After the nationwide lockdown was imposed in the third week of March, India’s Securities and Exchange Board of India (the “SEBI”) has been quick-thinking in introducing a slew of relaxations for the securities market with a focus to lessen the burden of listed companies and market intermediaries.
In this update, we analyze the key measures introduced by the SEBI to facilitate preferential and fast track rights issues.
Preferential issues
Flexible pricing norms
The SEBI’s erstwhile pricing norms mandated listed companies to adopt the higher of the average of the weekly high and low of the VWAP of the equity shares during the preceding twenty-six (26) weeks or the preceding two (2) weeks. However, now, listed companies may choose to do a preferential issue at a price, which is the higher of, the weekly high and low of the VWAP of the equity shares during the preceding twelve (12) weeks or the preceding two (2) weeks. This alternate pricing method will be applicable for all preferential issues from July 1, 2020, to December 31, 2020. Note, however, that the equity shares issued pursuant to a preferential issue at a price based on the alternate pricing method will be locked in for three (3) years.
The alternate pricing method takes into account a shorter lookback period, which will enable the effect of the pandemic to be reflected in the issue price. In our view, a lower issue price is likely to incentivize preferential allotments as a viable funding option, although the increased lock-in period may be a dampener.
Relaxed open offer requirements for promoters
In order to boost promoter funding, the SEBI has permitted promoters (holding more than 25% voting rights, but less than 75% equity shares of a listed company) to acquire an additional 5% (total 10%) voting rights until March 31, 2021 without triggering the open offer requirement. Previously, acquisitions of only up to 5% voting rights in a financial year were exempt. However, under the revised norms, acquisitions of voting rights beyond 5% can only be achieved by way of a preferential issue of equity shares to the promoter.
This change coupled with the relaxed pricing norms (discussed above) will incentivize cash-rich promoters to up their stake at a reduced overall cost. From the company’s standpoint, access to promoter funding will be a quicker way to raise capital and will also enable good companies from protecting themselves from third-party takeovers.
Relaxed norms for fast track rights issues
The SEBI introduced the following relaxed eligibility conditions for listed companies to undertake a fast track rights issue, if the rights issue opens on or before March 31, 2021.
- the gap of three (3) years required between two (2) listings was reduced to eighteen (18) months;
- the minimum market capitalization requirement was reduced from INR2.5 billion (approx.US$33.06 million) to INR1 billion (approx. US$13.24 million);
- issuer companies having audit qualifications in annual reports were permitted to undertake a fast track rights issue, subject to submitting restated financial statements reflecting adjustments on account of the audit qualifications; and
- issuer companies against whom, or against whose promoters or whole-time directors, adjudication proceedings were pending were also permitted to undertake a fast track rights issue, subject to disclosure of any adverse impact of the proceedings.
The relaxed norms enable a larger number of listed companies to undertake rights issues under the fast track route. They also ensure that companies that were otherwise barred from a fast track rights issue due to audit qualifications or ongoing adjudication proceedings can become eligible with adequate disclosures. The remarkably successful US$7 billion rights issue of Reliance Industries Limited was undertaken pursuant to the above relaxations. Press reports suggest that several large Indian listed companies are preparing to tap public funding under the fast track rights issue route.
The SEBI has also introduced a number of procedural measures to assist companies seeking to raise capital by, inter alia, reducing filing fees, permitting e-filling of documents and electronic transmission of notices, and extending the period of validity of the SEBI’s observations on issue documents.
In our view, all of this will go a long way in easing fundraising by listed companies in this very challenging financial year.