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SEBI eases fundraising, open offer norms for distressed companies
Photo Credit: Reuters

The Securities and Exchange Board of India (SEBI) has relaxed fundraising norms for distressed companies to help them tide over a cash crunch and find investors in a bid to get back on their feet.

The capital markets regulator said it has tweaked its pricing rules for preferential allotment of shares by distressed companies to investors and exempted the investors from making an open offer to public shareholders.

The decisions are aimed at helping stressed companies raise capital through timely financial intervention and, at the same time, protecting the interest of shareholders, SEBI said in a circular.

The decisions come about two months after the regulator issued a consultation paper seeking public feedback on proposals to ease fundraising and open offer norms for distressed companies.

SEBI said it has decided to reduce the period for determining the pricing of a preferential share issue for distressed companies to two weeks from 26 weeks earlier.

These companies can now fix the pricing of their preferential issues at not less than the average of the weekly high and low of the volume weighted average prices of the shares during the two weeks preceding the relevant date.

In its consultation paper, the regulator had said that distressed companies need funds to avoid bankruptcy but face difficulties in raising capital through conventional means. A fall in the share price of such companies after the disclosure of financial results or debt defaults makes it even more difficult for them to raise capital.

Such companies, SEBI said, need capital urgently from financial investors and they can do so via a preferential allotment of shares. However, the current pricing regulations make it difficult for companies to issue shares. 

At present, SEBI rules require the pricing of preferential share allotment to cover a period of at least 26 weeks. This leads to a wide gap in pricing between the share price at the beginning of the 26 weeks and the price when funds are required. A two-week period will resolve this problem.

In another key decision, SEBI said it will exempt investors who buy shares via preferential allotment from making an open offer to public shareholders of a distressed company if the acquisition is beyond the prescribed limit.

At present, SEBI rules require an investor buying a 25% stake in a company to make an open offer to purchase an additional 26% from the company’s public shareholders.

The regulator also defined how the companies will be deemed to be distressed. It said that a company will have to meet two of three conditions: One, a company which has defaulted on a loan from a bank or non-bank lender. Two, a company whose lenders already have an inter-creditor agreement under the Reserve Bank of India’s norms for stressed assets. And three, a company whose credit rating has been downgraded to ‘D’.

SEBI also listed a number of other conditions for a company to be eligible for taking advantage of its revised norms. These include that the preferential issue should be made to people or entities that are not part of the promoter or promoter group. Certain persons including wilful defaulters and fugitive economic offenders will also be ineligible.

Moreover, companies will have to disclose the end use of the funds to be raised via the preferential allotment. Also, the shares issued to the investors in such an issue will be locked in for three years, SEBI added.

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