Sebi moots big changes to preferential allotment norms on pricing, lock-in

Regulator says any preferential issue causing change in control or allotment of more than 5% stake will require a valuation report from a registered valuer

Sebi on Friday proposed large-scale changes to the framework governing preferential allotments—issue of shares, warrants or convertibles to promoters or large investors on a privately-placed basis.

In a discussion paper issued on Friday, Sebi has sought to tweak the pricing formula, lock-in requirements and valuation methodology for preferential issues.

Under the current framework, the pricing of shares has to be a higher of average of the weekly high and low of the volume weighted average price (VWAP) during the 26 weeks preceding date of issuance and the average of the weekly high and low of VWAP during the two weeks preceding the relevant date.

The new formula proposed by Sebi is the higher amount between VWAP of 60 trading days and VWAP of 10 trading days.

“Representations have been received stating that the norm of 26 weeks’ period is a very long period for determining the price considering the market volatility… This may act as a deterrent for the promoters or existing willing investors to come to the aide of the company in times of need,”Sebi has said in a discussion paper.

More importantly, Sebi has said any preferential issue resulting in change in control or allotment of more than 5 per cent stake will require a valuation report from a registered valuer.

This proposal comes in the wake of the PNB Housing Finance controversy where Sebi and the company were at loggerheads over appointment of an independent valuer.

Legal experts said with the proposal if implemented will remove the ambiguity around appointment of an independent valuer during such share allotments.

Sebi has said if the preferential allotment results in change in control, the valuation report will also have to cover guidance on control premium.

Further, allotment resulting in change in control will also require a reasoned recommendation from a committee of independent directors.

Meanwhile, Sebi has proposed to ease the three-year lock-in requirement.

“Lock-in for preferential issuance to promoters may be reduced from 3 years to 18 months and to persons other than promoter group, the lock-in may be reduced from 1 year to 6 months…”Sebi has said.

Other recommendations made by Sebi include allowing pledging of securities allotted under preferential route. Also allowing preferential issue for consideration other than cash, which includes shares swap. The paper also proposes to reduce the condition of ineligibility period for entities who have dealt in shares from six months to 60 trading days preceding the allotment.