Impetus to Public M&A in Distressed Companies Through Relaxations to SEBI Regulations

A unique opportunity to investors to acquire “control” of Stressed Companies by infusing capital at current valuations without the obligation of making an open offer.

The Securities and Exchange Board of India (SEBI) has recently announced a slew of changes to key SEBI regulations such as SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018 (ICDR Regulations) and SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 (Takeover Regulations), aimed primarily at facilitating fundraising for companies with stressed assets (Stressed Companies).

The recent experience shows that the cash-strapped companies have been constrained to raise fresh capital due to the pricing framework under the ICDR Regulations which required to take into account historical trading prices of 26 weeks. These relaxations for preferential issues by Stressed Companies are a welcome relief as it will help such Stressed Companies to attract investments at more current prices.

The above changes also afford a unique opportunity to investors to acquire “control” of Stressed Companies by infusing capital at current valuations.

Relaxations in preferential allotment by companies with stressed assets

The amendment to ICDR Regulations 1 now allows Stressed Companies to undertake preferential allotment at a price which is not less than the average of the weekly high and low of the volume-weighted average price (VWAP) of the shares during the two weeks immediately preceding the relevant date, subject to compliance with the prescribed conditionalities. The amendment specifies objective parameters to determine companies which are eligible to be categorized as Stressed Companies.