It is welcome that the stock market regulator, the Securities and Exchange Board of India, is moving lock-step with the RBI, in alleviating the financial distress being faced by businesses due to the disruption of economic activity caused by the Covid-19 pandemic. In its recent board meeting, SEBI provided an additional option to the existing pricing methodology for preferential issuance, which makes it easier for companies to raise funds. The companies have the option of pricing the preferential offer at the weekly average price over the preceding 12 weeks or the preceding two weeks, whichever is higher. The existing rules required the pricing to take into account the average price over the preceding 26 weeks. This would have resulted in the offers being priced very high, thus deterring potential investors. With declining revenue over the last three months making it difficult for companies to manage their fixed costs and working capital needs, companies need to raise funds through both debt as well as equity. SEBI’s tweak to the pricing rules is welcome as preferential issue is among the preferred channels of fund raising due to the relatively easier process.
The regulator has, rightly, tried to prevent misuse of this relaxation by stating that this pricing rule applies only for preferential issues made from July to December this year. It would be good if SEBI sticks to this timeline and does not extend the price relaxation beyond this year. The pricing guideline for preferential issues, as laid down in the ICDR Regulations stipulate considering a longer period of six-months to prevent promoters from using short-term stock price declines to issue shares at a lower price. Locking-in the shares thus issued for three years is also a good idea as it prevents misuse of this route to make quick gains through stock price appreciation, once the economy revives. The regulator had also, recently, given leeway to businesses that were facing financial distress, unable to meet their debt obligations. It had allowed such firms to raise funds through preferential issue by considering the share price of only the preceding two weeks. Investors in distressed firms were also exempted from the need to make an open offer. These rules are in the right direction as it is important to support businesses in these tough times to stay solvent.
SEBI has also made a couple of other important changes in its board meeting. Penal interest of 10 per cent is to be paid to all shareholders who have tendered shares in an open offer, if the open offer is unduly delayed due to omissions on part of the acquirer. This move is necessary to check bogus open offers announced with the mal-intent of manipulating the stock price. The Prohibition of Insider Trading Regulations have also being amended to require all companies to maintain a digital database of unpublished price-sensitive information and the names of persons who have shared the information.