Last updated: June 21st, 2018 3:22 PM

SEBI Regulation on Preferential Share Issue

The SEBI (ICDR) regulations are applicable in the event of equity share issue or any other financial instrument convertible as equity shares. Therefore, conversion of preferential shares, debentures, etc must comply with the ICDR Regulations. SEBI does not interfere in the activities of a private placement of shares. Know more about procedure for issuing preference shares in a company.

Pricing of Shares

If equity shares of the issuer have been listed on a recognized stock exchange for a period of 26 weeks or more as on the relevant date, the equity shares must be allotted at a price which is equivalent or lesser than the following:

• The average of the weekly closing price which is related to equity shares that are quoted on recognised stock exchange for 26 weeks preceding the specific date.
• The average of the weekly closing prices of the related shares quoted on a recognised stock exchange for 2 weeks preceding the specified date.

If the equity shares of the issuer have been listed on a recognized stock exchange for a period of not less that 26 weeks on a relevant date, then the equity shares must be allotted at a price not less than the following:

• The price at which equity shares were issued by the issuer in its initial public offer arrived at a scheme of arrangement pursuant to which the equity shares of the issuer were listed.
• The average of the weekly high & low of the closing prices of the related equity shares quoted on the recognized stock exchange during the period the shares have been listed preceding the relevant date.
• The average of the weekly high or low of the closing prices of the related equity shares quoted on a recognized stock exchange during the 2 weeks preceding the relevant date.

Pricing of Infrequently Traded Shares

• The prices determined by the issuer shall consider valuation parameters including book value, comparable trading multiples and other parameters which are customary for valuation of shares.
• The issuer must submit a certificate stating that the issuer complies with this regulation obtained from an independent merchant banker or an independent chartered accountant who practices for over 10 years to the stock exchange where the equity shares of the issuer are listed.

Relevant Date for Computation of Price

The price should be calculated based on the prices prior to 30 days on which an annual or extraordinary general meeting had passed. This date is relevant date. The relevant date would be the following:

• A date prior to 30 days on which annual or extraordinary general meeting is planned to be held.
• A date prior to 30 days on which the stakeholders of the convertible securities become entitled to apply for the equity shares.

The resolution must specify the relevant date based on which price of the resultant shares shall be calculated.

Relevant Date for Computation of Price

Allotment by any resolution must be completed within 15 days from the date of passing the resolution. The allotment on preferential shares cannot be made in view of any pending approval that is being allotted by regulatory authority or Central Government. Allotment must be completed within 15 days of such approval.

Auditor’s Certificate

A certificate from the company’s auditors must be obtained to the effect that the proposed issue of share comply with the ICDR regulations. Copy of the certificate should be made available for inspection to the members at the concerned general meeting.

Disclosures in the Explanatory Statement

The explanatory statement to be annexed to the notice of the general meeting must additionally hold the following details:

• The objects of the issue through preferential offer.
• The proposal of the promoters/directors/key management persons to subscribe the offer.
• Shareholding pattern before and after the offer.
• The time within which the preferential issue shall be complete.
• The percentage of post-preferential issue capital held by the proposed allottees and their change in control, must be informed to the the issuer consequent to the preferential issue.
• The issuer shall re-compute the price of the specified securities as per the  requirement in concurrence with the SEBI regulations.
• An undertaking that if the amount payable as the re-computation of price is not paid within the time stipulated in these regulations, the specified securities shall continue to be lock-in period until such amount is being paid by the allottees.