Promoters of stressed firms would gain more flexibility in attracting investors, and the process of deciding the right asset price will become easier following a new set of reforms adopted by capital market regulator SEBI (Securities and Exchange Board of India) in its preferential share issuance norms. Market experts said the new guidelines provide the promoters and promoter community organizations with flexibility in attracting investors for their companies rather than being entirely dispossessed as in the IBC (Insolvency and Bankruptcy) system. The amendments will also assist promoters in bringing financial investors on board without losing leverage over the company. And if they get investors who want to take over, they could end up with a continuing position in the business that could be diminished but not eliminated fully. Therefore, due to such flexibility, promoters may prefer restructuring as a better and faster alternative through these guidelines than going through IBC, the experts added.
On June 22, SEBI implemented guidelines relaxing pricing and open bid conditions to enable easier fundraising through preferential allocation by stressed listed firms. To ensure that truly stressed businesses can take advantage of the relaxations, strict requirements have been set for a company to qualify as a ‘stressed company. Adequate protections have also been placed in place to limit participating entities, reports of end-use, limitations and supervision, lock-in provisions, audit committee qualification, and statutory auditor, etc. Until these guidelines, the SEBI regulations offered exemption from preferential issue pricing and open bid conditions only for those firms whose resolution plan was approved under the IBC, but now a wider pool of firms can get those benefits.
The latest guidelines make fundraising simpler for even those companies that are currently stressed but have not gone under the IBC system through the preferential framework. Overall, as of today, more than 270 listed companies have their debt instruments/loans classified as D and can, therefore, be viewed as being stressed in nature. Most of these firms will benefit after the required conditions have been met. The new rules also expand the benefits to enduring six month’s suspension of IBC firms. Given the recent COVID situation, IBC-filed corporate insolvency resolution has suspended any debt defaults after 25th March 2020 for six months. Consequently, during these 6 months, many companies and lenders would not be able to use the IBC restructuring framework even if they wish to do so.
In this context, the guidelines of SEBI are in harmony with the guidelines of IBC by not allowing promoters and group promoters to participate in the preferential issue by either infusing funds or voting or using the proceeds. At the same time, the new guidelines provide the promoters/promoter community organizations with flexibility in attracting investors for their companies rather than being wholly dispossessed as in the IBC system. SEBI Regulations require a company to price the issue at an average of 26 weeks and two weeks of prices for a preferential issue, whichever is higher.
