SEBI heard this prayer and now proposes to relax not only the pricing norms applicable for a preferential issue by financially stressed listed companies, but also grant exemption from making an open offer if the acquisition results in the acquirer acquiring more than 25% voting rights in the investee company. It is about time. This relaxation is long overdue and not related to the pandemic. No doubt, because of the pandemic, valuations have taken a hit and the share prices of stressed companies have further contracted.
Companies which face financial stress need fund infusion to subjugate the stress situation and avoid insolvency and/or bankruptcy. Investors keen to invest in distressed companies are scarce and are also subject to hurdles and practical difficulties under various laws.
Companies with "stressed assets" experience further fall in their share price. To add salt to the wounds, the disclosures made by such companies, such as financial results and defaults in debt servicing aggravate the fall. The lack of funding at such a crucial stage leads to disruption in functioning of the company.
Recognising these difficulties, SEBI proposes to offer avenues and encourage investors and other funds, such as stressed asset funds and buyout funds, to invest money into these stressed companies by providing certain exemptions.
The current price at which investors may acquire shares issued on a preferential basis is based upon the weighted average price of last 6 months or 2 weeks, whichever is higher. This pricing mechanism became onerous for financially stressed listed companies, which on the one hand were subject to the global slowdown and on the other hand, lack of liquidity from banks and NBFCs; add to that the rout triggered by the pandemic.
SEBI now proposes that shares issued by financially stressed listed companies on preferential basis be priced based on the weighted average price during 2 weeks preceding the relevant date. SEBI also proposes that if the acquisition results in breaching the threshold of 25% as set out in Regulation 3(1) of the Takeover Regulations, then the acquirer be exempt from making an open offer.
The relaxation from the current preferential issue pricing guidelines is subject to adherence of few conditions, which if not complied with will take one back to the pricing mechanism of 26 weeks and 2 weeks.
What is a stressed company? As per the SEBI Consultation Paper (proposing these exemptions), a company will be considered a "stressed company", if:
- it has disclosed defaults for 2 consequent quarters on interest and/or principal payments availed from banks and/or financial institutions and on its listed and unlisted debt securities;
- the lenders of such a company have executed an inter-creditor agreement providing guidelines for finalisation and implementation of a resolution plan;
- the credit rating of such a company has been downgraded to "D", which rating is given to a borrower that is not of investment grade and implies the highest degree of risk, since the borrower has defaulted on its debts.
There are more conditions!
- promoters cannot participate;
- the resolution proposing the preferential issue, availing relaxation on pricing and seeking exemption from open offer must be approved by majority of the minority shareholders, i.e., no promoters and no shareholder desiring to subscribe to the preferential issue;
- the shares must be locked-in for 3 years;
- the use of proceeds of the preferential issue must be disclosed in the explanatory statement;
- a monitoring agency must be appointed to monitor the use of proceeds.
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Originally published Rajani, May 2020
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