Alternate Pricing Options for Preferential Issue of ICDR Regulation

I. Introduction

Amid the global COVID-19 pandemic, companies are facing unusually difficult hurdles in raising capital and ensuring expansion and the proper functioning of their business. Preferential issues has been a popular method of raising funds especially during this pandemic to overcome financial and operational challenges. Accordingly, with a view to making this process more beneficial to companies, the Securities and Exchange Board of India (“SEBI”) has introduced Regulation 164B to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR Regulations”) which establishes an alternate pricing option to the existing pricing framework with respect to preferential issues of frequently traded shares vide the SEBI (Issue of Capital and Disclosure Requirements) (Third Amendment) Regulations, 2020 (“ICDR Amendment”) with effect from July 1, 2020.

Prior to the ICDR Amendment, the price with respect to a preferential issue was to be computed over a period of 26 weeks, leading to huge differences in prices for a company that has been experiencing a decline in its activities and financial position. This move will allow companies to calculate a more probabilistic price for its preferential issue.

II. Salient Features - Temporary Relaxations

i. Under the ICDR Amendment, the pricing of equity shares of frequently traded shares will be the higher of the average weekly high and low of the volume weighted average price of the related equity shares quoted on the recognised stock exchange during either (i) 12 weeks, or (ii) 2 weeks preceding the relevant date.

ii. Prior to the ICDR Amendment, the pricing method was the higher of the average weekly high and low of the volume-weighted average price during either (i) 26 weeks, or (ii) 2 weeks preceding the relevant date.

iii. With the introduction of the new pricing framework, there is now an option between the existing pricing under Regulation 164(1) of the ICDR Regulations and the one introduced by the ICDR Amendment. However, if the new option is exercised, SEBI has mandated a three year lock-in period for such shares.

iv. Further, this new pricing method is available for preferential issues made between July 1, 2020 and December 31, 2020.