Lawyer Monthly Magazine August 2020 Edition

REGULATORY UPDATE OF THE MONTH of the ICDR Regulations ( i.e., after taking into account the valuation parameters including book value, comparable trading multiples, and such other parameters as are customary for valuation of shares of such companies ). However, the relaxed pricing norms as set out in Regulation 164A (and consequent exemption from open offer rules) has certain riders, including that the preferential allotment cannot be made to the promoters/promoter group entities and/or certain other categories of persons including undischarged insolvent, wilful defaulters and fugitive economic offenders. Any allotment made pursuant to Regulation 164A shall be locked-in for a period of three years. Additionally, the resolution for such preferential allotment must have the blessings of the majority of minority shareholders ( i.e., public shareholders excluding the proposed investor ) of the relevant Eligible Stressed Company. In case an Eligible Stressed Company does not have any identifiable promoter, then the resolution must be approved with 3/4th majority of the shareholders. The proceeds of such preferential issue cannot be used for repayment of loans, if any, taken from the promoters/promoter group/group companies. Further, in order to monitor the use of proceeds, a monitoring agency (which should be a public financial institution or a scheduled commercial bank, not related to such Eligible Stressed Company) would need to be appointed by the relevant Eligible Stressed Company. Relaxations for other listed companies While SEBI had relaxed the creeping acquisition limit for the promoters (for all listed companies) as well as the pricing norms and open offer rules for Eligible Stressed Companies in case of allotment to non-promoter entities, no relaxation was available from pricing norms in respect of the investments to be made (a) by promoters, or (b) in non-Eligible Stressed Companies. Keeping in mind the representations received from several stakeholders, SEBI further amended the ICDR Regulations 5 to provide temporary relaxations to all listed companies from pricing norms in case of preferential allotment. By way of the amendments, SEBI has inserted a new Regulation 164B in the ICDR Regulations which stipulates an optional pricing methodology for preferential issue of shares or specified securities and can be availed in respect of preferential allotment to be made till 31 December 2020. As per the optional pricing method, listed companies ( having frequently traded equity shares ) can now allot equity shares on preferential basis at a price being not less than higher of the average of the weekly high and lows of the volume weighted average prices of the related equity shares during (a) 12 weeks ( as against 26 weeks stipulated under Regulation 164 ), or (b) 2 weeks, preceding the relevant date. The listed companies would have the option to determine the issue price either as per the existing pricing norms set out in Regulation 164 or in accordance with the revised pricing norms set out in Regulation 164B. However, a lock-in period of three years would apply in case the preferential allotment is made using the pricing methodology set out in Regulation 164B of the ICDR Regulations. Further, all allotments arising out of the same norms for preferential allotment and the mandatory open offer rules 3 . However, these relaxations are available in respect of investments in such listed companies which qualify the criteria of stressed company ( Eligible Stressed Company ) 4 as prescribed by SEBI. A new Regulation 164A has been inserted in the ICDR Regulations to allow an Eligible Stressed Company who shares are frequently traded to make a preferential allotment of equity shares at a price which can be determined on the basis of 2 week average of the weekly high and low of the volume weighted average prices of the related equity shares quoted on a recognised stock exchange. At the same time, a new Regulation 10 (2B) has been inserted in the Takeover Code to provide an exemption from the open offer norms set out under Regulation 3(1) ( i.e., acquisition of 25% or more shares or voting rights ) and Regulation 4 of the Takeover Code ( i.e., acquisition of control ) to investors investing in an Eligible Stressed Company by way of preferential allotment pursuant to Regulation 164A of the ICDR Regulations. This exemption from open offer would also be applicable to an Eligible Stressed Company with infrequently traded shares provided that such Eligible Stressed Company complies with other conditions set out in Regulation 164A and the price of equity shares to be allotted on preferential basis is determined as per Regulation 165 14 WWW.LAWYER-MONTHLY.COM | AUG 2020 A lock-in period of 3 years would apply in case the preferential allotment is made using the pricing methodology set out in Regulation 164B of the ICDR Regulations