Stressed listed companies' hunt for a white knight gets Sebi boost

Pricing norms eased, conditional exemption from open offer extended

The Securities and Exchange Board of India (Sebi) has made it easier for listed companies under financial stress to find a white knight. 

The markets regulator has eased the pricing formula and waived off the open offer requirement for investments in a company with stressed assets. It, however, has kept out promoters from making such investments and has set strict eligibility criteria to prevent misuse of the relaxation.

Usually, the mandatory 26 per cent open offer and pricing formula —which is the average price for the past 26 weeks — discourage a potential financial or strategic investor from investing in a company under stress, which is often triggered by unsustainable debt levels, even as business prospects remain encouraging.

Sebi has now said capital infusion in stressed firms can take place at a more recent stock price-two-week average. Further, such investments will be exempted from open offer even if it breaches the 25 per cent threshold or if it results in a change in control. “These are significant changes and will enable a bunch of companies to find white knights,” said Manan Lahoty, partner, IndusLaw. “Eradicating the stringent requirements will help attract investors and provide financial aid to review stressed companies,” said Sonam Chandwani, managing partner, KS Legal.

 

The regulator, however, has set stiff conditions to determine a “stressed company” and also who can qualify as an investor and how the funds so raised are used.

The regulator said a listed entity will have to meet any two of three conditions it has laid down to be eligible for the relaxations. According to Sebi, the company should be in default for at least 90 days, its financial instruments should have a D (default) rating from a credit rating agency or it should have entered into an inter-creditor agreement under the Reserve Bank of India’s directions dated June 7, 2019.

Many listed companies in the telecom, hotel and infrastructure space are under immense stress, but won’t meet the edibility norms. “The eligibility norms limit the benefit of relaxations. Also, the multiple pre-conditions prescribed would create challenges from implementation and enforcement perspectives. Last, while there is a requirement to obtain an auditors certificate, ongoing compliance and monitoring of end-use via the agency will be a challenge,” said Moin Ladha, partner, Khaitan & Co.

Besides the eligibility criteria, Sebi has set other conditions — such as shares cannot be allotted to entities belonging to the promoter group and wilful defaulters or fugitive economic offenders. Also, such allotment will require the approval of the majority of minority shareholders. The end-use of the proceeds raised via such preferential allotment will have to be disclosed, monitored, and certified by the auditor.

Experts say the scheme should have been extended to the promoter group, as well. “A quick infusion of capital from the existing promoters could be a valid option. The preferential allotment route for promoters is practically shut since the pricing threshold still depends on the pre-Covid price levels. This opportunity could have been used to allow promoters, although with a few more safeguards,” said Lahoty.