant date.

PRICING OF LISTED EQUITY SHARES AS PER SEBI (ICDR)

Before we move to the pricing, let’s understand meaning of frequently traded shares:

Frequently traded shares means the shares of the issuer, in which the traded turnover on any recognised stock exchange during the twelve calendar months preceding the relevant date, is at least ten per cent of the total number of shares of such class of shares of the issuer:

In case where the share capital of a particular class of shares of the issuer is not identical throughout such period, the weighted average number of total shares of such class of the issuer shall represent the total number of shares.

Explanation: For the purpose of this regulation, ‘stock exchange’ means any of the recognised stock exchange(s) in which the equity shares of the issuer are listed and in which the highest trading volume in respect of the equity shares of the issuer has been recorded during the preceding twenty six weeks prior to the relevant date

PRICING OF FREQUENTLY TRADED SHARES AND INFREQUENTLY TRADED SHARES

Pricing of infrequently traded shares

It is mentioned under the heading of valuation of listed securities

Pricing of frequently traded shares

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WHERE THE ABOVE SHARE COMPLETES PERIOD OF 26 WEEKS FROM DATE OF LISTING TO STOCK EXCHANGES PRICING SHALL BE:

 Average of the weekly high and low of the volume weighted average prices of the related equity shares quoted on the recognised stock exchange during these twenty six weeks and if such recomputed price is higher than the price paid on allotment, the difference shall be paid by the allottees to the issuer.

Equity shares shall remain in lock in until the balance amount is paid by allotee.

PRICING WHEN EQUITY SHARES OR CONVERTIBLE SECURITIES ISSUED TO QIBS

A preferential issue of specified securities to qualified institutional buyers, not exceeding five in number, shall be made at a price not less than the average of the weekly high and low of the volume weighted average prices of the related equity shares quoted on a recognised stock exchange during the two weeks preceding the relevant date. 

CONDITIONS FOR PREFERENTIAL ISSUE OF EQUITY SHARE AND CONVERTIBLE SECURITIES

EXPLANATORY STATEMENT OF SPECIAL RESOLUTION SHALL CONTAIN THE FOLLOWING DISCLOSURES:

COMPANIES ACT COMPLIANCES- ROC FILING

1. MGT- 14 within 30 days of passing Board resolution in which Preferential allotment is approved

2. MGT-14 within 30 days of passing Special Resolution

3. PAS -3 within fifteen days of allotment along with a complete list of all the allottees containing-

> the full name, address, permanent Account Number and E-mail ID of such security holder;

> the class of security held;

> the date of allotment of security ;

> the number of securities herd, nominal  value and amount paid on such securities; and particulars of consideration received if tire securities were issued for consideration other than cash.

SEBI (LODR) COMPLIANCES

In-principle approval of recognized stock exchange(s).

The listed entity, before issuing securities, shall obtain an ‘in-principle’ approval from recognised stock exchange(s) in the following manner:

LISTING APPLICATION

Issuer shall make an application to the exchange/s for listing in case of further issue of equity shares from the date of allotment within 20 days

TRADING APPROVAL

Listed entities shall make an application for trading approval to the stock exchange/s within 7 working days from the date of grant of listing approval by the stock exchange/s.

POST ALLOTMENT COMPLIANCES

Lock in period as SEBI (ICDR)

Trading approval shall mean the latest date when trading approval has been granted by all the stock exchanges where the equity shares of the issuer are listed, for specified securities allotted as per the provisions of this Chapter.

1. The equity shares issued on a preferential basis pursuant to any resolution of stressed assets under a framework specified by the RBI or a resolution plan approved by the NCLT under the IBC, shall be locked-in for a period of one year from the trading approval:

2. Not more than twenty per cent. of the total capital of the issuer shall be locked-in for three years from the date of trading approval

3. Equity shares allotted in excess of the twenty per cent. shall be locked-in for one year from the date of trading approval pursuant to exercise of options or otherwise, as the case may be.

4. The entire pre-preferential allotment shareholding of the allottees, if any, shall be locked-in from the relevant date up to a period of six months from the date of trading approval:

5. In case of convertible securities or warrants which are not listed on stock exchanges, the entire pre-preferential allotment shareholding of the allottees, if any, shall be locked-in from the relevant date up to a period of six months from the date of allotment of such securities. 

Explanations For the purpose of this regulation:

(I) The expression “total capital of the issuer” means:

(a) equity share capital issued by way of public issue or rights issue including equity shares issued pursuant to conversion of specified securities which are convertible; and

(b) specified securities issued on a preferential basis to the promoters or the promoters group.

(II) For the computation of twenty per cent. of the total capital of the issuer, the amount of minimum promoters’ contribution held and locked-in, in the past in terms of Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000 or these regulations shall be taken into account.

(III) The minimum promoters’ contribution shall not be put under fresh lock-in again, even though it is considered for computing the requirement of twenty per cent. of the total capital of the issuer, in case the said minimum promoters’ contribution is free of lock-in at the time of the preferential issue.

TRANSFERABILITY AS SEBI (ICDR)

1. May be transferred among the promoters or the promoter group or to a new promoter or persons in control of the issuer subject to provision of SAST, However that the lock-in on such securities shall continue for the remaining period with the transferee.

2. The equity share or convertible securities allotted on a preferential basis shall not be transferable by the allottees till the trading approval is granted for such securities by all the recognised stock exchanges where the equity shares of the issuer are listed.  

PAYMENT OF CONSIDERATION AS SEBI (ICDR)

Annexure-A