Make price regulation clear and simple

WITHOUT CONTEMPT

Price regulation has now become an integral feature of the securities market. While it may sound a bit odd""capital market reform started in 1991 with abolition of the Controller of Capital Issues""over time, a whole rangeof securities transactions have been brought under the realm of price regulation.

While exchange controls regulate price both from a minimum price or a maximum price perspective depending on whether the transaction in question would entail an inflow or an outflow, various securities laws prescribe formulae for computation of a minimum price. It has now become easier to list securities issuances that are not price-regulated rather than those that entail price regulation.

Apart from an initial or follow-on public offering (IPO) in India, a rights issue to all existing shareholders, or an allotment under a court-approved scheme of arrangement, every other form of share issue entails price regulation.

Preferential allotment of shares (out of turn allotment of shares without offering them to all the existing shareholders), a qualified institutional placement (private placement with an offer to less than 50 'qualified institutional buyers') and issue of shares towards global depository receipts (GDRs) or foreign currency convertible bonds (FCCBs) are all subject to a minimum price specification.

Securities price-regulation being a tricky subject, regulators tend to copy the same formula across various situations. The minimum price payable for such issuances is substantially dependent on the average of the weekly high and low prices on stock exchanges for 26 weeks prior to the information about the transaction entering the public domain in the form of announcement by the board of directors, of a shareholders meeting seeking authority for the issuance.

Adopting this formula blindly can be tricky. A company cannot remain dormant with its capital. It may split its stock, re-write its face value, or issue bonus shares. For instance, a company may have an equity share capital base of Rs 10 crore, comprising a million shares of Rs. 100 each, and it could change its capital to 10 million shares of Rs 10 each. In other words, the same capital would simply be denominated differently. None of the fundamentals of the company would change from such a denominational variation. This is commonly done by reputed growing companies that have to unlock value and create more liquidity in their stock.

Now assume the company had passed, or is in the midst of seeking, a shareholder resolution authorising a GDR or an FCCB issue or a preferential allotment, and such a change takes place. And, let's say the minimum price applicable were Rs 1,000 per share having a face value of Rs 100 each when the minimum price was computed.

When such a denominational change takes place, it would but be logical that the minimum price ought to be adjusted from Rs 1,000 for a Rs-100-face-value share to Rs 100 per share for a Rs-10-face-value share. It would also be logical that the number of shares authorised to be issued too would have to be adjusted accordingly.

However, the regulations do not explicitly provide for such adjustments. Merchant bankers and other practitioners, chary of how regulators would respond, run helter-skelter seeking clarifications. The situation worsens when it comes to issue of GDRs and FCCBs because the minimum price formula for these issues has been prescribed by the Ministry of Finance and not the capital market regulator. The Securities and Exchange Board of India (SEBI) would therefore not volunteer any clarity (not its jurisdiction), and one would have to run to New Delhi, which would in turn perhaps seek inputs from SEBI and the RBI before it changes anything already cast in stone. Making life even more complicated for such a simple issue is the inter-play of exchange controls, which adopt virtually the same formula.

Such a denominational change event could even have occurred prior to the minimum price being computed, but within the relevant 26-week period. The price at which the market would have quoted the shares would clearly vary before and after the change event. Logically, this too ought to be adjusted.

Pertinently, the takeover regulations, which adopt substantially the same formula as one of the criteria for minimum offer price to shareholders, provide for an adjustment in the quoted price for events such as bonus issues, rights issues and dividend payments within the 26-week period. There is no logic for enabling the same adjustment for fresh issues of capital.

There can be another twist to this formula. Some shares may not have a trading history of 26 weeks to compute the minimum price. The lack of trading history could be because the company is a product of a demerger, or because it has made a fresh listing. Even the takeover regulations provide no clarity on how to deal with the sheer absence of a complete price history. Asking the regulator for a clarification is not an option "" informal guidance takes far too long and obviously one cannot provide the name of the target company.

The author is a partner of JSA, Advocates & Solicitors. The views expressed hereinare his own

somasekhar@jsalaw.com