SEBI Proposes Changes to Preferential Allotment Norms

The Securities and Exchange Board of India (SEBI), has just released a consultative paper suggesting some key changes to the preferential allotment of shares, warrants and convertibles to promoters and key investors.

Preferential allotments allow easier fund raising without compromising interests of minority shareholders. The consultative paper on preferential allotments by SEBI dwelt broadly on the lock-in period, pricing model for preferential allotment, control premium, pledging of locked-in preferential shares and conditions for preferential offer. Here is a gist.
 

Highlights of what SEBI has suggested for preferential allotments

1) One major challenge in preferential allotments is the time period to consider for arriving at the indicative preferential allotment price.

SEBI has proposed 2 changes in the pricing formula. Firstly, SEBI has suggested using the 60-days high / low VWAP price instead of 26-weeks average price.

Secondly, SEBI has suggested using Use 10-days high / low VWAP instead of 2-weeks VWAP. This also syncs with new settlement cycle.

2) The PNB / Carlyle deal raised some sticky questions on how the preferential allotment should be valued and when there should be a control premium payable.

In this consultative paper, SEBI has proposed independent valuation by a registered valuer for any preferential issue that leads to change of control or entails allotment of over 5% of post-issue full-diluted equity.

SEBI has also proposed that valuers give guidance on control premium where there is change in control due to preferential offer.

3) The third proposal pertains to the lock in period, which has come for criticism as being too harsh in the case of preferential allotments. SEBI has accordingly made two proposals.

Firstly, the lock in for preferential allotments to promoters be reduced from 3 years to 18 months. Secondly, for preferential allotments other than to promoter / promoter groups, the lock-in period be reduced from 1 year to 6 months. SEBI has also called for greater transparency in disclosure of status of allottees.

4) There is also an important recommendation on pledging of shares in preferential lock-in. Currently, promoters or non-promoters getting preferential allotment, cannot pledge shares for raising funds during the lock-in period.

SEBI has proposed that the pledge of lock-in securities may be allowed in special circumstances if the promoter pledge is part of the terms of the loan sanction by a commercial bank, financial institution or systemically important NBFC. 

5) Finally, SEBI has also dwelt on the provision that bars preferential issue to any person who sold or transferred shares of the issuer in last 6 months.

SEBI has suggested to reduce this time limitation from 6 months to 60 days. However, SEBI has also proposed that any company should not be allowed to make a preferential offer, if it has any outstanding dues to the regulator, stock exchanges or to the depositories.

Overall, these suggestions if implemented will make the preferential allotment process simpler, more transparent and friendlier to issuers and investors.

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