Restructuring of listed companies often got stuck as the Securities and Exchange Board of India (“SEBI”) norms were inflexible on exempting key compliances. The key hurdle used to be having to make an open offer (being a time-consuming process) to public shareholders, as many such transactions would result in the incoming investor triggering the change of control provisions. Restructuring effected under the insolvency laws as well as bank driven debt restructurings where banks were converting their loans into equity were exempt. Another key hurdle was the pricing norms applicable while making a preferential issue.
This has now changed. The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 and the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 have been amended.
SEBI had highlighted these issues in its consultation paper on “Pricing of Preferential Issues and exemption from open offer for acquisitions in Companies having Stressed Assets” a few months back.
1) No Open Offer
A stressed company can now allot shares and have a change of control effected without an open offer having to be made.
The earlier requirement of mandatorily making an open offer in case of a change of control would create a substantial financial burden for an incoming investor in addition to the capital infusion required to be made in the stressed company. Further open offer being a time- consuming process would further delay the completion of the acquisition process. This may not have been feasible where the acquisition was being made to save the stressed company from insolvency.
2) Relaxed Pricing for Preferential Issue:
Unlike previously being dragged (often) up by the volume weighted average price of the preceding 26 weeks, now the volume weighted average price of the preceding 2 weeks only will matter.
Given the financial condition of the stressed company, the old pricing norms lead to a wide gap in pricing between the price at the beginning of the twenty- six weeks and the price when funds were required to be raised. This pricing misalignment became a practical challenge for investors to infuse capital in a stressed company. Further, prior to the amendment, a preferential issue to 5 qualified institutional buyers was permitted to be made based on the new pricing norms. However, this condition restricted a large category of investors from participating in the acquisition of stressed companies.
3) Other key conditions:
The amendment sets out other conditions which are as follows:
(a) The preferential issue cannot be interalia made to the following persons:
(i) individuals who are a part of the promoter or promoter group as on the date of the board meeting to consider the preferential issue;
(ii) a person declared as an undischarged insolvent or wilful defaulter or disqualified from being a director or a fugitive economic offender, each in accordance with the applicable Indian law;
(iii) a person debarred from accessing the capital markets; and
(iv) a person who has executed a guarantee in favour of a lender of the issuer and such guarantee has been invoked by the lender and remains unpaid in full or part.
(b) Shareholders Resolution: The resolution for the preferential issue shall be passed by the majority of public shareholders. Considering the acquisition may save the stressed company from a possible bankruptcy/insolvency scenario it is likely that the public shareholders would vote in favour of such a proposal.
(c) Lock-in: The allotment made shall be locked-in for a period of 3 years from the last date of trading approval. This should benefit promoters of the stressed company and also promote investment by persons who are willing to have a skin in the game.
(d) End-use restrictions: The proceeds of preferential issue shall not be allowed to be used for the purpose of repayment of loans borrowed from promoters/ promoter group/ group companies.
A stressed company is a listed company which fulfils any 2 of the following:
1) payment default is continuing for 90 days and has been disclosed by the issuer;
2) an inter-creditor agreement (“ICA”) is signed by the lenders of the company under the Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions, 2019 dated 7th June 2019; and/or
3) the credit rating of the financial instruments, credit instruments / borrowings of the company has been downgraded to “D”.
Juris Corp’s comments:
1) Expect an increase in Earn Out Structures including Reverse Vesting.
2) Not making signing of ICAs mandatory (as other conditions can be complied with) is a big plus. Getting ICAs in place has been a time-consuming process and are invariably made as conditions subsequent which then remain unmet.
3) These amendments will trigger friendly acquisitions and restructurings in India. Investors will no longer be deterred by having to invest more than what is required by the lenders of the stressed company.
4) A further move away from acquisitions under the provisions of the Insolvency and Bankruptcy Code, 2016 (“IBC”). In the last 2 years, many acquisitions were pursuant to IBC. However, under IBC rarely any deal gets closed in under 12 months. This is primarily given all the time carve outs interpreted by the courts. Equally, if not importantly, IBC does not allow (except in case of SMEs) for the existing promoters to stay around or collaborate with the incoming investor. Also, there is a current suspension of new filings under IBC. Further no filings can ever be made in respect of defaults committed during the 6-month period starting from 25th March 2020.