New Sebi norms to give more fund-raising flexibility to stressed firms

Promoters of stressed companies will get more flexibility in attracting investors and the process of determining the right price for assets would get easier following a new set of amendments introduced by capital market regulator Sebi in its preferential share issuance norms.

Market experts said the new guidelines provide flexibility to the promoters and promoter group entities to attract investors for their companies rather than becoming completely dispossessed as under the IBC framework.

The amendments can also help promoters get financial investors on board without losing control of the company. Even if they get investors who wish to take control, they could end up with a continuing role in the company which may be diluted but not completely removed.

Therefore, due to such flexibility, promoters may prefer restructuring through these guidelines as a better and faster alternative than going through IBC, the experts added.

Sebi, on June 22, introduced guidelines relaxing pricing and open offer requirements to enable easier fund raising through preferential allotment by stressed listed companies.

In order to ensure that the relaxations can be availed by genuinely stressed companies, clear criteria for a company to qualify as a stressed company' have been laid down.

Adequate safeguards have also been put in place in terms of restricting persons who are eligible to participate, end-use disclosures, restrictions and monitoring, lock-in requirements, certification by audit committee & statutory auditor etc.

Prior to these guidelines, the Sebi regulations provided exemption from preferential issue pricing and open offer requirements only for those companies whose resolution plan was approved under the IBC, but now a wider pool of companies can get these benefits.

The recent guidelines make fund raising through preferential issue easier for even those companies which are actually stressed but have not gone under the IBC framework.

Many companies prefer restructuring outside the IBC framework, especially in view of delays, associated litigations, clogging of the cases in the NCLT, etc and these relaxations would be of immense benefit to such companies, experts said.

Overall, more than 270 listed companies as on date have their debt instruments/loans rated as D and therefore can be construed as stressed in nature. Many of these companies can get benefitted after satisfying necessary conditions.

Further, exemption from open offer is a major relaxation for investors in such companies since the investors now would have to only infuse funds to the extent of investment in the company and not for giving exit to other investors.

The new rules also extend the benefits to companies under ongoing IBC suspension for six months.

In view of the recent COVID situation, corporate insolvency resolution filing under IBC has suspended for six months for any debt defaults post March 25, 2020. Therefore, many companies and lenders would not be able to utilise the restructuring framework under the IBC during these 6 months even if they wish to do so.

Market analysis further observed that the IBC prevents promoters and promoter group entities from participating in the restructuring of the company through various provisions.

In this context, Sebi's guidelines are harmonious with IBC guidelines by not permitting promoters and promoter group entities to participate in the preferential issue either by way of infusing of funds or voting or utilisation of the proceeds.

At the same time, the new guidelines provide flexibility to the promoters/ promoter group entities to attract investors for their companies rather than becoming completely dispossessed as under the IBC framework.

For a preferential issue, Sebi Regulations require a company to price the issue at average of 26 weeks and two weeks prices, whichever is higher.

In a stressed company, since the prices tend to be falling over a period of time, the average of 26 weeks tends to be much higher than the average of last two weeks.

In some cases, the difference is even as high as 40-50 per cent. This results in a price that doesn't really represent the value of the company's share at that point of time.

This has often discouraged investors from investing in preferential issue of stressed companies since they would have had to pay much higher than the prevailing market price of the shares. Ultimately, the stressed company loses out on a critical fund raising opportunity.

The new guidelines ensure that only two week pricing is employed for preferential issue by stressed companies. Therefore, even when prices of a stressed company is falling, the company's preferential issue is priced at the latest two weeks prices which is much more representative of the value of the company's share as on that date, experts said.

The investors would also now be willing to subscribe since the pricing is now favourable for them to invest. This would be a great boon for stressed companies to raise funds especially in a market where they are facing serious funding crunch and liquidity issues.

Sebi has also incorporated necessary safeguards to prevent any misuse of the flexibility given under new norms.

Firstly, promoters and promoter group entities have been barred from participating in the issue thereby reducing the potential for misuse significantly.

Secondly, the requirement to approve both the pricing and open offer resolution by a majority of minority ensures that promoters and promoter group entities cannot participate in voting on this issue and therefore cannot influence the decision thereof.

Thirdly, by laying down that the proceeds should not be used for any repayment of loans taken from promoters/ promoter group/ group companies, it ensures that the funds raised is actually used for the benefit of the company and not indirectly for the promoters and related entities.

On the other hand, these safeguards do not stop promoters and promoter group from infusing funds into stressed company at the prevailing market prices.