SEBI provides relaxations to listed companies with stressed assets in respect of preferential issues and open offer obligations

On June 22, 2020 the Securities and Exchange Board of India (“SEBI”) issued the SEBI (Issue of Capital and Disclosure Requirements) (Second Amendment) Regulations, 2020 (“ICDR Amendment”) and the SEBI (Substantial Acquisition of Shares and Takeovers) (Second Amendment) Regulations, 2020 (“SAST Amendment”) in order to provide certain relaxations to listed companies with stressed assets in respect of the pricing methodology for preferential issues by such companies and exempting them from open offer obligations in such cases. A new regulation 164A has been introduced by in the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR Regulations”) by the ICDR Amendment after regulation 164. Regulation 164A deals with pricing in preferential issue of shares of companies having stressed assets and, inter alia, provides the following 1. Relaxation In case of “frequently traded shares”, the price of the equity shares to be allotted pursuant to the preferential issue shall not be less than the average of the weekly high and low of the volume weighted average price of the related equity shares quoted on a recognised stock exchange during the 2 (two) weeks preceding the relevant date. 2. Eligibility In order for allotment of equity shares to made, the issuer company (“Issuer”) shall be required to meet any 2 (two) of the following criteria a. the issuer has disclosed all the defaults relating to the payment of interest/ repayment of principal amount on loans from banks / financial institutions/ systemically important non-deposit taking non-banking financial companies/ deposit taking non-banking financial companies and /or listed or unlisted debt securities in terms of SEBI circular dated November 21, 2019 and such payment default is continuing for a period of at least 90 (ninety) calendar days after the occurrence of such default; b. there is an inter-creditor agreement in terms of the Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions 2019 dated June 7, 2019; c. the credit rating of the financial instruments (listed or unlisted), credit instruments/ borrowings (listed or unlisted) of the Issuer has been downgraded to “D”. 3. Other conditions The Issuer shall be required to ensure compliance with the following conditions a. The preference issue shall not be made to i. a person who is a part of the promoter or promoter group as on the date of the board meeting in which the preferential issue was considered; ii. an undischarged insolvent in terms of the Insolvency and Bankruptcy Code, 2016 (“IBC”); iii. a ‘wilful defaulter’ as per the guidelines of the Reserve Bank of India issued under the Banking Regulation Act, 1949; iv. a person disqualified to act as a director under the Companies Act, 2013; v. a person debarred from trading in securities or accessing the securities market by SEBI (provided that this restriction shall not be applicable to who persons or entities that were debarred in the past by SEBI and the period of debarment is already over as on the date of the board meeting considering the preferential issue); vi. a person declared as a fugitive economic offender; vii. a person who has been convicted for any offence punishable with imprisonment (A) for 2 (two) years or more under any act specified under the twelfth schedule of the IBC; or (B) for 7 (seven) years or more under any law for the time being in force. However, this restriction shall not be applicable to a person after the expiry of a period 2 (two) years from the date of his release from imprisonment; and viii. a person who has executed a guarantee in favour of a lender of the Issuer and such guarantee has been invoked by the lender and remains unpaid in full or part. b. The resolution for the preferential issue and exemption from open offer shall provide that the votes cast by the shareholders in the ‘public’ category in favour of the proposal shall be more than the number of votes cast against it. The proposed allottee(s) in the preferential issue that already hold specified securities shall not be included in the category of ‘public’ for this purpose. In the event the Issuer does not have an identifiable promoter; the resolution shall be deemed to have been passed if the votes cast in favour are not less than 3 (three) times the number of the votes, if any, cast against it. c. The proceeds of such preferential issue shall not be used for any repayment of loans taken from promoters/ promoter group/ group companies. The proposed use of proceeds shall be disclosed in the explanatory statement sent for the purpose of the shareholder resolution. d. The Issuer shall make arrangements for monitoring the use of proceeds of the issue by a public financial institution or by a scheduled commercial bank, which is not a related party to the issuer. In this regard i. the monitoring agency shall be required to submit its report to the Issuer in the specified format on a quarterly basis until at least 95% (ninety five%) of the proceeds of the issue have been utilized. ii. the board of directors and the management of the Issuer shall be required to provide their comments on the findings of the monitoring agency as specified; iii. the Issuer shall be required to, within 45 (forty five) days from the end of each quarter, publicly disseminate the report of the monitoring agency by uploading the same on its website as well as submit the same to the stock exchange(s) on which the equity shares of the issuer are listed. e. The proceeds of the issue shall also be required to be monitored by the audit committee until utilization of the proceeds. f. The allotment made shall be locked-in for a period of 3 (three) years from the last date of trading approval. g. The statutory auditor and the audit committee shall be required to certify that all of the conditions set out in paragraphs 1, 2, 3(a), 3(b) and 3(c) above are met at the time of dispatch of notice for general meeting proposed for passing the special resolution and at the time of allotment. The SAST Amendment has introduced a new sub-regulation 2B after sub-regulation 2A of regulation 10 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Code”) that provides that any acquisition in accordance with regulation 164A of the ICDR Regulations shall be exempt from the obligation to make an open offer under regulations 3(1) and regulation 4 of the Takeover Code. The SAST Amendment also provides that the exemption shall be applicable to a company with “infrequently traded shares” that complies with the other requirements of regulation 164A of the ICDR Regulations and that the pricing of such infrequently traded shares shall be in terms of regulation 165 of the ICDR Regulations. Read ICDR Amendment here and the SAST Amendment here. This update has been contributed by Adity Chaudhury (Partner) and Deeya Ray (Associate).