India - Temporary Relaxation In Pricing Methodology For Preferential Issuances By Listed Companies.
Legal News & Analysis - Asia Pacific - India - Capital Markets
9 July 2020
SEBI has introduced a more lenient price calculation option in addition to the existing pricing methodology for preferential issuances undertaken between July 01, 2020 and December 31, 2020, by Indian listed companies.
1. Optional Pricing For Preferential Issues
• Minimum Price: The floor price for preferential issuances is usually determined on the basis of the historical share prices prior to the ‘relevant date’ as per the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.
• Existing Pricing: In case of frequently traded shares, the minimum price per equity share is calculated as the average of the weekly high and low of the volume weighted average price of the equity shares on the stock exchange during either: (i) the twenty six weeks preceding the relevant date, or (ii) the two weeks preceding the relevant date, whichever is higher.
• Alternate Pricing: SEBI has now introduced an alternate formula under Regulation 164B, where the lookback period of twenty six weeks has been reduced to twelve weeks preceding the relevant date. Thus, the minimum price will be the average of the weekly high and low of the volume weighted average price during either: (i) the twelve weeks preceding the relevant date, or (ii) the two weeks preceding the relevant date, whichever is higher.
• Option of the Issuer: For preferential issuances between July 01, 2020 and December 31, 2020, the issuer company can now choose whether the floor price is to be based on the earlier twenty six week lookback period or the new twelve week lookback period. All allotments arising out of the same shareholders’ approval are required to follow the same pricing methodology.
• Lock-in: Securities allotted on a preferential basis using this new alternate pricing will be locked-in for a period of three years. Under the existing pricing regime, preferential issuances to non-promoters are only locked-in for one year and preferential issuances to promoters are locked-in for one or three years depending on the percentage of capital already subject to lock-in.
2. Way Forward
• Given the current volatility in the stock prices and the expected economic downturn, the erstwhile pricing methodology of a twenty six week lookback made it unviable for listed companies to raise capital. The alternative method introduced under Regulation 164B is a positive step, and is likely to encourage fund-raising by listed companies at a more current market valuation.
• Financial investors would need to consider whether the longer lock-in is acceptable or whether they can avail the qualified institutional buyer route where the pricing for preferential issuances is subject only to the two week lookback (and there is no twenty six week lookback).
• This alternative pricing regime (and the recent increase in creeping acquisition limit from 5% to 10%) offers a good opportunity for promoters to consolidate their stakes in companies where the stock market price has dropped in the past three months due to the impact of Covid-19.
• This relaxation is one of the many recent amendments by SEBI to ease fund-raising by companies, such as the relaxations to pricing norms for companies with stressed assets and the relaxations of takeover offer limits for preferential issuances to promoters.
For further information, please contact:
Zia Mody, Partner, AZB & Partners
 “relevant date” is the date which is 30 days prior to the shareholders meeting approving the preferential issuance, usually this ends up being the date of the board meeting approving the preferential issuance.
 “frequently traded shares” means the shares of the issuer, in which the traded turnover on any recognized stock exchange during the twelve calendar months preceding the relevant date, is at least ten per cent of the total number of shares of such class of shares of the issuer