Recent Amendment In The Preferential Allotment Norms By SEBI
To expand its share capital and raise funds, a company has three methods available. One is through the issue of bonus rights which includes issuing fresh shares to the existing shareholders in proportion to the shares already held by them. The second method involves an open offer called the initial public offer (IPO), which is inviting the general public to subscribe to the shares. The third method is bulk allotment of shares at a predetermined price to individuals, companies, venture capitalists, or any other entity.
In the wake of Covid-19 and the collapsing market, the Securities Exchange Board of India (SEBI) laid down certain conditions to help stressed companies raise capital through preferential allotment.
WHAT IS PREFERENTIAL ALLOTMENT?
A preferential allotment is a move to raise funds through issuing bulk shares at a predetermined price to predetermined entities, who may or may not be existing shareholders of the company. Generally, preferential allotment is made to people who wish to take a strategic stake in a company, for example, venture capitalists, buyers of the company’s products, promoters, etc. This strategy is adopted to secure those who can be valuable to the company. This route is usually made available and used by the entities who are unable to buy a large chunk of the company’s shares at affordable prices during the initial public offer (IPO).
LAWS RELATED TO PREFERENTIAL ALLOTMENT
Section 62 of the Companies Act, 2013 along with Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014 deal with the preferential allotment of shares and other securities including fully convertible debentures, partly convertible debentures or any other securities which would be convertible into or exchanged with equity shares at a later date. Section 42 of the Companies Act, 2013 read with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 deals with the provisions related to the private placement of securities.
The underlying difference between Section 62 and Section 42 of the Companies Act, 2013 is that Section 62 of the Companies Act, 2013 deals with the preferential allotment of equity shares and convertible securities only whereas, Section 42 deals with the allotment of securities as defined under Securities Contract (Regulation) Act, 1956 through private placement. Therefore, preferential allotment under Section 62 means the private placement of equity shares and convertible securities.
The pricing of a preferential allotment is set at the average of weekly high and low of 26 weeks and the average weekly high and low of the two weeks preceding the relevant date.
RECENT AMENDMENT BY SEBI
The Securities Exchange Board of India (SEBI) recently laid down a relaxed methodology for preferential allotment to help stressed companies raise capital. A stressed company, as defined by SEBI is any listed company that has made disclosures about default in payment of interest or in repayment of principal amount on loans from banks or other financial institutions or unlisted debt securities. Such default must continue for a period of at least 90 days after the date of occurrence of such default.
According to the recent amendment, the time gap between qualified institutional placement (QIP) has been reduced from 6 months to 2 weeks. This means the eligible listed companies that have stressed assets shall be able to determine the pricing of their preferential allotment at not less than the average of weekly high and low of volume-weighted average prices of the related equity shares during the two weeks preceding the relevant date. SEBI has also amended the takeover regulations to exempt promoters from the obligation of making an open offer if they acquire more than 5% and less than 10% in a financial year pursuant to preferential issue of equity shares by a company.
The conditions that need to be complied by such companies include that the preferential allotment of shares shall not be made to persons and entities that are not part of the promoter group.
The current economic conditions need desperate measures that help companies during such stressful times. In such a case, this amendment is a positive move as the companies which find it difficult to access alternate fundings can now raise necessary equity funds as they are not obliged to make an open offer. This will help raise capital into the company when other investors may not be comfortable with investing during this economic crisis. However, this amendment only targets a particular group of entities namely, stressed companies. Such relaxation shall also be given to other companies before they turn into stressed companies.
ABOUT THE AUTHOR
Arushi Gupta is a 5th-year BA LLB student at Savitribai Phule Pune University.
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