SEBI Overhauls Preferential Allotment Rules

SEBI has eased norms for companies to raise funds through preferential allotment of shares

The Securities and Exchange Board of India (SEBI) has relaxed pricing norms and lock-in requirements to make it easier for companies to raise funds through preferential allotment of shares.

In addition to this, the regulator has allowed pledging of shares allotted to promoter or promoter group under preferential issue during the lock-in period, according to a notification.

SEBI has also that any preferential issue resulting in a change in control or allotment of more than a 5 per cent stake will require a valuation report from a registered valuer.

Moreover, any preferential issue allotment resulting in a change in control will be required to provide a reasoned recommendation from a committee of independent directors along with their comments on all aspects of preferential issuance, including pricing.

Further, the voting pattern of the committee needs to be disclosed to shareholders or the public.

This comes against the backdrop of PNB Housing Finance's proposed allotment of preference shares to US-based Carlyle Group and a clutch of other investors hitting a roadblock.

SEBI had questioned PNB Housing Finance's rationale behind the fixing of the issue price, among other aspects, in that deal that was later shelved.

To this effect, the regulator has amended ICDR (Issue of Capital Disclosure Requirements) rules.

To determine the floor price for frequently traded security, Sebi said the floor price for the preferential issue should be higher of 90/10 trading days' volume-weighted average price (VWAP) of the scrip preceding the relevant date.

For infrequently traded security, SEBI said a valuation report by a registered independent valuer will be required.

At present, the pricing formula in a preferential allotment is the VWAP of the last two weeks or the last 26 weeks, whichever is higher.       In the wake of the coronavirus pandemic, a temporary relaxation for pricing was allowed to make preferential allotment by using 12 weeks' VWAP.

Such a relaxation was applicable for the preferential issues made between July 1, 2020 and December 31, 2020.

In addition, the regulator relaxed lock-in provisions for a preferential issue to promoters and non-promoters.

For promoters, Sebi said the lock-in requirement for allotment up to 20 per cent of the post issue paid-up capital has been   reduced to 18 months from the existing 3 years.

The lock-in requirement for allotment exceeding 20 per cent of the post issue paid-up capital has been cut to 6 months from the existing 1 year.

For non-promoters, the lock-in requirement for allotments shall be reduced from the requirement of 1 year to 6 months, Sebi said.

"Lock-in requirements for an allottee who has become a promoter due to change in control consequent to the preferential issue shall be the same as those applicable to the promoters and promoter group," the notification issued on January 14 noted.

The regulator said promoters have been permitted to pledge the shares locked-in following a preferential issue provided if the pledge of such securities is one of the terms of sanction of the loan granted by a financial institution.

Further, the loan is to be sanctioned to the issuer company or its subsidiaries for financing objects of the preferential issue, Sebi said.

The regulator also said that consideration for a preferential issue, "other than cash" would be permitted only for share swaps backed by a valuation report from an independent registered valuer.       The issuer company will have to necessarily apply for in-principle approval from stock exchanges on the same day as the date of dispatch of notice for AGM or EGM to the shareholder.