On June 25, 2020, in its first board meeting after the Covid-19 pandemic severely impacted the securities market, the SEBI board has approved some major amendments to the existing securities laws. Some of these decisions are discussed below:
Pricing of Preferential Issues
The economic downturn caused by Covid-19 has forced many companies to raise equity capital. The existing pricing model for preferential issues, as provided under Regulation 164(1) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR Regulations”), states that the preferential issue price shall not be less than the average of the weekly Volume Weighted Average Price (VWAP) of the equity shares in the preceding 26 weeks or 2 weeks, whichever is higher (“Method-1”). Since the prices of equity shares plummeted after the beginning of this crisis in March 2020, following this pricing model might lead to an absurdity where the preferential issue price will be substantially more than the current market price of those equity shares.
Therefore, in an effort to ease such capital raising activities during the pandemic, SEBI has decided to provide an additional option to calculate the issue price for preferential issues made between July 01, 2020 and December 31, 2020. Under this method, the minimum preferential issue price shall be the average of the weekly VWAP of the equity shares in the preceding 12 weeks or 2 weeks, whichever is higher (“Method-2”). The issuers have an option to calculate the preferential issue price by choosing either of the two methods, as stated above. Further, it is also specified that the securities allotted using Method-2 shall be locked-in for a period of three years. Under the existing framework, where the preferential issue price is calculated using Method-1, the securities allotted to non-promoters are locked-in for a period of one year and those allotted to promoters or promoter group are locked-in for three years.
Takeover Regulations
Regulation 22(1) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Regulations”) prohibits an acquirer from completing an acquisition of shares in a target company, where such acquisition attracts an obligation to make an open offer, until the expiry of the offer period. However, Regulation 22(2A) provides an exception to this by allowing an acquirer to acquire shares through preferential issue or through stock exchange settlement process, other than bulk or block deals, subject to fulfilment of the following conditions – a) such shares shall be kept in an escrow account, and b) the acquirer shall not exercise any voting rights over such shares.
While the definition of bulk deal is not provided under the Takeover Regulations, SEBI had issued two circulars, on January 14, 2004 and September 02, 2005, which defined bulk deal as transactions where total quantity exceeds 0.5% of the listed equity shares. However, in the matter of Asit Mehta & Others v. SEBI (May 28, 2018), the Securities Appellate Tribunal was of the view that the SEBI circulars do not define ‘bulk deal’ such that it can be applied generally for all purposes. This created a confusion regarding the scope of the applicability of Regulation 22(2A) of the Takeover Regulations.
Resting the confusion, SEBI has now decided to allow acquisition through stock exchange settlement process through bulk or block deals also, subject to fulfilment of the abovementioned conditions.Further, SEBI has decided that in case of indirect acquisitions where public announcement has been made, 100% of the consideration payable must be deposited 2 working days before the date of detailed public statement. A 10% simple interest shall be payable to tendering shareholders in case the open offer is delayed on account of acts of omission or commission by the acquirer.
The amendments to the ICDR Regulations and Takeover Regulations have been notified in the Official Gazette.
PIT Regulations
The SEBI board has approved amendments to the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”), which include maintaining a structured digital database containing nature of unpublished price sensitive information and the names of persons who have shared the information, automation of process of filing disclosures to stock exchanges, restriction on trading window not to be made applicable for transactions as prescribed by SEBI, and filing of non-compliances of code of conduct with stock exchanges and crediting of amounts collected for such non-compliances with the Investor Protection & Education Fund administered by SEBI.
Settlement Regulations
Under Table X of Schedule II of the SEBI (Settlement Proceedings) Regulations, 2018 (“Settlement Regulations”), which specifies the base amount for calculation of the settlement amount for residual instances not covered under the preceding tables, ‘principal officers’ of a body corporate or firm are treated differently and a higher base amount is specified for such persons, as compared to ‘individuals’. Currently, under the existing framework, ‘principal officer’ includes director, manager, secretary, other officers and persons who are in charge of and are responsible for the conduct of the business of the company. The SEBI board has now decided to include promoters within the definition of ‘principal officer’ for the purpose of calculation of the base amount.
The board has also decided to rationalise the calculation of base amount for defaults relating to open offer violations where the making of the open offer has become infructuous. Currently, the base amount is Rs. 1 crore or the open offer size, whichever is higher, where the open offer has become infructuous on account of an act by the company; or any amount between minimum penalty to probable cost of open offer, where it has become infructuous due to any other reason.
Further, in order to save time, the SEBI board has also decided to include a paragraph in the show cause notice informing the noticee about the option of filing a settlement application, instead of issuing a settlement notice in terms of Regulation 18 of the Settlement Regulations.
