Optional Pricing in Preferential Issue

The Securities and Exchange Board of India (SEBI), via notification no. SEBI/LAD-NRO/GN/2020/21 dated 1st July 2020, introduced the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) (Third Amendment) Regulations 2020. This amendment brought forth regulation 164B concerning Optional Pricing in Preferential Issue. In this article, we delve into the new regulation and its implications.

Understanding the Applicability of New Regulation 164B

According to regulation 164B (1), for frequently traded shares, the price of equity shares to be allotted under preferential issues shall be determined as per regulation 164 or the newly introduced regulation 164B. This temporary pricing mechanism is available for preferential issues executed between 1st July 2020 and 31st December 2020.

Understanding the Temporary Pricing Method

Regulation 164B (2) stipulates that the price of equity shares allotted via preferential issue should not be less than the higher of the following amounts:

The average of the weekly low and high of the volume-weighted average price (VWAP) of the equity shares listed on the recognized stock exchange during the 12 weeks preceding the relevant date.
The average of the weekly low and high of the VWAP of the equity shares listed on the recognized stock exchange during the 2 weeks preceding the relevant date.

In the context of the current pandemic and economic challenges, this temporary pricing method is beneficial for entities as it allows them to raise funds at a more practical price.

Comparison of Existing and New Temporary Pricing Methods

The new regulation offers additional flexibility without replacing the existing pricing method, allowing issuers to choose between the two. Below is a comparison of both methods:

Existing Pricing Method

New Temporary Pricing Method

The pricing of shares will be at least higher of the following:

The average of the weekly low and high of the VWAP of the related equity shares as listed on the recognized stock exchange during the 26 weeks prior to the relevant date; or
The average of the weekly low and high of the VWAP of the related equity shares as listed on the recognized stock exchange during the 2 weeks prior to the relevant date.

The pricing of shares will be at least higher of the following:

The average of the weekly low and high of the VWAP of the related equity shares as listed on the recognized stock exchange during 12 weeks before the relevant date; or
The average of the weekly low and high of the VWAP of the related equity shares as listed on the recognized stock exchange during 2 weeks before the relevant date.

Other Important Provisions

The above pricing methodologies apply to allotments made via preferential issues between 1st July 2020 and 31st December 2020 (or from the regulation notification date).
Securities allotted on a preferential basis using this pricing method will be locked-in for 3 years.
The same pricing method must be applied to all allotments from the same shareholders.

Entities considering preferential issues might also be interested in related procedural topics such as starting a publishing company in India or seeking appropriate business permits like FSSAI registration or license in Telangana.

For broader knowledge on professional compliance, explore the specifics of Professional Tax in Puducherry or the complex nature of FSSAI License vs. FSSAI Registration.

Lastly, for those needing financial support or loan information, understanding different prospects like the HDFC Business Loan process can be insightful.

In preparation for property-related transactions, you might review Maharashtra Property Valuation guidelines.

Additionally, for agri-business enthusiasts, check out government initiatives like the Formation and Promotion of 10,000 Farmer Producer Organizations (FPO) Scheme.

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Frequently Asked Questions

Common questions about Optional Pricing in Preferential Issue.

The new temporary pricing method introduced by SEBI is aimed at allowing entities to raise funds through preferential issues at a more realistic price during the current pandemic situation and economic crisis. It provides an alternative pricing mechanism that takes into account the recent market conditions.

The new temporary pricing method can be availed only for preferential issues made between 1st July 2020 and 31st December 2020.

Under the new temporary pricing method, the price of equity shares to be allotted through a preferential issue should not be less than the higher of: (a) the average of the weekly low and high of the volume-weighted average price during the 12 weeks prior to the relevant date, or (b) the average of the weekly low and high of the volume-weighted average price during the 2 weeks prior to the relevant date.

No, the new temporary pricing method does not replace the existing pricing method. The regulation has given an option to the issuer to select between the existing pricing method and the new temporary pricing method.

The specified securities allotted on a preferential basis using the new temporary pricing method shall be locked-in for a period of 3 years.

No, the new temporary pricing method can be used only for preferential issues made between 1st July 2020 and 31st December 2020. For preferential issues outside of this period, the existing pricing method must be followed.

The rationale behind the introduction of the new temporary pricing method is to provide relief to entities seeking to raise funds through preferential issues during the challenging market conditions caused by the COVID-19 pandemic and the resulting economic crisis.

The new temporary pricing method is applicable only for frequently traded equity shares. The conditions and pricing methods for infrequently traded equity shares remain unchanged.

Yes, the new temporary pricing method, if chosen, is to be followed for all the allotments arising out of the same shareholders during the specified period.

If the pricing of shares under the new temporary method is lower than the existing method, the issuer can choose to opt for the new temporary method, as it provides a more favorable pricing option during the current market conditions.