The finance ministry has proposed a material change to its policy on pricing of issue of shares in the case of global depository receipts and foreign currency convertible bonds. In August 2005, the Government of India had taken a protectionist measure.
Amending the “Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993”, price restrictions were imposed on issue of global depository receipts (“GDRs”) and foreign currency convertible bonds (“FCCBs”). After this measure only initial public offerings, follow-on public offerings and rights issues were spared of price regulation.
The government had picked up the minimum price formula contained in the Sebi (Disclosure and Investor Protection) Guidelines, 2000 (“DIP Guidelines”).
Therefore, no issuance could then be lower than the average of the weekly high and low closing prices of the relevant shares for the six months preceding the “relevant date”, and the average of the weekly high and low of the closing prices of the shares in the two weeks preceding the “relevant date”, whichever is higher.
The term “relevant date” is currently defined as the date falling 30 days prior to the date on which shareholders approve the requisite resolution.
Consequently, once shareholders pass a resolution, the minimum price would get cast in stone unless such resolution were to be overridden by a new resolution.
Indian company law requires a notice period of at least 21 days for a shareholders meeting. Once the board convenes the shareholders meeting, the news of the proposed transaction would fall into the public domain and would start impacting the price. Since the “relevant date” is fixed as the date falling 30 days prior to the shareholders’ meeting, companies have to scurry around to ensure that their shareholder meetings indeed get held within 30 days of the board meeting. If they fail to do so, the impact of the board’s decision to call a shareholders’ meeting on the price would itself feed into the minimum floor price computation.
The finance ministry has now proposed that instead of taking an average of weekly high and low closing prices over a prior period of six months, such average may be taken over a period of two months preceding the “relevant date”.
The term “relevant date” itself is sought to be changed to the date falling 30 days prior to the date on which the board of directors of the issuer company passes a resolution authorising the proposed issue, instead of linking the 30-day period to the date of the shareholders meeting.
The ministry’s proposal is a welcome measure. Companies would no longer have to scurry to get shareholders resolutions passed within 30 days of their board decision becoming public. Instead, the board of directors would be free to pick any date for the shareholders meeting, resting assured that the price impact of its own decision to seek shareholder approval could never affect the computation of the minimum floor price.
The finance ministry’s note seeking comments on these proposed changes erroneously states that the DIP Guidelines already provide for such a position on the “relevant date”. In fact, there is a crying need for Sebi to amend the DIP Guidelines to bring them on par with the amendments now being proposed by the finance ministry.
The pricing formula being reviewed by the finance ministry is found ad nauseam across securities laws with varying tinkering made by value-adding draftsmen at each stage. This pricing formula was originally used by the Reserve Bank of India (“RBI”) under exchange controls for preferential issue of shares to foreign promoters.
Sebi adopted the formula in August 1994 to regulate the cheap shoring of promoter stake that was effected by many listed companies. The provision found its way into the DIP Guidelines. Even the takeover regulations have adopted the formula with a tweak of its own.
Another area of price regulation that seems to have missed the review is the need to provide for adjustments to the minimum price – for instance, if the floor price were computed for a Rs-10 face value, and the company sub-divides the capital into shares of Rs-5 face value, naturally, the conversion entitlements would have to be adjusted. Here too, different portions of securities laws are at variance.
It would make immense sense to house the floor price fixation provisions in a single body of law – say, the DIP Guidelines, and to cross-refer every other guideline, regulation or policy measure to the relevant provision in the DIP Guidelines.
The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.
