The Securities and Exchange Board of India (SEBI) has proposed to relax fundraising norms for distressed companies to help them tide over a cash crunch and find investors in a bid to get back on their feet.
The capital markets regulator said it plans to tweak its pricing rules for preferential allotment of shares by distressed companies to investors and may also exempt the investors from making an open offer to public shareholders.
The proposals, if finalised, will smoothen access to capital for such companies during a difficult economic situation, SEBI said on Wednesday in a consultation paper seeking public feedback.
The SEBI action is the latest in a series of measures the regulator has taken over the past month as the coronavirus pandemic disrupted economic activity, roiled financial markets and raised the prospects of more debt defaults.
The regulator had on Tuesday allowed more time and flexibility to companies preparing to float initial public offerings, tightened some regulations last month to limit market volatility and permitted alternative investment funds more time to meet disclosure obligations.
In its consultation paper, the regulator said distressed companies need funds to avoid bankruptcy but face difficulties in raising capital through conventional means. A fall in the share price of such companies after the disclosure of financial results or debt defaults makes it even more difficult for them to raise capital.
Such companies, SEBI said, need capital urgently from financial investors and they can do so via a preferential allotment of shares. However, the current pricing regulations make it difficult for companies to issue shares.
At present, SEBI rules require the pricing of preferential share allotment to cover a period of at least 26 weeks. This leads to a wide gap in pricing between the share price at the beginning of the 26 weeks and the price when funds are required. To resolve this issue, the regulator proposed to reduce this period to two weeks with certain riders.
SEBI also said it may exempt investors who buy shares via preferential allotment from making an open offer to public shareholders of a company if the acquisition is beyond the limit prescribed.
At present, SEBI rules require an investor buying a 25% stake in a company to make an open offer to purchase an additional 26% from the company’s public shareholders.
An exemption from making an open offer, SEBI said, will ease the financial burden on investors or buyers of the stressed assets.
The regulator also defined a stressed company as one that meets two of three conditions. These conditions are: Disclosing a default on payment of interest or repayment of principal amount on bank loans and debt securities for two consequent quarters; the credit rating of listed instruments has been downgraded to 'D'; and existence of an inter-creditor agreement as per the Reserve Bank of India’s norms for resolution of stressed assets.