SEBI: Treading the middle path
With the onset of Covid 19 in India and the consequent mammoth India lockdown, businesses in the country went into a slump. A series of measures were announced by the Indian Government through various regulators. Major relaxations were introduced by the Securities and Exchange Board of India (SEBI).
A look at the various notification issued by SEBI in light of the Covid pandemic:
SEBI SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS (AMENDMENT) REGULATIONS, 2020
Regulation 3 deals with provisions and conditions and for substantial acquisition of shares, voting rights or control by an acquirer either individually or together with Person acting in concert (“PAC”). The Regulation states that the acquirer together with the PAC can hold up to 25% of shares or voting rights or control subject to making a mandatory open offer public announcement. The Regulation further states that
In particular, Regulation 3 (2) states that any acquirer along with Person acting in concert (“PAC”) who holds shares or voting rights in the Target Company which enables them exercise 25% or more of the voting rights in the Target company, can further acquire additional shares or voting rights which will (further) entitle them to exercise 5% or less of voting rights in the Target company in a financial year without having to give an open offer. If the further additional shares are 5 % or more than, it is mandatory to give an open offer.
The proviso to Regulation 3 (2) states that an acquirer shall not be entitled to acquire or enter into any agreement to acquire shares or voting rights when (the existing and proposed acquisition) will exceed the maximum permissible non-public shareholding.
Vide Notification dated 16th June 2020, the Proviso has been amended to include the acquisition of more than 5 % up to 10% shall be permitted in the Target company for Financial year FY 2020-21 (up to 31st March 2021) only with respect to acquisition by Promoter by way of preferential issue of equity shares by the Target company.
This amendment essentially means that Promoters can acquire upto 10% in the Target company by way of preferential issue of equity shares (and not in any other manner) until 31st March 2021 only.
Regulation 6 deals with the provisions relating to voluntary public announcement of open offer to be made by the Acquirer along with the PAC in shares or voting rights of the Target company.
An acquirer along with PAC who holds shares or voting rights in the Target company which entitle them to exercise 25% or more of voting rights in the Target company can voluntarily make a public announcement of open offer (for further acquiring additional shares) subject to such holdings (existing + proposed acquisition) not exceeding the maximum permissible that can be held by non- public.
The first Proviso states that where an acquirer along with PAC has acquired shares in the preceding 52 weeks without making public announcement of open offer, he shall not be eligible for voluntary public announcement of open offer (for further acquiring additional shares).
The second proviso states that during such offer period, such acquirer can acquire shares only through Open offer (and not in any other manner).
Vide Notification dated 16th June 2020, the Proviso has been amended to provide relaxation from this Proviso till 31st March 2021.
This means that during the offer period, the acquirer can acquire shares in any manner. There is no restriction to acquire it only through Open offer until 31st March 2021.
Regulation 10 deals with general exemptions making an open offer under regulation 3 and regulation 4 subject to fulfilment of stipulated conditions.
Regulation 10(2) deals with exemption from making open offer when shares have been acquired in a Target company but does result in change of control over such target company, pursuant to a scheme of corporate debt restructuring in terms of the Corporate Debt Restructuring Scheme notified by the Reserve Bank of India vide circular no. B.P.BC 15/21.04, 114/2001 dated August 23, 2001, or any modification or re-notification provided such scheme has been authorized by shareholders by way of a special resolution passed by postal ballot.
Regulation (2A) in Regulation 10 was inserted through a notification in 2019. Regulation 10 (2A). Regulation (2A) essentially exempted the acquirer from making open offer for further acquiring additional shares under Regulation 3, provided there was increase in voting rights of the shareholder beyond the threshold limits but no acquisition of control pursuant as it was due to conversion of superior voting rights equity shares into ordinary equity shares.
Vide Notification dated 22nd June 2020, SEBI has inserted Regulation (2B) under Regulation 10. Regulation (2B) exempts acquirer from making open offer for further acquiring additional shares under Regulation 3 & 4 with respect to any acquisition of shares or voting rights or control of target company by way of preferential issue in compliance with Regulation 164A of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.
The exemption from open offer shall also apply to the target company with infrequently traded shares which is compliant with the provisions of Regulations 164A (2) to (8) of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018. The pricing of such infrequently traded shares shall be in terms of regulation 165 of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018.
This means that Promoters acquiring shares through preferential issue as per Regulation 164A of SEBI (ICDR) Regulations is exempt from making open offer.
SEBI (ISSUE OF CAPITAL AND DISCLOSURE REQUIREMENTS) (SECOND AMENDMENT) REGULATIONS, 2020
The SEBI ICDR Regulations lay down guidelines relating to conditions for various kinds of issues like public issue and rights issue. It deals with provisions relating to IPO, Further Public Offer (FPO) and conditions relating to various key issues such as pricing, promoter’s investment minimum offer to public, disclosures in offer documents and related provisions.
Vide Notification dated 22nd June 2020, SEBI has inserted Regulation 164A after Regulation 164.
Regulation 164A essentially deals with provisions relating to pricing of preferential issue of shares with respect to companies having stressed assets. In simple terms, Regulation 164A states that:
- In case of frequently traded shares, the price of the equity shares to be allotted as 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 two weeks preceding the relevant date.
*At present, the price of preferential shares is calculated at weighted average of previous 26 weeks
- No allotment of equity shares shall be made unless the issuer company meets any two of the following criteria:
(a) Issuer has disclosed all defaults relating to payment of interest / repayment of principal amount on loans from banks / financial institutions/ Systematically 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 calendar days after the occurrence of such default;(b) there is an inter-creditor agreement in terms of Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions 2019 dated June 07, 2019;(c) the credit rating of the financial instruments (listed or unlisted), credit instruments / borrowings (listed or unlisted) of the listed company has been downgraded to “D”.
