ALL YOU NEED TO KOW ABOUT THE SEBI GUIDELINES FOR PREFERENTIAL ISSUE OF SECURITIES!

INTRODUCTION

One of the most popular financing methods of recent years is the private placement method. What is commonly referred to as private placement is referred to as issuance of preferred securities in SEBI guidelines. As the name suggests, it is about raising money from a selected group of people, including individuals, venture capitalists, companies or others (who may or may not be existing members) and from up to 200 people in total in a financial year.

The promoters, who were responsible for the management of the company at that time were making preferential allotment of shares etc to a selected group of persons , including themselves, at prices unrelated to the prevailing market prices of such instruments. This was considered against the interest of the general investors and hence in order to protect the interest of the investors SEBI issued guidelines on August 04 1994, covering the issue of shares etc on preferential basis to a select group of persons. 

In case of a listed company,  the SEBI (Issue of Capital and Disclosure Requirement ICDR) Regulations, 2018 are applicable in the event of equity share issue or any other financial instrument convertible as equity shares. In other words,  the SEBI guidelines apply to a preferential issue of equity shares/ Fully Convertible Debentures (FCDs)/ Partly Convertible Debentures (PCDs) or other convertible instruments such as warrants, convertible preference shares.  Therefore, the issue of securities on preferential basis that are convertible to equity share must comply with the ICDR Regulations. In case the preferential issue instrument is not convertible into equity shares, then these Guidelines would not apply. CHAPTER V consisting of Regulations 158 – 170 of the ICDR Regulations governs this particular topic of issue on preferential basis.

APPLICABILITY

Earlier, as per regulation 158 of SEBI (ICDR) Regulations, 2018, the Chapter did not apply to issue of shares under Section 62(3) and 62(4) of the Companies Act, 2013, which deals with issue of shares on a preferential basis against loans or any other instruments, on which the terms of issue includes the right of conversion of the security into equity shares, or a case wherein the same is demanded by the Government through an order. But amendments were made to extend the applicability of Chapter V to the preferential issue of shares, arising out of conversion of loans or debt securities subject to the compliance of the provision under Section 62(3) of the Act, 2013.

ISSUERS INELIGIBLE TO MAKE A PREFERENTIAL ISSUE

  • Regulation 159 prohibits preferential allotment to persons who have sold the shares of the company at any time during 90 days prior to the preferential allotment. 
  • Further, any person belonging to the promoter group who has previously subscribed to  warrants  of  an  issuer  but  has  failed  to  exercise  the  warrants,  shall be ineligible for issue on preferential basis for a period of one year from (a)the date of expiry of the tenure of the warrants due to non-exercise of the option to convert; or (b)the date of cancellation of the warrants, as the case may be. 
  • An issuer shall be ineligible to make a preferential issue if any of its promoters or directors is a fugitive economic offender.  
  • An issuer shall be ineligible to make a preferential issue if it has any outstanding dues other than dues that are the subject matter of a pending appeal or proceeding(s), to be paid to the Board, the stock exchanges or the depositories

CONDITIONS FOR PREFERENTIAL ISSUE 

As per regulation 160 of SEBI (ICDR) Regulations, 2018, a listed issuer making a preferential issue of specified securities shall ensure that:

  1. All equity shares allotted must be fully paid up
  2. Special resolution has to be passed
  3. All equity shares held by proposed allottees are in Dematerialized form
  4. Issuer has complied with conditions for continuous listing of equity shares as specified
  5. Issuer has obtained Permanent Account Numbers of allottees
  6. Issuer has  made in application for approval from the stock exchange where its equity share are listed

RELEVANT DATE

According to regulation 161 of SEBI (ICDR) Regulations, 2018, the price shall be calculated based on the prices prior to 30 days on which an AGM Annual General Meeting or EGM Extraordinary General Meeting has been conducted. The relevant date would be the following:

  • A date prior to 30 days on which annual or extraordinary general meeting is planned/proposed to be held.
  • A date prior to the 30 days on which the shareholders of the convertible securities become entitled to apply for such conversion into the equity shares.

TENURE OF CONVERTIBLE SECURITIES

As per regulation 162 of SEBI (ICDR) Regulations, 2018, the tenure of the convertible securities of the issuer shall not exceed eighteen months from the date of their allotment. The  issuer  shall have the responsibility to ensure  that  the  allotment  of  equity  shares pursuant  to  exercise of  the  convertible  securities  is  completed  within  15  days  from  the  date  of such exercise by the allottee.

