To ease fundraising for stressed companies, markets regulator Sebi on Wednesday proposed easier pricing guidelines under the preferential route and exemption from making an open offer for the allottees of such issue.
Listed companies that are facing financial stress are in need of fund infusion to tide over the current stress situation. Such listed firms face certain difficulties in raising capital through the conventional means.
Typically, listed companies having "stressed assets" experience progressive fall in their share price. Further, the disclosures that are made by stressed companies such as their financial results and default in servicing debts also aggravate the fall.
The lack of funding at such a crucial stage may lead to major disruption in functioning of the company.
The Securities and Exchange Board of India (Sebi) said these companies are often in urgent need of capital from financial investors, as other sources of funds tend to dry out at this stage. One method available for raising capital can be through preferential allotment to help resuscitate the company.
However, the current pricing regulations make it practically difficult if not impossible for such companies to raise funds through the preferential allotment route.
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Accordingly, in the draft papers, Sebi has proposed pricing should not be less than the average of the weekly high and low of the volume weighted average prices of the related equity shares on a recognised stock exchange during the two weeks preceding the relevant date.
At present, the determination of the pricing covers a period of 26 weeks or more for frequently traded shares. This large latency in pricing period especially given the deteriorating financial condition of the listed company 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.
Further, a case has also made by such investors to have a substantial holding in the company, in order to take control over the operations of the company and guide the company out of the stress.
However, this acquisition of substantial holding and control triggers the obligations by such investor to make open offer to the other investors under the SAST norms, which require him to acquire 26 per cent more shareholding.
Sebi has proposed exemption from making an open offer for the allottees of preferential issue in such stressed companies if the acquisition is beyond the limit prescribed.
To avail this exemption, listed companies need to ensure that preference issue is made to persons/entities that are not part of the promoter or promoter group on the date of the board meeting to consider the preferential issue, as per the draft paper.
Also, resolution for the preferential issue at the proposed pricing and exemption from open offer should be approved by the majority of minority shareholders (excluding the promoters, the promoter group and any proposed allottee in the preferential issue that may already hold specified securities in the listed company prior to the preferential issue).
The proposed use of the proceeds of such preferential issue should be disclosed in the explanatory statement sent for purposes of the shareholder resolution. In addition, an agency should be appointed for monitoring use of the proceeds of such a preferential issue.
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 the stock exchanges where the specified securities are listed.
Sebi has sought comments from public till May 13 on these proposals and final norms would be taken into account after taking views of all the stakeholders.
A stressed company is the one that has made disclosure of defaults on payment of interest/ repayment of principal amount on loans from banks/ financial institutions and listed and unlisted debt securities for two consequent quarters and the credit rating of the listed instruments of the company has been downgraded to 'D'.