The Securities and Exchange Board of India’s (SEBI) move to relax funding norms for companies with stressed assets by easing pricing norms for preferential issues may provide a new lease of life for such firms and save many from insolvency, market experts say.
The market regulator proposed the idea in a consultation paper -- ‘Pricing of preferential issues and exemption from open offer for acquisitions in companies having stressed assets’ -- issued on April 22 and sought public comments from stakeholders. The last date for submitting inputs was May 13.
The measure was recommended by SEBI’s Primary Market Advisory Committee, and the regulator is expected to implement the new guidelines in a month’s time.
A preferential issue is a primary market issuance of shares by listed companies to selected institutions or institutional buyers. So far, the pricing was based on the weighted average price of the last 26 weeks or two weeks, whichever was higher.
Now, SEBI has proposed to remove the six months’ weighted average price from the guidelines for preferential issues, adding the pricing in such cases will be done on the basis of the weighted average of the last two weeks only. Moreover, the market regulator relaxed proposals related to the exemption from an open offer for acquisitions, as per the consultation paper.
Market observers have welcomed the proposal as a step in the right direction. “This is also a kind of stimulus for stressed companies. Giving a helping hand to such companies and making the price attractive for the acquirer are crucial steps as the number of firms in distress will go up in the wake of the COVID-19 pandemic,” said Lalit Kumar, Partner, J Sagar Associates.
SEBI is also getting ready to redefine the criteria for determining a company as stressed. As per the consultation paper, “a company that has made disclosure of defaults on payment of interest or repayment of principal amount on loans from banks or any financial institutions and listed and unlisted debt securities for two consequent quarters” could be termed stressed. The downgrading of the credit rating of listed instruments of a company to 'D' default category will also put the entity under the stressed category.
These stressed companies could get an exemption from Issue of Capital and Disclosure Requirements in the pricing of a preferential issue and Substantial Acquisition of Shares and Takeovers exemption in the case of open offers.
Pranav Haldea, Managing Director of Prime Data Base, has lauded the proposal. “These new norms will save several companies from going into insolvency. The COVID-19 crisis has adversely impacted many listed firms. SEBI is taking the right step at the right time by offering these firms a way to infuse fresh funds,” he observed.
As per the proposed guidelines, individuals or entities that are not part of the promoter or promoter group will not be eligible to participate in the preferential issue. Also, resolution for the preferential issue at the aforesaid pricing and exemption from open offer has to be approved by the majority of minority shareholders.
The company should also give details of the proposed use of the proceeds of such preferential issue in an explanatory statement. An agency may be appointed for monitoring the use of the proceeds of such preferential issues.
“SEBI had given a similar exemption earlier for companies under insolvency and bankruptcy code. This time, the regulator is taking a bold step to help companies get an acquirer to infuse funds and thus save them from reaching the stage of insolvency. In the current situation, this will come as a relief for companies. Thankfully, necessary checks and balances like taking nod of minority shareholders have been provided in the SEBI proposal,” Kumar noted.