Resuscitation of companies in COVID-19 is the most herculean of all tasks. SEBI had introduced easing out fund norms for stressed companies. This comes with a proviso that the promoter is willing to find a new owner. The economic turmoil’s effects are evenly spread everywhere. Although, only stressed companies have got relief, the move came from a Consultation Paper in April. The paper stated the dire need for raising capital, especially in the pandemic. The pandemic has led to a stark decline in share prices, making fund-raising difficult. The amendment followed the RBI’s Draft Comprehensive Framework for Sale of Loans.
Preferential allotment in these times is very difficult due to the pandemic. The guidelines for the preferential allotment route were also changed. Pricing of the preferential issue is also mandated under the SEBI Regulations, 2018. The 26-week weighted average was too done away with. The weighted average of the last 2 weeks would form the basis for adding prices.
Another relief is the exemption of investors from the open offer. It’s helpful when the acquisition limit is beyond Regulation 3 (1) of the Takeover Regulations. This will ease the financial burden on investors to avoid the buyer-seller clash. These open offers are also regulated under SEBI (SAST) Regulations, 2011.
It’s one thing to provide relaxation and another to actually relax the companies. Yet, the SEBI’s easing out such norms are a welcome step at least for stressed companies.
What are these ‘stressed’ Companies’?
According to the Consultation Paper, the definition of stressed companies must be objective. Hence, if two of the three criteria get fulfilled, the company becomes eligible:
- If it is defaulting on a loan from a bank or non-bank lender.
- A company whose lenders have an inter-creditor agreement with the RBI.
- A company whose credit rating is as low as a ‘D’.
Other than these, SEBI has listed several other conditions. One of them is that the allotment must be outside the promoter group. Restrictions on the allotment to wilful defaulters or fugitives also exist. Other requirements include disclosure of the purpose of raising funds. The resolution must have got approval from the majority of minority shareholders. The funds get locked in for 3 years.
A period of 2 quarters is long. Especially when the investors are ready to buy and companies are ready to sell. An issue also exists with inter-creditor agreement, as this would need commercial negotiations. The Listing Obligation and Disclosure Requirements can also be an eligibility criterion. Even companies on the verge of getting stressed should get relief.
Was there a Need for the Stress Buster?
Listed stressed companies need fund infusion as COVID 19 has ripped them off. The decline in share prices can be a major disruption in the functioning of these companies. The 26-week wide gap in pricing as per Regulation 164 of the ICDR Regulations, 2018 is too burdensome. Etihad had sought relaxations for infusing more funds. Jet Airways had a crisis because no exemptions from open offers were given to Etihad.
The pricing regulations allow issuance to Qualified Institutional Buyers. But the same is also limited to 5. According to the Consultation Paper, making an open offer will create fiscal obligations. This will increase the costs of financial intrusion and avoid bankruptcy. Hence, the reforms in the wake of COVID-19 are much needed. However, even non-stressed companies yearn for more relaxation.
According to Mrs. Richa Kashyap, Business Law Professor at NMIMS School of Law,
“The relaxations brought by SEBI are in consonance with the RBI draft regulations. In these fragile economic conditions, companies need more such breathers from regulators. But regulators must also consider other issuers before they become stressed. However, the lock-in period for 3 years could get reduced or relaxed.”
Are IBC and NCLTs in Cold Storage?
Delay in implantation of resolution plans was the biggest failure of IBC. IBC was a rescue route for insolvent companies. The Consultation Paper did not mention about the pending cases of IBC and NCLT, nor about the process. Yet, Mr. Shardul Shroff in a panel discussion had stated that proceedings are ongoing, and appeals are also heard. The Supreme Court is also hearing matters. However, the object of the consultation paper is not to restrict exemptions. Especially those exemptions under Takeover Regulations under the IBC and NCLT route.
Conclusion and Recommendations
The SEBI reforms with RBI draft regulations are a big step. Recapitalization of stressed companies will toughen them in the blackout period. The easing out norms through amendments in SEBI Regulations will rescue companies. Also, it will infuse in much-needed finance.
With some more relaxations, companies will be in a better position to bounce back. Even after the 4 months blank out period. The criteria for stressed companies and the conditions attached make it somewhat restrictive. The first criteria that the company must have a loan for at least 90 days, may be too long a period. Especially if the company is already an NPA for banks. Inter -credit agreements may also be a hurdle for getting banks together. Green-shoe options could also help in reviving back companies. The 3-year lock-in period must also get reduced. Such steps can help businesses resuscitate and bounce back after COVID 19.
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