M&A in stressed Indian companies: will the SEBI amendments help?

Jul 13, 2020

The SEBI has permitted stressed companies to undertake a preferential issue at a price, which is the average of the weekly high and low of the volume-weighted average price (‘VWAP’) of its equity shares during the preceding two (2) weeks.

In order to be eligible to avail of the foregoing relaxation, a stressed company must comply with any two (2) of the following requirements:

  • the company must have disclosed a default in payment of interest or repayment of the principal amount on loans availed from banks, financial institutions, systemically important non-deposit taking non-banking financial companies, deposit-taking non-banking financial companies and/or listed or unlisted debt securities, and such a default must continue for a period of at least ninety (90) days after its occurrence;
  • the company must be subject to an inter-creditor agreement in terms of the Reserve Bank of India’s Prudential Framework for Resolution of Stressed Assets; and
  • the company’s credit rating must have been downgraded to “D”.

In addition, as regards the preferential issue, a stressed company must comply with the below-listed conditions, including, inter alias:

  • the preferential issue can only be made to a person who is not a promoter or a part of the promoter group of the issuer company as on the date of the board meeting to approve the issue;
  • the preferential issue cannot be made to certain categories of persons like un-discharged insolvents, willful defaulters, fugitive economic offenders, disqualified directors and persons barred from dealing in securities;
  • the proceeds of the preferential issue cannot be used for repayment of loans taken from promoters, the promoter group or group companies of the issuer company, and the end-use of the capital raised has to be disclosed to the shareholders;
  • an unrelated public financial institution or scheduled commercial bank is to be engaged to monitor the end-use of the proceeds of the issue; and
  • the shares are subject to a lock-in period of three (3) years.

Once the aforesaid criteria are met, any preferential issue undertaken by stressed companies is exempt from the SEBI’s open offer requirements, even if the prescribed thresholds are exceeded.

In our view:

  • The relaxed pricing norm for a preferential issue by a stressed company is a great move and will ensure that the issue price reflects the most recent market price of the issuer company.
  • This avenue opens the way for distressed funds and strategic buyers to acquire stakes in good quality public companies under stress, especially at a time when the insolvency process is closed and acquiring companies in an insolvency process is not possible.
  • Promoters have been excluded from acquiring shares under these rules; therefore, buyers will have more room to negotiate harder.
  • The lock-in requirement may be a dampener, but for patient money looking at a discounted entry point, a three (3) year time horizon is not too long.

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