SEBI proposes to revise Preferential Issue Guidelines

By December 2, 2021 No Comments

Vide it’s Consultation Paper dated 26 November 2021, the Securities Exchange Board of India/SEBI has recommended changes in pricing norms, lock-in requirements, pledge, etc. in the Preferential Issue Guidelines contained in Chapter V of the SEBI (Issue of Capital and Disclosure Requirements), Regulations, 2018.

Key Recommendations:

Pricing Methodology: At present, the price of the shares to be allotted pursuant to preferential issue is required to be not less than higher of the average of weekly high and low of the Volume Weighted Average Price (VWAP) of shares on stock exchange during 26 weeks or VWAP during 2 weeks preceding the relevant date. SEBI has proposed to reduce these periods to 60 days and 10 days respectively while considering that the existing norm of 26 weeks is a very long period for determining the price in view of the market volatility.

Due to the outbreak of COVID-19 pandemic, a temporary relaxation with respect to pricing was earlier also allowed to make preferential allotment by using 12 weeks VWAP, in addition to existing pricing methodology subject to certain conditions, in order to enable companies to raise funds with dire need of funds during those pressing times. 
Lock-in Requirements: At present, the shares allotted pursuant to preferential issue are subject to lock-in period so that the said shares cannot be offloaded immediately after the issue to benefit from price arbitrage. SEBI has recommended reducing the lock-in period from 3 years to 18 months (in case of promoters) and from 1 year to 6 months (in case of non-promoters) to harmonize the same with lock-in requirements in case of public issue which were recently reduced. 

Valuation Report and other requirement – preferential issue resulting in change of control or allotment of more than 5% of post-issue capital: SEBI has proposed introduction of a mandatory requirement of a valuation report from a registered valuer in case of any preferential issue resulting in change in control or allotment of more than 5% of post-issue fully diluted share capital of the issuer company to an allottee or to allottees acting in concert. The said valuation shall be considered for pricing. It has also been recommended that any such preferential issue may be done only pursuant to reasoned recommendation from committee of independent directors. 

Pledging of Shares: SEBI has proposed allowing pledging of shares allotted to promoters/promoters group under preferential issue during lock-in period for the purpose of financing the objects of the preferential issue. 

Alpha Rajan & Partners Comments:

The proposal has been made in an attempt to make it easier for companies to raise funds through preferential issue while at the same time ensuring that such issuance is not detrimental to the interest of the shareholders

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