Rejig in preferential share rules proposed

Mumbai: The Securities and Exchange Board of India (Sebi) has proposed a revamp of rules on preferential share offers by relaxing pricing norms and lock-in requirements for promoters. This will make it easier for companies to raise funds through this route. It has also proposed that companies must obtain a valuation report, whenever there is a change in control following a preferential allotment of shares to investors.

This follows the controversy over the PNB Housing Finance-Carlyle deal. In June, Sebi had halted an attempt by Carlyle to buy a majority stake in PNB Housing through a preferential share issue over pricing. The deal was shelved after the Securities Appellate Tribunal gave a split verdict on PNB Housing Finance’s petition, which had challenged the regulator’s stay on the mortgage lender’s proposal for the preferential issue of shares to private equity funds.

“Stricter provisions in respect of pricing of preferential issue, if any already provided, under the Articles of Association of the issuer company shall also be considered for pricing in addition to pricing guidelines under ICDR (Issue of Capital and Disclosure requirement) Regulations for the purpose of making any preferential issue,” Sebi said in a consultation paper on Friday.

It has sought public comments on the paper by December 11.

“In case of any proposed preferential allotment results in change in control, the valuation report / certificate from registered valuer should also cover guidance on control premium,” Sebi said.

On the pricing of preferential shares, the regulator proposed that it should be based on the volume weighted average price (VWAP) of weekly high and low for 60 trading days or 10 trading days, whichever is higher.

Currently, pricing is based on the average of weekly high and low VWAP (volume-weighted average price) of 26 weeks or two weeks, whichever is higher.

“Representations have been received stating that the norm of 26 weeks’ period is a very long period for determining the price considering the market volatility,” Sebi said. “Further, it is argued that there is a significant difference in the price determined on the basis of 26 weeks’ average vis-a-vis 2 weeks’ average. This may act as a deterrent for the promoters or existing willing investors to come to the aid of the company in times of need.”

The regulator also suggested a reduction in the lock-in period for promoters to 18 months from the current three years and for other investors to six months from the current one-year requirement.

It’s been pointed out that a lock-in of 3 years is onerous for a company listed for a reasonable number of years with the promoters having held on to their stake, Sebi said.


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