Relaxation for Listed Companies having stressed Assets
The Securities and Exchange Board of India (SEBI) recently relaxed the pricing methodology for preferential issues by listed companies having stressed assets and exempted allottees of preferential issues from open offer obligations in such cases with immediate effect. In this article, we shall discuss the relaxation for listed companies.
Which is a listed company?
A company whose share is traded on an official stock exchange is regarded as a listed company. It is required to adhere to the listing requirements of that exchange, which shall include how many shares are listed and a minimum earning level. Listed companies are owned by many shareholders. The shareholders are entitled to two forms of return by investing in a listed company. They are dividend and capital gains.
What is the purpose of this relaxation for listed companies?
According to SEBI, the framework will help stressed companies to raise capital through timely financial intervention, and it will also protect the interests of the shareholders. The regulator has earlier also taken the decision to relax many laws amidst the Covid-19 pandemic. These relaxations are essential considering the entire nation was under lockdown which restricted a lot of activities.
What are the relaxations stated by the SEBI?
The relaxation for listed companies from SEBI includes the following:
- Eligible listed companies that have stressed assets would be able to determine the pricing of its preferential allotments not less than an average of the weekly high and low of volume-weighted average prices of the relevant equity shares during the two week period preceding the relevant date.
- Allottees of preferential issue will be exempted in such eligible companies from making an open offer in case where the acquisition is beyond the prescribed threshold or where the open offer is warranted owing to change in control in terms of takeover regulations.
What is the eligibility to be considered as a stressed company?
A listed company meeting any two out of the following three conditions will be considered as stressed and hence shall be eligible under relaxation for listed companies:
- Any listed company that has made disclosure of default on the payment of interest/repayment of principal amount on loans from banks/ financial institutions/ Deposit taking Non-banking financial companies (NBFCs) / systematically important non-deposit taking non-banking financial companies (NBFCs)/ listed or unlisted debt securities in terms of SEBI circular dated 21st November 2019 and such default is continuing for a period of minimum 90 calendar days after the occurrence of such default.
- Existence of Inter creditor agreement in terms Reserve Bank of India (Prudential Framework for Resolution of stressed Assets) Directions dated 7th June 2019.
- The downgrading of the credit rating of financial instruments, (whether listed or unlisted), credit instruments/ borrowings (Listed or unlisted) of a listed company to “D”.
What are some of the other conditions to be complied by the eligible listed companies to avail the relaxations?
To avail the relaxation for listed companies, the eligible listed companies are required to adhere to the following conditions:
- The preferential issue will be made to person or entities that are not part of the promoter or the promoter group. Moreover, certain other persons including an undischarged insolvent, fugitive economic offender, wilful defaulter, persons disqualified to act as directors, prohibited by SEBI from insider trading in securities and assessing the securities market would also be ineligible.
- The resolution for preferential issue at the aforesaid pricing and exemption from the open offer shall be passed by the majority of minority.
- Proposed end use of the proceeds of such preferential issue will be disclosed. The proceeds must not be used for any repayment of loans taken from promoters/ promoter group/group companies.
- Monitoring agency shall be appointed that will monitor the end use of the proceeds of such a preferential issue. The monitoring agency will not be an associate to the company. The Audit Committee will also monitor the proceeds of such preferential issue.
- The shares issued to the investors in such an issue will be locked in for three years period from the last date of trading approval granted by all stock exchanges where the specified securities are listed.
- The Statutory auditor and the audit committee will certify that eligibility norms as mentioned above in 2nd point and conditions at 3rd point has been satisfied at the time of dispatch of notice for general meeting proposed for the passing of the special resolution and also at the time of allotment.
Why is the relaxation for listed companies by SEBI essential?
Usually listed companies having stressed assets may have a progressive fall in their share price. Moreover, the disclosure that is made by the stressed companies such as their financial results and default in servicing debts also aggravates the fall. Such firms face difficulty in raising capital through traditional means. Therefore, the Securities and Exchange Board of India (SEBI) eased the pricing methodology of preferential issues by such firm.
Considering the stressed status of the company, it may not be incorrect to suggest that aligning the pricing with that of the pricing requirement in case of the preferential issue to Qualified Institutional Buyers (QIBs), will increase the pool of investors effectively. Moreover, the exemption from the making of an open offer will lessen the additional burden on an incoming investor to comply with the strict requirements hence allowing more investors to put their money in such companies. To give effect to these regulations, SEBI ICDR (Issue of Capital and Disclosure Requirements) Regulations and SEBI takeover regulations have been amended. The relaxation for listed companies, introduced on 22nd June 2020, is expected to make fundraising through preferential allotments reasonably more straightforward for stressed companies.