SEBI relaxes preferential allotment norms; 4 ways in which it will help D-Street

Capital market regulator, Securities and Exchange Board of India (SEBI) on June 17 relaxed the preferential allotment norms till March 2021.

SEBI has allowed promoters to increase their stake in the company by up to 10 percent through a preferential allotment, against the limit of 5 percent earlier.

The move comes at a time when a lot of companies are in need of funds to start operations following the countrywide lockdown. It can help the companies to raise funds faster via promoters.

"With regard to the notification issued by SEBI for amending provision of SEBI (SAST) Regulations, promoters of the listed company were allowed to acquire shares up to 5% in any Financial year without making a public announcement of an open offer but with this amendment, promoters are allowed acquire shares up to 10% in FY21 by way of acquiring shares of their company through preferential allotment, which will be issued as per provision of SEBI (ICDR) Regulation," Shalibhadra Shah, CFO, MOFSL told Moneycontrol.

"This amendment will help promoter to increase stake in their company and at the same time will help the company to raise equity capital from promoters through preferential issue," he said.

Preferential allotment serves as an alternative mechanism of resource mobilisation wherein a listed firm issues shares or convertible securities, to a select group of shareholders. It is considered to be the fastest way of raising capital.

“SEBI relaxations are a welcome move, relaxing preferential allotments norms will help promoters have more strategic investors on board. With most companies operating at skeletal staff counts, removing timeline restrictions and voluntary open offer norms should help as well,” Nikhil Kamath, Co-Founder & CIO, Zerodha & True Beacon told Moneycontrol.

Here are 4 ways in which this relaxation will help capital markets:

Provide stability to markets:

SEBI’s move will get more stability to the market as flows from promoters are considered to be more long term compared to FII or DII flows, suggest experts.

With the massive price erosion that has taken place due to COVID-19, investor sentiment is negative. “Both DIIs and FIIs have been selling heavily in the markets which is leading to a lot of instability in the markets,” Gaurav Garg, Head of Research at CapitalVia Global Research Limited- Investment Advisor told Moneycontrol.

“The major reason behind relaxing these norms is that SEBI wants a stable fund flow in the market which can give stability as well as direction to the market,” he said.

Easier for companies to raise funds:

At a time when funding seems to have dried up – SEBI’s move could help companies to fight the COVID-related downturn with some ease, suggest experts.

“We believe that the amendments by SEBI to the takeover regulations by allowing promoters to increase their stake in a company by 10% through a preferential allotment is a positive development,” Jyoti Roy, DVP Equity Strategist, Angel Broking Ltd told Moneycontrol.

“It will not only allow promoters to increase their holdings substantially, but will also make it easier for companies to raise funds from promoters to tide over the current difficult economic conditions,” he said.

Could have come earlier, but Capital market-friendly  

Better late than never. Yes, the move could have come in early, but SEBI is also trying to do its bit in boosting investors’ confidence and provide stability.

“Just like the Govt and RBI are doing whatever they can to kick start the real economy, SEBI too is doing its part by relaxing preferential allotment norms and voluntary offers to strengthen the hands of bulls in this uncertain phase of financial markets,” Umesh Mehta, Head of Research, Samco Securities Ltd told Moneycontrol.

“These changes are investor-friendly and proactive in the interest of capital markets. It ought to have come a little earlier to see some practical impact but given that markets have already bounced back decently, the said changes may remain on paper unless there is a second wave of selling, which at that time will act as a soft landing for the markets,” he said.

Voluntary Open offer:

The SEBI also relaxed voluntary open offer norms and removed timeline restriction, and restriction on voluntary open offer if shares are purchased within 52-weeks.

Roy of Angel Broking is of the view that relaxation of the provisions relating to voluntary open offer by promoters is also a positive development as it would allow the promoters to make an open offer even if they had increased their stake in the company during the past 52-weeks.

“Therefore, we may see promoters come out with voluntary open offers as they may want to use current low stock prices to increase their holdings in their company which should provide support to stock prices,” he said.

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