Sebi may have to amend preferential issue guidelines

Mohan Kumar K

SEBI issued a press release on January 18, 2013, amending certain provisions of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. These amendments were introduced to provide more clarity to market participants on the interpretation of the relevant date and open offer price for transactions where change of control happens either through a preferential allotment or through any other combined modes of acquisitions.

As per the press release, the relevant date for making the Public Announcement and determination of offer price in cases of preferential allotment has been decided as the date on which the board authorizes the preferential allotment, instead of the date on which special resolution is passed under Section 81(1A) of the Companies Act, 1956 (as per current regulations).

However such an amendment can lead to further confusion for market participants until appropriate amendments are made to the Chapter VII of SEBI (ICDR) regulations which regulates preferential issues of shares. Under the provisions of Chapter VII of SEBI (ICDR) Regulations the relevant date for calculation of the floor price for preferential allotment is the date thirty days prior to the date on which the meeting of shareholders is held to consider the proposed preferential issue. Having two separate criteria for deciding the relevant date for preferential allotments - one for preferential offerings under SEBI (ICDR) 2009 Regulations and one of calculation of open offer trigger under SEBI (SAST) 2011 Regulations, will lead to further confusion.

Assume that we have a case of a listed firm, where the change of control occurs solely due to a preferential allotment (assuming a 25% preferential issue) and hence a mandatory open offer is triggered subsequently – as per amended regulations the preferential allottee will be allotted shares at a price decided in accordance with Chapter VIII of the SEBI (ICDR) regulations (relevant date - date thirty days prior to shareholder approval) and the open offer will be offered at a price calculated as per the amended SEBI (SAST) Regulations (relevant date – date of board authorization).

Now if the price calculated as per ICDR regulations is greater than the open offer price calculated as per amended SEBI (SAST) provisions (due to market price increases), will SEBI revise the open offer price upwards to match the price of preferential allotment? The current SEBI (SAST) regulation does not factor in any post public announcement increases for revising the open offer price and hence it is unclear on how the open offer price can be revised upwards under current regulations for such cases.

SEBI should ensure that the pricing criteria for preferential allotment under both regulations should be in conformity with each other. SEBI should consider amending the preferential issue guidelines under SEBI (ICDR) Regulations and change the relevant date as the date when the board authorizes the preferential allotment. However, in the interest on other shareholders, SEBI should also make it mandatory for having a shareholder meeting within a stipulated timeline post the board approval.

The writer is lead analyst, InGovern Research Services Pvt. Ltd