DISCLOSURES TO SHAREHOLDERS  

As per regulation 163 of SEBI (LODR) Regulations, 2018, the explanatory statement to be annexed to the notice of the general meeting must additionally contain the following details: 

  • a) Objects of the preferential issue;
  • b) Maximum number of specified securities to be issued; 
  • c) Intent  of  the promoters,  directors  or  key  managerial  personnel  of  the  issuer  to subscribe  to the offer; 
  • d) Shareholding pattern of the issuer before and after the preferential issue;
  • e) Time frame within which the preferential issue shall be completed; 
  • f) Identity of the natural persons who are the ultimate beneficial owners of the shares proposed to be allotted and/or who ultimately control the proposed allottees. 

PRICING OF FREQUENTLY TRADED SHARES 

As per regulation 164 of SEBI (ICDR) Regulations, 2018, if equity shares offered under the placement are frequently traded and they have been listed on the recognised stock exchanges for a minimum of 90 trading days, then the equity shares must be allotted at a price which is equivalent or lesser than 

  • (i) the average of the weekly closing price which is related to equity shares that are quoted on recognised stock exchange for 90 trading days preceding the specific date.
  • (ii) the average of the weekly closing prices of the related shares quoted on a recognised stock exchange for 10 trading days preceding the specified date.

However if equity shares offered under the placement have been listed on the recognized stock exchange for a period less than 90 trading days, then the equity shares must be allotted at a price not less than 

  • (i) the price at which equity shares were issued by the issuer in its initial public offer arrived at a scheme of arrangement pursuant to which the equity shares of the issuer were listed.
  • (ii) the average of the weekly high & low of the closing prices of the related equity shares quoted on the recognized stock exchange during the period the shares have been listed preceding the relevant date.
  • (iii) the average of the weekly high or low of the closing prices of the related equity shares quoted on a recognized stock exchange during the 10 trading days preceding the relevant date.

PRICING OF INFREQUENTLY TRADED SHARES 

As per regulation 165 of SEBI (ICDR) Regulations, 2018, if equity shares offered under the placement are not actively traded, then the prices set by the issuer shall include valuation parameters like comparable trading multiples and other parameters which are customary for valuation of shares, and also book value. The issuer is required to submit to the stock exchange where the equity shares of the issuer are listed, a certificate from an independent merchant banker or an independent chartered accountant who practices for over 10 years, stating that the issuer complies with this regulation obtained.

OTHER CONDITIONS FOR PRICING

As per regulation 166A of SEBI (ICDR) Regulations, 2018, the preferential issues that causes a change in control or results in allotment of securities made to a single allottee or allottees in concert of more than 5% of post-issue fully diluted share capital of the issuer, shall be required to get pricing determined by a independent registered valuer and a valuation report from the independent registered valuer. The valuation report shall also cover guidance on control premium, which shall be computed over and above the price determined. Further the report shall  be  published  on  the website  of  the  issuer  and  a  reference  of  the  same  shall  be  made  in  the  notice  calling  the  general meeting of shareholders. 

LOCK IN 

As per regulation 167 of SEBI (ICDR) Regulations, 2018,  in case of preferential issue, shares allotted to promoters and promoter group are required to be locked-in for a period of 18 months from the date of allotment or receipt of trading approval, subject to the same not exceeding 20% of the total capital of the issuer. Further shares allotted to persons other than promoters and promoter group are required to be locked-in for a period of 6 months from the date of allotment or receipt of trading approval.

PLEDGE OF LOCKED-IN SPECIFIED SECURITIES

As per regulation 167A of SEBI (ICDR) Regulations, 2018, pledging of shares locked-in pursuant to a preferential issue for loans taken from certain financial institutions being scheduled commercial bank, or a public financial institution or a systemically important non-banking finance company or a housing finance company, has been permitted by way of insertion of this regulation as an amendment. 

TRANSFERABILITY 

As per regulation 168 of SEBI (ICDR) Regulations, 2018, securities held by promoters that are locked-in as per regulation 167 may be transferred among the promoter group or persons in control of the issuer provided that the lock-in period on such securities shall continue to exist with the transferee for the remaining period. Further, such securities shall  not  be  transferable  by  the allottees  till  the  trading  approval  is  granted  for  such  securities  by  all  the  recognised  stock exchanges where the equity shares of the issuer are listed. 

Written by: Swetha SS

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