Promoters helpless amidst COVID-19: SEBI to the rescue
The Securities and Exchange Board of India (SEBI) on 16th June, 2020 has issued certain amendments[i] relating to the Creeping Acquisition Limit, Voluntary Open Offer and Qualified Institutional Placement (QIP) to help the distressed companies to raise finance amid COVID-19 crisis. The severe challenges that most of the companies are facing at present are cash flow and valuation issues. Companies, primarily the small-cap and mid-cap entities are not generating any revenue; however, they continue to incur committed cash outflows even when the chain of demand and supply has come to a standstill. SEBI is aware of the woes of the small players and has tried to ease the difficulties faced by such entities.
AMENDMENT IN RESPECT OF REGULATION 3 – CREEPING ACQUISITION LIMIT
The Creeping Acquisition limit of 5% under Regulation 3 of SEBI (Substantial Acquisition of Shares and Takeover) Regulations or the Takeover Code has now been extended to 10%. As per the prevailing provision, any acquirer who held 25% or more but less than maximum permissible non- public shareholding of the Target company, which is currently 75%, could acquire such additional shares, entitling him of more than 5% of the voting rights in the target company in a financial year only after making a Public Announcement to acquire a minimum of twenty-six percent shares of the Target Company from the shareholders through an Open Offer.
The recent amendment provides that promoters will be required to make a mandatory public announcement to acquire the shares of their own company/firm only if the acquisition is over 10% in a financial year. In a nutshell, the limit of the creeping acquisition limit has been extended from 5% to 10%. Thus, the first 5% can be acquired under the pre-existing regulation through any mode, but the rest 5% has to be acquired only through a particular issue. Few other aspects of the amendment are- the extension is granted only till 31st March 2021. The amendment is applicable only in respect of acquisition made by promoter of the listed company/firm, acquisition by any person other than promoter is not covered under the scope of this amendment, and most importantly, acquisition can be made only via a 'Preferential Issue'. A Preferential Issue means the issuance of equity shares to promoter group or selected investors such as institutional investors, private equity investors or high net worth individuals. It is one of the critical sources of fundraising where money can be raised quickly and efficiently as compared to other means such as an IPO or Right Issue etc.
RELAXATION IN REGULATION 6- VOLUNTARY OPEN OFFER
The second amendment is regarding the relaxation of the first proviso of Regulation 6 of the Code , which deals with 'Voluntary Open Offer'. A Voluntary Open Offer is an offer for acquiring at least 10% of shares or voting rights or control, which can be made by an acquirer who by himself or along with persons acting in concert (PACs) holds 25% or more of shares or voting rights but less than 75% in the target company. The first proviso to Regulation 6 states that where an acquirer by himself or along with PACs, has in the 52 weeks before the voluntary offer acquired any shares of the target company without attracting the provisions of making a Public Announcement (Example: A purchase through the creeping acquisition mode) then a voluntary open offer cannot be made. SEBI, in its amendment, has relaxed the above-stated restriction until 31st March 2021.
Let us understand the following with an illustration. Consider, a (target) company A. An investor called ‘X’ who holds more than 25% of the shares in the company, wishes to make a voluntary open offer on the present day. However, in the preceding 52 weeks, he has acquired 4% shares of A. Thus, he was not required to give a mandatory public announcement. In such a case, as per Reg. 6 a voluntary open offer cannot be made by X. However, under the current amendment, this restriction has been relaxed, which makes X eligible to make a voluntary open offer.
AMENDMENT REGARDING THE TIME GAP BETWEEN TWO QIPs
The last amendment[ii] relates to the time gap between the issuance of two consequent Qualified Institutional Placements (QIPs). A QIP is a form of a Private Placement of securities, where a Listed Issuer, instead of issuing securities to public or existing shareholders such as through a Right Issue, issues equity shares or securities that are convertible into equity to a select group of persons, specifically to Qualified Institutional Buyers (QIBs). Chapter VIII of the SEBI (Issue of Capital and Disclosure Requirement) Regulations 2011 lay down provisions relating to QIPs.
Corporates have quick access to funding raising via a QIP as they are issued solely to QIBs who have expertise and financial power. Another reason why QIPs are preferred because it is the most the expeditious way in which money can be raised, other methods need to undergo cumbersomely documentation and approval compliances which are time-consuming and expensive and companies cannot afford the same in the current cash crush economy. As per the provisions, a six-month time gap is mandated between two subsequent QIPs. In the amendment issued on 16 June 2020, the market regulator has reduced this time gap from six months to two weeks. The COVID-19 situation has made access to debt financing difficult. The amendment seeks to offer a helping hand to companies raise money in quick succession.
Regulation 172 of the 2018 ICDR regulation, states that a special resolution shall be passed if the listed entity proposes a QIP. However, an exception is made when the QIP is made by the promoter or promoter group through an offer for sale for compliance with minimum public shareholding laid down in the Securities Contracts (Regulation) Rules,1957. Thus, any QIP made by the promoter or promoter group in these times will stand beneficial to the listed entity. However, companies contemplating QIP also need to take into consideration Regulation 89 of ICDR Regulations which states that the aggregate of the proposed and the past QIPs made in the same financial year shall not exceed five times the net worth of the listed entity. Reduction in the time gap of two QIPs made lead to entities crossing the said threshold. One cannot forego of the fact that investors in a QIP, in this uncertain situation, would prefer to invest in well-established firms.
Thus, the benefit of the said amendment may not be available to those outside the said ambit of 'well-established'. However, in recent times, there has been a considerable growth in raising funds via a QIP. In the year 2019, fundraising by QIPs amounted to Rs. 35,238 Crores, making it the second-highest QIP raising in the past five years. The year 2020 has already seen quite a few issuances of QIPs, the most recent one being by JM Financials which raised Rs 770 Crore through the said route. As the situation over the existence of the pandemic remains unclear, with the notified change, it may be possible that companies start resorting to this option more frequently than before.
A bird’s eye view of the three amendments showcases that all of these are promoter friendly to help the companies keep themselves afloat in these tough times. A question that could arise is why is the scope of the above provisions limited to the promoter and not to the other investors? It needs to be taken into consideration that the aim of creeping acquisition was to enable individuals in control of a company to consolidate their holdings or to build defences against takeover threats, provided it did not unduly affect shareholder interests.
Hence, in these times of crisis had the scope of amendment been open to all, it would possess a high risk of a hostile takeover. Hence, SEBI has taken into consideration the survival of companies along with the prevention of risk of takeover and has also set out means to raise funds at the same time. While SEBI's aim to boost the companies during such turbulent times is appreciated and are sure to act as a breather in the short run, it is debatable whether the end justifies the method adopted, given the objectives of the Takeover Regulations. It also poses questions to long term stability of the company, which continues to remain blurred until the market brings some clarity.
[i] SEBI (Substantial Acquisition of Shares and Takeover) (Amendment) Regulations available at https://www.sebi.gov.in/legal/regulations/jun-2020/securities-and-exchange-board-of-india-substantial-acquisition-of-shares-and-takeovers-amendment-regulations-2020_46884.html, last seen on 16/06/2020.
[ii] SEBI (Issue of Capital and Disclosure Requirements) (Amendment) Regulations available at https://www.sebi.gov.in/legal/regulations/jun-2020/securities-and-exchange-board-of-india-issue-of-capital-and-disclosure-requirements-amendment-regulations-2020_46885.html, last seen on 16/06/2020.
ABOUT THE AUTHOR
This blog has been authored by Pranjal Pawar and Divya Baheti who are Final Year B.A., LL.B. (Hons.) students at ILS Law College, Pune and DES Law College, Pune respectively.
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