Market regulator, Securities and Exchange Board of India, on Wednesday, proposed to relax funding norms for companies with stressed assets to help them inject some funds and stave off bankruptcy. The regulator proposed the move in its consultation paper, and sought public comments by May 13.
The SEBI eased the funding norms by relaxing pricing guidelines for preferential issues . A preferential issue is a primary market issuance of shares by listed companies to select groups of institutions (or qualified institutional buyers). Until now, the financial investments for such issues were based upon the weighted average price of the last six months or the two weeks whichever was “higher”.
However, these guidelines were seen onerous in the wake of global rout experienced by listed companies fuelled by Coronavirus pandemic. This is since financial investors today wouldn’t think of investing in the listed company at “a six months weighted average price”, when the asset prices have fallen significantly in the last few months. Indian benchmark indices, amid unquantifiable uncertainty, have seen 30 per cent fall since the start of the calendar year 2020.
“Given these pricing regulations, it is practically difficult if not impossible for such companies to raise funds through preferential allotment route,” the SEBI noted. It, therefore, proposed doing away with the six months weighted average price in the guidelines for preferential issues, adding the pricing in such cases will be done based on the weighted average of the last two weeks only. Also, the SEBI, for the same category of companies, relaxed proposals related to the exemption from open offer for acquisitions.
“This (relaxation in funding norms) is a very positive development. There are sufficient checks and balances introduced by SEBI as such investment needs to be approved by majority of minority shareholders and investment is locked in for 3 years,” commented Bhavin Shah, Partner, PwC India.
The regulator, the expert suggested, should extend the same relaxation to all listed companies and not just limit this ease out to firms with stressed assets. “It will help to reduce potential defaults and allow Indian companies to procure liquidity at the right time and at a better price,” he emphasised.
Due to Covid-19 economic fallout, companies are often in urgent need of capital from willing financial investors, as other sources of funds tend to dry out at this stage. One method available for raising capital is through the preferential allotment to help resuscitate the company.