Sebi plans to ease fundraising norms for listed stressed companies

The Securities and Exchange Board of India (Sebi) on Wednesday proposed easier pricing norms, as well as  exemptions from open offers, for investments made through the preferential route in stressed listed companies. 

According to the regulator, the existing pricing guidelines for buying via the preferential route are too onerous for any financial investor to consider investments in a stressed company.

Currently, the pricing covers a period of 26 weeks or more for frequently-traded shares. This large latency in pricing period leads to a wide gap in pricing between the price at the beginning of the 26 weeks and the current price — when funds are required to be raised — especially given the deteriorating financial condition of the listed company.

According to the new proposals, the price should be not less than the average of the weekly highs and lows of the volume-weighted average price of the related equity shares, quoted on a recognised stock exchange during the two weeks preceding the relevant date.

The proposals also envisage an exemption from making an open offer in the stressed companies if the acquisition is beyond the limit prescribed in terms of the SAST Regulations. This is provided that the issue is made to entities that are not part of the promoter or promoter group, and the exemption from an open offer is approved by the majority of the minority shareholders.

“This relaxation would help avoid a Jet Airways type of situation, where the interested investors could not invest because of pricing restrictions and the time-consuming IBC resolution process,” said Saumil Shah, senior chartered accountant. “This is an extension of the pricing guidelines and an open offer relaxation already provided to listed companies referred to insolvency. This would facilitate quicker resolution under ICA between bankers, and hopefully, the stressed company would be able to protect its brand value and jobs.”

The regulator has defined what would constitute a stressed entity. This includes any listed company that has made disclosure of defaults on the payment of interest or the repayment of principal amount on loans from banks or financial institutions, and listed and unlisted debt securities for two consequent quarters. The other two conditions include the existence of an inter-creditor agreement in terms of the RBI framework, and the downgrading of credit rating of the listed instruments of the company to “D”. Any two of the above conditions could qualify an entity to be considered as stressed.

“In the definition of stressed companies, it would have been better if the qualification was limited to one out of the three conditions. Further, a company should be eligible for relaxation if it is unable to pay its financial obligations for one quarter, rather than two quarters. If the company has to wait for two quarters, it may become too weak to attract any investor,” said Vaneesa Agrawal, founder, Thinking Legal.

She added that the restriction that promoters are not eligible for preferential issues would limit the pool of potential investors. “Promoters could be allowed to invest with approval of majority of minority shareholders. Considering the difficult financial situation, these additional relaxations will help in reviving companies that struggle during the Covid-19 pandemic,” she said.

“If Sebi extends the same relaxation to all listed companies during this unprecedented time for a specified period, it will help reduce potential defaults and allow Indian companies to procure liquidity at the right time and at a better price,” said Bhavin Shah, partner and leader, financial services tax, PwC India.

The proposed use of the proceeds of such preferential issues should be disclosed, and 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 stock exchanges where the specified securities are listed.

Sebi has sought comments from the public till May 13 on these proposals.