PREFERENTIAL ALLOTMENT: KEY CHANGES IN SEBI ICDR REGULATIONS, 2018

The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR 2018”) has replaced SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (“ICDR 2009”) effectively from November 10, 2018.

What follows is the analysis of Chapter V of the ICDR 2018 which deals with preferential allotment. Preferential allotment is the process of allocating shares to the existing shareholders of the company and other categories of people under special circumstances subject to section 62 of the Indian Companies Act, 2013.

Independent valuer:
ICDR 2009 had provided a definition of independent valuer. ICDR 2018 defines the term independent valuers by mapping it to of the Companies Act, 2013. The term “valuer” has been defined under the Companies (Registered Valuers and Valuation) Rules, 2017. A valuer now needs to be registered with the designated authority (IBBI) and must fulfil the rest of the eligibility conditions under Chapter II of the above-mentioned Rules. There are a few conditions, qualifications and an examination which the candidate needs to clear.

Lock-in:
The ICDR 2018 expressly clarify that the lock-in provisions need to be adhered during the implementation of a rehabilitation scheme approved by BIFR or a resolution plan under IBC [Regulation 158(2)]. This was not clear in ICDR 2009.

The ICDR 2018 exempt a “scheduled commercial bank” as opposed to a “scheduled bank” under ICDR 2009 from certain lock-in provisions and ineligibility conditions. Scheduled commercial banks are defined and listed in RBI Act, 1934 and are a subset of scheduled banks which also cover co-operative banks. [Regulation 158(2) of ICDR 2018]

QIPs:
QIPs are expressly excluded from this chapter. Technically, a QIP is a sub-set of a preferential allotment. As the ICDR 2009 had a separate chapter on QIPs (as does the new ICDR) this distinction was always implied and this change is therefore a drafting clean-up.

Conditions for Preferential Issue:
Regulation 160(e) of the ICDR 2018 acknowledges that certain allottees are exempt from specifying their Permanent Account Number (PAN) without specifying exceptions. The 2009 Regulations stated that PAN is required for all allottees. [Circular MRD/DoP/Cir-20/2008]

Additional Disclosures:
ICDR 2019 introduces the additional responsibility of disclosing the “maximum number of specified securities to be issued” and “intent of the promoters, directors or key managerial personnel of the issuer to subscribe to the offer”. [Regulation 163]

Further, an explanation has been inserted in ICDR 2019 stating that SEBI has the power prescribe guidelines to classify “the ultimate beneficial owners of the allottees where the allottees are institutions/entities.”

Pricing of Frequently Traded Shares:
The ICDR 2018 lays down the pricing method of equity shares which have been listed on a stock exchange for than 26 weeks which require the application of sections 230-234 of the Companies Act, 2013. These sections, which deal with schemes of amalgamation were notified in the Companies Act, 2013 partly in years 2016 and 2017 each.

Adjustments in Pricing:
The ICDR 2018 (and also ICDR 2009) list conditions under which the prices of both, frequently and infrequently traded shares, can be adjusted.

A new price adjustment condition is now added as follows: “(b) (If the issuer) makes an issue of equity shares after completion of a demerger wherein the securities of the resultant demerged entity are listed on a stock exchange.”

Miscellaneous:
At several places in the new regulations, the phrase “a scheme approved under the Corporate Debt Restructuring framework of Reserve Bank of India” has been replaced with “any resolution of stressed assets under a framework specified by the Reserve Bank of India or a resolution plan approved by the National Company Law Tribunal under the Insolvency and Bankruptcy Code, 2016”. This is due to the introduction of a wider stressed asset resolution framework by in the RBI through a notification in early 2018 which was also revised recently revised in 2019.

Fugitive Economic Offenders Act, 2018’s sanctions have been accommodated at certain places.

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