Given the poor market sentiment, the Securities and Exchange Board of India (SEBI) has made it easier for listed companies to mop up funds through fresh issuance of shares or preferential allotment. Under the new rule, preferential issues can be priced near the prevailing share prices.
Preferential allotment of shares had become unviable since prices are down 60-70 per cent from their peak. Under SEBI’s previous formula for preferential allotments, pricing for the new shares should be based on the average six-month price of the shares already trading on the stock exchanges, or the previous 15 days, whichever was higher. But under that formula, a company offering preferential allotment would have failed to attract new buyers now, since the shares would be pegged to prices in January or February, when markets were near their all-time highs.
Bhavin Shah, Partner, PwC India, said, “Many deals were stuck because of the pricing misalignment. This amendment paves the way for these transactions and will help ease liquidity for several companies.”
For example, if IndusInd Bank had gone in for a preferential issue based on SEBI’s old formula, the shares would have had to be priced at more than ₹1,500 per share (with a one-year lock-in as mandated) given the Bank’s high share price in the past six months on the BSE and the NSE. However, its shares have crashed and now trade at around ₹450.
The new rule
Now, however, companies can price preferential issues taking the average of the high and low price of the share during the preceding 12 weeks or the past two weeks, whichever was higher.
Simply put, IndusInd can now offer a preferential issue at ₹350-450 a share, the range it has been trading over the past few weeks. However, under the new formula, the shares will remain locked in for three years.
“Even with a three-year lock-in, the new preferential norms are attractive. Most companies are available at throwaway valuations and long-term investors will take the bet,” said Kishor Ostwal, MD, CNI Global Research.
“The extended lock-in is entirely fair. It will ensure short- to medium-term fund requirement for companies and ensure that investors do not abuse the new rule,” said Yash Ashar, Partner, Cyril Amarchand Mangaldas.
Room for flexibility
Companies, mainly banks, are starved for funds, and investors are giving them a tough time with bargains. “It also makes sense for investors to cost-average their previous holdings at a lower price now in preferential allotment, since only the new shares issued will be locked in. Old holdings can be offloaded once prices move up, said Ostwal.
“Importantly, the relaxation is available to investment by promoters as well, and this, coupled with the relaxation from open-offer obligations, announced recently, provides room for creative flexibility in overall deal structuring,” said Vishal Yaduvanshi, Partner, IndusLaw.
“In the current circumstances, linking the floor price for preferential issues with a six-month look-back period was not justified. It was dampening investor interest,” said Jitesh Shahani, Partner, L&L.