The securities market regulator SEBI has recently proposed a consultation paper for stressed listed entities to solve liquidity/fundraising problems as they are facing problems due to COVID-19 pandemic, hence in view of this SEBI proposed some certain relaxations which are Briefed below write-up.
INTRODUCTION:
In respect of these situations prevailing in existing market, Securities and Exchange Board of India (SEBI) has recently proposed a consultation paper titled “Pricing of Preferential Issues and exemption from open offer for acquisitions in Companies having Stressed Assets”, on April 22, 2020 proposing certain amendments to SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011 and SEBI (Issue of Capital and Disclosures Requirement) Regulations, 2018 for the listed companies who are adversely affected by the economic slowdown and COVID-19 pandemic as investors are losing interest in investing their capital into companies due to negative/less returns.
BACKGROUND:
The Security Market Regulator (SEBI) has comes with the discussion paper for listed companies facing certain difficulties in raising capital through the traditional means like loan from banks/FI. Preferential allotment is one of the methods through which funds can be raised and it is observed that listed companies having “stressed assets” experiencing continuous fall in their share price. Further with decline in the share prices the financial results of the companies may be adversely affected.
The main aim to bring this consultation paper for the stressed listed companies who are facing financial or liquidity crisis due to global factors like economic slowdown and COVID-19 pandemic as a big segment of investors are losing faith in investing capital in the security market because of more risk with less return or negative returns, so in view of this SEBI had issued consultation paper on April 22, 2020 to all listed entities, related stakeholders or market intermediaries.
CRITERIA TO IDENTIFY A STRESSED COMPANY:
As per consultation paper if the company satisfies any two of following three conditions given below it can be considered as “Stressed”:
- The listed company has given disclosure about the default made in payment of interest/ repayment of principal amount on loans from banks/ financial institutions and listed and unlisted debt securities for two consequent quarters in terms of SEBI Circular dated November 21, 2019.
- Existence of inter-creditor agreement in terms of Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions 2019 dated June 07, 2019.
Which means as per RBI cases where the resolution plan (RP) is to be implemented, all lenders shall enter into an inter-creditor agreement within 30 days of the default, to provide for ground rules for finalization and implementation of the RP in respect of borrowers with credit facilities from more than one lender.
- The company had given downgraded Credit rating of its listed instruments to “D”
SEBI (ISSUE OF CAPITAL AND DISCLOSURES REQUIREMENT) REGULATIONS, 2018:
Any preferential issue made by listed company are regulated by SEBI (Issue of Capital & Disclosure Requirement) Regulations 2018. Regulation 164 deals with pricing methodology for issuing shares which are as follows:
If the equity shares of the issuer have been listed on a recognized stock exchange for a period of 26 weeks or more as on the relevant date, the price of the equity shares to be allotted pursuant to the preferential issue shall be not less than higher of the following:
A. The average of the weekly high and low of the volume weighted average price of such equity shares during the 26 weeks from preceding the relevant date,
B. the average of the weekly high and low of the volume weighted average prices of the related equity shares quoted during the 2 weeks preceding the relevant date.
SEBI Proposed Exemptions Under ICDR:
The Exemption are provided to eligible listed entities who satisfies the above conditions from strict implementation of pricing regulations given under Chapter V (Preferential Issue) of the ICDR Regulations. However, the pricing in such cases may be determined as follows:
- Pricing 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 recognized stock exchange during the two weeks preceding the relevant date.
In order to avail above exemptions listed entity should comply with the following conditions:
> The preference issue is made to persons/entities that are not part of the promoter or promoter group on the date of the board meeting to consider the preferential issue.
> The resolution for preferential issue is passed by majority of minority shareholders.
> The proceeds from such issue should be disclosed in the explanatory statements.
> Monitoring agency will be appointed to monitor funds.
> The shares issued as preferential allotment shall be locked in for period of 3 years from the date of trading approval granted by all the stock exchanges.
SEBI (SAST) REGULATIONS,2011:
As per Regulation 3(1) of SEBI (SAST) Regulations 2011 on Substantial acquisition of shares or voting rights says:
No acquirer shall acquire shares or voting rights in a target company which taken together with shares or voting rights, if any, held by him and by persons acting in concert with him in such target company, entitle them to exercise twenty-five per cent or more of the voting rights in such target company unless the acquirer makes a public announcement of an open offer for acquiring shares of such target company in accordance with these regulations.
SEBI proposed exemption under SAST:
If the acquisition is beyond the limit prescribed in terms of Regulation 3(1) of SAST Regulations than it would be exempted from making open offer for the allottees of preferential issue in such aforesaid stressed companies.
CONCLUSION:
Due to lack of funding at such a growing stage it may lead to a major disruption in functioning of day to day operations of the company, but if said the considerations by SEBI are implemented in the current situation than it will be possible for the stressed companies to raise funds through preferential allotment and also saves from insolvency or bankruptcy proceedings. The consultation paper is open for comments and public views from the market participants and stakeholders until May 13, 2020.
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