InvestorQ : Can you tell me quickly about the key changes that SEBI has proposed for preferential allotments of shares?
Dilmini Mercia made post

Can you tell me quickly about the key changes that SEBI has proposed for preferential allotments of shares?

Dawn Cherian answered.
6 months ago

Let me responds to your query as under.

· First and foremost, this is not just about the preferential allotment of shares alone, but also encompasses the preferential allotment of warrants as well as convertibles. The proposed regulation is up for discussion and covers pricing, control premium, lock-in period etc.

· The first change proposed by SEBI is with reference to the time period to consider for arriving at indicative preferential allotment price as a base. Currently, the formula is the higher of the 26-weeks average of VWAP high/low and 2-week average of VWAP high/low.

· SEBI proposes to change the 26-week formula to 60-days high / low VWAP. Secondly, SEBI has suggested using Use 10-days high / low VWAP instead of 2-weeks VWAP. With markets getting more volatile on a daily basis and settlements at T+2, this 1994 formula was actually outdated.

· The SEBI has also addressed the issue of valuation of listed companies in the case of preferential allotments and the control premium. It was apparent in the PNB / Carlyle case that the market price may not be authoritative in the case of stocks that are not very liquid. The deal eventually fell through due to these contradictions.

· SEBI has proposed that in the event of change of control or 5% post-shift in ownership, independent valuation must be done by a registered valuer for preferential issue. In addition, SEBI has also proposed that when the preferential offer leads to change in control, then valuers must also give guidance on control premium.

· Currently, any preferential allotments made to promoters of the company are subject to lock-in period of 3 years. SEBI has proposed to reduce the lock-in period in case of preferential allotments to promoters from 3 years to 18 months.

· In the case of other than to promoter / promoter groups, the preferential offer is subject to lock-in period of one year. SEBI proposes to reduce this lock-in period for non-promoters from 1 year to 6 months for easier administration.

· Pledging of locked-in shares has been a contentious issue. Currently, preferential shares under lock-in cannot be pledged as collateral to raise funds. SEBI proposed that if promoter pledge is part of the terms of the loan sanction by a commercial bank or systemically important NBFC, then pledge may be allowed.

· Currently, any person who sold or transferred shares of a company cannot apply in a preferential allotment of the same company for 6 months. SEBI proposes to reduce this lock in time period for re-application from 6 months to 60 days.

Finally, SEBI has tightened regulations on eligibility of a particular company to make a preferential allotment to promoters or to other investors. For example, SEBI has proposed that any company with outstanding dues to the regulator, stock exchanges or to the depositories; not be allowed to make a preferential issue.