The Securities and Exchange Board of India (SEBI), on 25th June 2020, relaxed the rules on the pricing of preferential issues in the wake of COVID-19 crisis, in an attempt to ease fundraising for companies. Meaning, it has approved providing listed companies with a time-bound, a temporary option of undertaking preferential allotments, at possibly more investment-friendly pricing, by choosing to utilise the higher of the two weeks or the 12 weeks formula price (i.e. based on the average of the weekly high and low of the volume-weighted average price quoted on the stock exchange), instead of the existing norm of higher of the two weeks or the 26 weeks formula price.

Under the current market conditions, the stock prices have seen a significant drop ever since the pandemic grew in March 2020. This option is bound to result in lower and, arguably, more favourable pricing for potential investments.

However, such securities allotted on preferential basis, using the above pricing formula, shall be mandatorily locked-in for a period of three years, SEBI said in a release. This change stands in opposition to the one-year lock-in that currently applies to non-promoter allotments or promoter allotments above 20% of the capital of the company when based on the 26 weeks pricing formula. The amendments to the SEBI ICDR (Issue of Capital and Disclosure Requirements) Regulations, incorporating this option, will be made soon and will remain in effect from 1st July 2020, until 31st December 2020.

The existing pricing guideline for preferential issue for frequently traded shares will also continue to remain in force, and the issuer may choose any one of the 2-week-12-week or 2-week-26-week formulae.

The new pricing option can be called a fundamental change, as it is the first pricing relaxation offered by SEBI in many years for preferential allotments to promoters of listed companies as well as for strategic investors.

Other changes brought by SEBI in this regard

The markets regulator also made amendments to the insider trading prohibition rules. It said the amendments to the insider trading prohibition rules include maintaining a structured digital database containing the nature of unpublished, price-sensitive information, along with the names of persons who have shared the information.

It will involve automation of the process of filing disclosures to stock exchanges, restriction on the trading window not to be made applicable for transactions as prescribed by SEBI. It also requires entities to file any non-compliances of Code of Conduct with the stock exchanges.

SEBI also approved some amendments to the settlement regulations. Under this, promoters will now be included along with the principal officer for calculation of the base amount.

Further, to save time, instead of issuing a settlement notice, SEBI will now include a paragraph in the show cause notice, informing the notice about the option to file a settlement application.

Conclusion

The new pricing option for preferential allotments is a welcome relief and is expected to give a significant boost to the funding of listed companies. By increasing the lock-in period, it proposes to push companies towards long-term capital, be it through promoters or strategic investor consolidations. While the optionality is currently proposed to be valid only till the end of the current year, subject to market conditions and exercise of the new pricing option leading to better market dynamics, increased deal-making and positive impact, we will not be surprised if the regulator chooses to extend the same for a longer period.