- The issuer company making the preferential issue shall ensure compliance with the following conditions:
(a) The preference issue shall be made to a person not part of the promoter or promoter group as on the date of the board meeting to consider the preferential issue. The preference issue shall not be made to the following entities:(i) Undischarged insolvent in terms of the Insolvency and Bankruptcy Code, 2016;
(ii) Wilful defaulter as per the guidelines of the Reserve Bank of India issued under the Banking Regulation Act, 1949;
(iii) A person disqualified to act as a director under the Companies Act, 2013;
(iv) A person debarred from trading in securities or accessing the securities market by the Board;
Explanation: The restriction under (iv) shall not apply to the persons or entities mentioned therein who were debarred in the past by the Board and the period of debarment is already over as on the date of the board meeting considering the preferential issue.
(v) A person declared as a fugitive economic offender.
(vi) A person who has been convicted for any offence punishable with imprisonment-
– For two years or more under any Act specified under the 12th Schedule of the IBC, 2016
– For seven years or more under any law for the time being in force.
Such restriction shall not be applicable to a person after the expiry of a period two years from the date of his release from imprisonment.
(vii) 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.
- The resolution for the preferential issue and exemption from open offer shall provide for the following:
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.
Where the company 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 three times the number of the votes, if any, cast against it.
- 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.
- a) 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:(i) The monitoring agency shall submit its report to the issuer in prescribed format on a quarterly basis until at least ninety five percent of the proceeds of the issue have been utilized.
(ii) The board of directors and the management of the issuer shall provide their comments on the findings of the monitoring agency as specified in Schedule XI.
(iii) The issuer shall, within 45 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
- b) The proceeds of the issue shall also be monitored by the Audit Committee till utilization of the proceeds.
- The allotment made shall be locked-in for a period of three years from the last date of trading approval.
- The statutory auditor and the audit committee shall certify that all conditions under sub-regulations (1), (2), (3), (4) and (5) of regulation 164A are met at the time of dispatch of notice for general meeting proposed for passing the special resolution and at the time of allotment.”
SEBI also issued Circulars offering relaxation by extending timelines for compliance activities. A quick glance at relaxations provided due to continuing impact of CoVID 19 pandemic:
Date of Circular
Further extension of time for submission of Annual Secretarial Compliance Report by listed entities
On 19th March 2020 SEBI granted extension of time upto 30th June 2020
On 25th June 2020, SEBI granted further extension of time upto 31st July 2020
Further extension of time for submission of financial results for the quarter /half year / financial year ending 31st March 2020
On March 19 2020 SEBI granted extension of time upto 30th June 2020
On 25th June 2020, SEBI granted further extension of time upto 31st July 2020
Temporary relaxation in processing of documents pertaining to Foreign Portfolio Investors (FPIs)
On 30th March 2020 SEBI granted temporary relaxations upto 30th June 2020
On 23rd June 2020 SEBI granted further extension of temporary relaxations upto 31st August 2020
Relaxations in timelines for compliance with various regulatory requirements by the trading members / clearing members / depository participants
On 16th & 21st April 2020 and 15th May 2020 SEBI granted extension upto 31st July 2020
On 19th June 2020 SEBI granted further extension upto 31st July only for the quarter ended 21st March 2020
Exemption from KYC & related document uploading (within 10 working days) between 23rd March 2020 and 31st July 2020
Relaxations from certain provisions of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 in respect of Further Public Offer (FPO)
On 21st April 2020 temporary relaxation in eligibility conditions related to Fast Track Rights Issue were introduced
On 9th June 2020 similar relaxations in the eligibility conditions related to Fast Track Further Public Offer (FPO) as contained in the SEBI (ICDR) Regulations 2018 were introduced
Relaxation from compliance with certain provisions of the SEBI (Issue and Listing of Debt Securities) Regulations, 2008, SEBI (Non-Convertible Redeemable Preference Shares) Regulations, 2013 and other SEBI Circulars
On 23rd March 2020 SEBI specified guidelines for relaxation from compliance with certain provisions of the SEBI LODR Regulations and other SEBI Circulars
In partial amendment SEBI decided to extend the relaxation provided in the circular for issuers who intend/propose to list their Non- Convertible Debentures (NCDs) /Non-Convertible Redeemable Preference Share (NCRPS) /Commercial Papers (CPs) for disclosure of financial results for another one month. Cut off dates have been extended by 91 days on or before 30th June 2020
Relaxation in filings of Alternate Investment Funds (AIFs) and Venture Capital Funds (VCFs)
On 30th March 2020 SEBI extended due date for filing for 31st March 2020 & 30th April 2020 by 2 months over and above prescribed filing dates
On 4th June 2020, SEBI further extended for filings related to March 2020 – June 2020 on or before 7th August 2020
Handholding: need of the hour
As the primary market regulator, SEBI has reached out to companies, shareholders, promoters, and other stakeholders reeling under the aftermath of Covid 19.
To achieve this end, SEBI has emphasized on preferential issue of shares. Preferential issue is considered the fastest way of raising capital by companies as it is aimed at particular or select group of investors. Further such preferential shareholders do not have voting rights in the company.
SEBI has amended the Takeover code by upping the percentage of promoters’ holding upto 10% (from the existing 5%).
Further with respect to pricing of preferential issue of stressed companies, SEBI has relaxed its pricing norms. The amendment will ensure the price of preference shares has been calculated at average of the preceding 2 weeks (as compared to the existing average of preceding 26 weeks). The reduction in time in calculating the weighted average of the price will ensure cushioning of the volatile price fluctuations due to the impact of Covid19 on businesses. Welcome relief during Covid.