Ccps Seen As Route To Skirt Sebi Norms

Promoter groups are looking at convertible cumulative preference shares (CCPs) as a means to circumvent the Securities & Exchange Board of India guidelines on pricing of preferential allotments while raising stake in a company at concessional prices.

Sebi guidelines say shares or warrants/FCDs (fully convertible debentures)/PCDs (partly convertible debentures) or other financial instruments made on a preferential basis to a select group of persons under Section 81 (1A) will be governed by the provisions for preferential allotment of shares.

Corporates point out that other financial instruments could be read to include preference shares, but CCPs would have to be specifically included in the guidelines since they carry a conversion option. This means Sebi will have to specify norms for pricing of CCPs, the upfront payment necessary and the pricing of conversion.This is the case with warrants, whose pricing has to be based on the six monthly average prices of the share being quoted on the bourses 30 days prior to the date of the general body meeting convened to move the special resolution under the provisions of Section 81 (1A). A preferential offering can be made only through a special resolution.

 

The guidelines on warrants require that at least 10 per cent of the price be payable on the date of allotment. In case the conversion option is not exercised, the amount would stand forfeited. Conversion pricing, too, has to subscribe to the norms on preferential allotments.

Finance ministry sources say technically the pricing norms for preferential allotments by implication would also extend to CCPs, but corporates point out that this is a grey area and needs clarification. Preferential allotments to hike stake through CCPs is advantageous even at six monthly average prices, say corporates.

The most dominant is the trailing prices of scrip that have taken the six monthly average price below the 52-week average price. Promoters of such companies stand to gain by making preferential allotments at this point even at Sebi-designated prices.

Some promoter groups have already made preferential allotments of pure equity shares in recent months to take advantage of the low scrip prices. But sources say CCPs, apart from the price advantage arising out of low stock prices, are additionally attractive since they promise an assured return in the form of dividend, payable cumulatively, unlike the erratic nature of return on pure equity where returns depend not merely on the fundamentals of the company but also on extraneous factors like market sentiment. Besides, the removal of double taxation in this years budget has ensured that while CCPs constitute cost to the company since the incidence of a 10 per cent dividend tax will be on it it promises tax-free returns until conversion to the holder.

Sebi cracked down on preferential allotments offered to select shareholders at concessional prices in 1994 on the ground that they were unfair to minority shareholders. Although preferential allotment of equity is subject to a special resolution (voting by 75 per cent of the shareholders), minority shareholders lack the collective strength to stop the resolutions.