Decoding Sebi Relaxations For Preferential Issues Matters

Author: CS Lalit Rajput

Partner at Xcede Consultech LLP

Securities Exchange Board of India (SEBI) vide Press Release no. PR No.35/2020 dated 23^rd June, 2020 has come out with Relaxations for Listed Companies having stressed assets aimed at helping stressed companies raise capital through timely financial intervention, at the same time protecting the interest of shareholders.

Relaxations are divided into two main parts:

Relaxations in the pricing methodology for preferential issues
exempt allottees of preferential issues from open offer obligations

Eligibility: Listed Companies having stressed assets only eligible.

Applicability of the relaxations: shall come into force with immediate effect.

What are the relaxations:

Pricing of their preferential allotments	Exempted from making an open offer
not less than the average of the weekly high and low of the volume weighted average prices of the related equity shares during the two weeks preceding the relevant date.	if the acquisition is beyond the prescribed threshold or if the open offer is warranted due to change in control, in terms of Takeover Regulations.

Eligibility to be considered as stressed and therefore be eligible for aforesaid relaxations:

A listed entity satisfying any two out of the following three conditions shall be considered as stressed and therefore be eligible for aforesaid relaxations:

Condition 1	Condition 2	Condition 3
Any listed company that has made disclosure of defaults on payment of interest/ repayment of principal amount on loans from banks / financial institutions/ Systemically Important Non-Deposit taking Non-banking financial companies/ Deposit taking Non-banking financial companies and /or listed or unlisted debt securities in terms of SEBI Circular dated November 21, 2019, and such default is continuing for a period of at least 90 calendar days after occurrence of such default.	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.	Downgrading of credit rating of the financial instruments (listed or unlisted), credit instruments / borrowings (listed or unlisted) of the listed company to “D”.

Other Required Conditions:

Other mandatory requirements shall be fulfilled to avail the relaxations by the Eligible Listed Companies:

1. Eligibility / Ineligibility:

The preferential issue will be made to persons/entities that are not part of the promoter or promoter group.
an Undischarged insolvent, Wilful defaulter, Fugitive economic offender, those Disqualified to act as director, prohibited by SEBI from trading in securities and accessing the securities market will also be ineligible.

2. Passing of Resolution

The resolution for the preferential issue at the aforesaid pricing and exemption from open offer shall be passed by majority of minority.

3. End-use of proceeds

Proposed end-use of proceeds of such preferential issue will be disclosed
The proceeds should not be used for any repayment of loans taken from promoters/ promoter group/ group companies.

4. Monitoring agency

Monitoring agency will be appointed for monitoring end-use of the proceeds of such a preferential issue.
Monitoring agency will be appointed for monitoring end-use of the proceeds of such a preferential issue. The monitoring agency shall not be an associate to the company. The Audit Committee shall also monitor the proceeds of such a preferential issue.

5. locked in period for Shares

The shares issued to the investors in such an issue shall be locked in for a period of three years from the latest date of trading approval granted by all the stock exchanges where the specified securities are listed.

6. Certification of Eligibility Norms

The statutory auditor and the Audit Committee shall certify that eligibility norms as mentioned above in Eligibility Criteria and conditions at point 1 to 3 of this segment have been met at the time of dispatch of notice for general meeting proposed for passing the special resolution and also at the time of allotment.

Kindly note that:

To give effect to these relaxations, SEBI ICDR Regulations and SEBI Takeover Regulations have been amended. The relaxations introduced vide notifications dated June 22, 2020, are expected to make fund raising through preferential allotments relatively easier for stressed companies.

SEBI ICDR Regulations:

https://www.sebi.gov.in/legal/regulations/jun-2020/securities-and-exchange-board-of-india-issue-of-capital-and-disclosure-requirements-second-amendment-regulations-2020_46907.html

SEBI Takeover Regulations

https://www.sebi.gov.in/legal/regulations/jun-2020/securities-and-exchange-board-of-india-substantial-acquisition-of-shares-and-takeovers-second-amendment-regulations-2020_46908.html

Link of the Circular:

https://www.sebi.gov.in/media/press-releases/jun-2020/relaxations-for-listed-companies-having-stressed-assets_46910.html

Disclaimer:

IN NO EVENT THE AUTHOR SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM OR ARISING OUT OF OR IN CONNECTION WITH THE USE OF THIS INFORMATION.