Brief Note - Chapter V of SEBI Regulations on Issue and Capital Disclosure Requirements

(ICDR), 2018 – Preferential issue

Provisions of this chapter not to apply in certain cases which include -

1. This provision shall not be applicable to companies where preferential issue of shares is
made pursuant to:
a. Conversion of loan or an option attached to convertible debt instruments in terms of
Section 62 of the Companies Act, 2013 i.e. Further issue of share capital
b. A scheme approved by High Court under Section 230 to 234 of the Companies Act,
2013 i.e. provisions on ‘Compromises, Arrangements and Amalgamations’
c. A QIP in accordance with Chapter VI of the ICDR
2. This provision shall not be applicable to companies that issues of shares on preferential
basis, except for lock-in provisions, in terms of rehabilitation scheme approved under
Sick Industrial Companies Act, 1985 or resolution plan approved under Section 31 of the
Insolvency & Bankruptcy Code, 2016 whichever is applicable.
3. The pricing and lock-in of shares shall not be applicable to equity shares allotted to any
financial institutions which include securitization companies or any such other institution
as the Central Government may, having regard to its business activity and the area of its
operation in India, by notification, specify;
4. The provision of Regulation 163 i.e. Disclosure of preferential issue to shareholders and
sub-regulation (1), (2), (3) and (4) of Regulation 164 i.e. Pricing of frequently traded
shares
Sub-regulation (1); In case of DHFL, If equity shares of issuer have been listed on
recognized stock exchange for a period of 26 weeks or more from the relevant date, the
price of equity shares to be allotted on preferential basis shall not be less than higher of:
a. Average VWAP of 26 weeks
b. Average VWAP of 2 weeks
shall not apply to the preferential issue of shares or compulsorily convertible debt, fully
or partly, where the board has granted relaxation in terms of Regulation 11 of SEBI
(Substantial Acquisition of Shares and Takeovers [SAST], 2011), if adequate disclosures
about the plan and process proposed for identifying allottees are given in notice for
shareholder meeting
5. The provisions of sub-regulation (1) of Regulation 159 i.e. Preferential issue of specified
securities shall not be made to any person who has sold or transferred any equity shares
of the issuer during the six months preceding the relevant date and sub-regulation (6) of
Regulation 167 i.e. The entire pre-preferential allotment shareholding of the allottees, if
any, shall be locked-in from the relevant date up to a period of six months from the date
of trading approval shall not apply to preferential issue of shares where proposed
allottee is Mutual Fund registered with Board or Insurance Company with IRDA or
Scheduled Commercial Bank or Public Financial Institution.
6. The provisions shall not apply where the preferential issue of equity shares is made to
Lenders pursuant to conversion of their debt, as a part of a debt restructuring scheme
implemented in accordance with RBI subject to:
a. Guidelines for determining conversion price have been specified by RBI and will be
determined and in accordance with Companies Act, 2013
b. Conversion price to be certified by 2 independent Valuers
c. Equity shares so allotted shall be locked-in for a period of one year from the date of
allotment. (for the purpose of transferring the control, Lenders may transfer the shares
before the lock-in period subject to continuation of the lock-in for remaining period,
with transferee)
d. The lock-in of equity shares allotted pursuant to conversion of convertible securities
issued on preferential basis shall be reduced to the extent of convertible securities
already locked-in
e. Applicable provisions of Companies Act, 2013 are complied with, including special
resolution
7. The provisions shall not apply where the preferential issue of shares is a made to
person(s) at the time Lenders selling their holding or enforcing change in ownership in
favour of the person(s) pursuant to debt restructuring scheme implemented in
accordance with RBI subject to:
a. Guidelines for determining conversion price have been specified by RBI and will be
determined and in accordance with Companies Act, 2013
b. Conversion price to be certified by 2 independent Valuers
c. Equity shares so allotted shall be locked-in for a period of at least three years from the
date of allotment
d. The lock-in of equity shares allotted pursuant to conversion of convertible securities
issued on preferential basis shall be reduced to the extent of convertible securities
already locked-in
e. Special resolution has been passed by shareholders before preferential issue
f. Disclose additional information of allottees like:
i. Identity of company / person
ii. Business model
iii. Statement on growth of business over a period of time
iv. Summary of audited financials of previous 3 financial years
v. Track record
vi. Proposed roadmap for effecting turnaround of the issuer
vii. Applicable provisions of the Companies Act, 2013 are complied with