The Securities and Exchange Board of India (Sebi) on Wednesday joined the fight against bad loans by providing several relaxations to the rules of share acquisitions in the case of distressed companies.
The market regulator said an investor gaining control of a stressed company in the listed space would not have to make an open offer. Also, Sebi’s pricing formula for an acquisition of shares would not be applicable in such cases.
Currently, these exemptions are only given to banks, but the restructuring process hits a roadblock if the bank further decides to divest to a new investor.
“The Sebi board has taken decisions to facilitate the resolution of distressed assets, thereby contributing to the efforts made by the RBI (Reserve Bank of India) and the Insolvency and Bankruptcy Board of India,” said Ajay Tyagi, chairman, Sebi.
At the board meeting, Sebi took other key decisions such as banning participatory notes (p-notes) from taking naked positions in the derivatives segment, and easing the entry process for foreign portfolio investors (FPIs). It also removed the one-year lock-in requirement for private equity investors registered as alternative investment funds (AIFs) in initial public offerings (IPOs).
Sebi said acquisitions of stressed companies approved by the National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code (IBC) would be given exemptions from an open offer. Under the current rules, any acquirer buying 25 per cent in a listed company has to make an open offer to acquire another 26 per cent.
Sebi’s relaxation would keep the acquisition costs in check and also expedite the bad loan resolution process. The move comes at a time when the government and the Reserve Bank of India (RBI) are struggling to restructure about Rs 7 lakh crore worth of stressed assets.
Sebi said there would be certain safeguards for minority shareholders such as three-year lock-in for new investors and need for a special resolution to approve the new promoter. “I hope Sebi’s move will facilitate the restructuring of stressed assets,” Tyagi said.
Experts say Sebi’s decisions would ease the challenges faced by banks in restructuring.
“It is an important step from Sebi to facilitate a smooth restructuring process. However, it is not clear what pricing guidelines will apply if fresh shares were issued as preferential allotment or under a bid process where different bidders under resolution process provide different price offers,” said Darshan Upadhyay, partner, Economic Law Practice.
“The Sebi law directing open offer to the acquirers of such stressed listed companies could have been a big hurdle as it increases the cost of the deals. It is expected that soon many big stressed listed companies would undergo management changes in accordance with these schemes,” said Manoj Kumar, partner and head, Corporate Professionals.
Sebi also provided a boost to FPIs by proposing to ease the definition of broad-based funds and also the ‘fit and proper’ criteria. The market regulator also reduced the paperwork for FPIs coming in from countries that have diplomatic tie-ups with India.
On the other hand, Sebi further tightened the p-note framework by imposing a regulatory fee of $1,000 every three years on each ODI subscriber, starting April 1, 2017. It also said p-notes would be allowed to deal in derivatives strictly for hedging purpose.
“Sebi’s move to levy regulatory fee will increase the cost of investing in Indian market but may not be seen as a significant barrier. However, limiting p-notes on derivatives to hedging purposes only will not only negatively impact liquidity to some extent but also create artificial regulatory arbitrage,” said Suresh Swamy, partner – financial services (tax), PwC.
Tyagi said Sebi’s didn’t intend to completely ban p-notes as they were important for investors wanting to “test the India market” first before registering.
Concerned with high turnover in the derivatives segment vis-à-vis the cash segment, Sebi said it would soon issue a consultation paper on the equity derivatives market. Tyagi said there was a need to review the product suitability for retail investors.
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