SEBI Tightens the Noose for Preferential Allotments

With a view to enhance transparency, ensure adequate audit trail and to plug the entities misusing the private placement route to garner funds, the Capital Market Regulator, SEBI vide its notification dated 26th August, 2013, has made certain amendments in the Chapter VII of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.

SEBI’s initiative is surely a welcoming step that aims at aligning private placement norms applicable on listed companies with the new Companies Bill on one hand and to cork regulatory loopholes and protect investors’ interest on the other.

The main highlights of the amendments are outlined as follows:

    1. Issuing company shall disclose the ultimate beneficial owner of allotted shares:

    To curb the indirect routing of funds, SEBI has amended Regulation 73, thereby casting a responsibility on the Companies to disclose in the Explanatory Statement, the identity of the ultimate beneficial owners of the shares proposed to be allotted.
    Regulation 73(1)(e) after amendment would read as follows:
    The identity of the natural persons who are the ultimate beneficial owners of the shares proposed to be allotted and/or who ultimately control the proposed allottees, the percentage of post preferential issue capital that may be held by them and change in control, if any, in the issuer consequent to the preferential issue:
    A new Proviso has also been inserted in Regulation 73(1)(e), which would read as follows:
    Provided that if there is any listed company, mutual fund, bank or insurance company in the chain of ownership of the proposed allottee, no further disclosure will be necessary.
      Our Comments:
      With the intent to unhide the dubious identies, SEBI has directed the Companies to disclose the details of the ultimate beneficial owners in the Explanatory Statement to the Notice for the General Meeting. However, by mentioning only the names of the beneficial owners, the names of the real allottees would not be appearing, thereby again leading to a confusing situation, because, pre and post holding has to be mentioned, with reference to the main allottee. In our opinion, the Companies should disclose the identity of the main allottee along with the identity of the ultimate beneficial owners.

    2. Allotments in preferential issues shall only be made in dematerialized form:

    Under the extant Regulations, although the pre preferential holding is needed to be held in demat mode, but the fresh allotment being made under the Preferential Allotment could have been made in physical as well. Now, this system of physical allotment has been done away with.
    Newly inserted Sub- Regulation (4) of Regulation 74 would read as follows:
    (4) Allotment shall only be made in dematerialised form
    Explanation.-The requirement of allotment in dematerialised form shall also be applicable for the equity shares to be allotted pursuant to exercise of option attached to warrant or conversion of convertible securities
      Our Comments:
      SEBI’s initiative that the preferential allotment can be made to allottees only in dematerialized form, is surely considered as a convivial step that aimed at plugging the loophole of the extant Regulations.

    3. Preferential issue shall be subscribed only through the allottee’s own bank account:

    To restrict the payments through backdoor channels, SEBI has put a stipulation that the allotment can be made only when the subscription money is received from the proposed allottee’s own bank account.
    Newly inserted Sub- Regulation (5) & (6) of Regulation 77 would read as follows:
    (5) The issuer shall ensure that the consideration of specified securities, if paid in cash, shall be received from respective allottee's bank account
    (6) The issuer shall submit a certificate of the statutory auditor to the stock exchange where the equity shares of the issuer are listed stating that the issuer is in compliance of sub-regulation (5) and the relevant documents thereof are maintained by the issuer as on the date of certification.
      Our Comments:
      In order to curb the malpractices being followed under the garb of Preferential Allotment, SEBI has mandated the Companies to ensure that the preferential issue shall be subscribed only through the allottee’s own bank account.

    4. Lock-in period shall be considered from the latest date of receipt of Trading Approval from all the Recognised Stock Exchanges:

    SEBI has amended the Lock-in requisites wherein the Companies will be required to ensure that the Lock-in shall commence from the date of receipt of Trading Approval not from the date of allotment.
      Our Comments:
      The said amendment would lengthen the lock in period, where, in a case, the issuance of trading permission gets delayed for any reasons beyond the control of the Company, say non adjudication of Stamp Duty/ any dispute arising with any party etc. Further, the situation might exacerbate, in cases where in the Companies are listed on more than one Stock Exchange, because getting Trading approvals from all the Stock Exchanges might linger on the entire lock in period

    5. Shares allotted in the preferential issue shall not be transferred till trading approval is granted for such shares by the stock exchanges:

    To ensure investors’ interest, SEBI has put restrictions on the transferability of shares prior to the receipt of trading approval. This amendment is considered as a precautionary measure been taken by SEBI after mandating the Depositories to devise a mechanism so that the new securities created shall be frozen till the time final listing/ trading permission is granted by the Exchange(s).
    Newly inserted Sub- Regulation (2) of Regulation 79 would read as follows:
    The specified securities allotted on preferential basis shall not be transferred by the allottee till trading approval is granted for such securities by all the recognised stock exchanges where the equity shares of the issuer are listed.
      Our Comments:
      Since SEBI vide its notification dated 2nd August, 2012 advised the Depositories to allot additional securities under a new temporary ISIN which shall be kept frozen till the date of receipt of final listing/ trading permission to ensure that the said shares cannot be transferred prior to the receipt of Trading approval, therefore, to align the preferential norms with the said Circular, SEBI has specifically restricted transfer of shares prior to the receipt of Trading Approval.


For Any Professional Advice, please contact:
Ms.Anjali Aggarwal
Vice President
+911140622230, +919971673336,
Email:-anjali@indiacp.com

Ms.Simran Kaur
+911140622219, +919999702150,
Email:-simran@indiacp.com
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