Optional pricing in preferential issue

Optional pricing in preferential issue

The Securities and Exchange Board of India, vide notification no. SEBI/LAD-NRO/GN/2020/21 dated 1st July 2020 has introduced the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) (Third Amendment) Regulations 2020. Vide the said amendment, new regulation 164B relating to Optional Pricing in Preferential Issue had been inserted. The new regulation is taken up and explained in the current article.

Understanding the applicability of new regulation 164B

As per regulation 164B (1), in case of frequently traded shares, the equity shares’ price to be allotted in accordance with the preferential issue shall be determined as per regulation 164 or regulation 164B.

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

Understanding the temporary pricing method

As per regulation 164B (2), the equity shares’ price to be allotted pursuant to the preferential issue should not be less than higher of the following amounts-

  1. The average of the weekly low and high of the volume weighted average price of the related equity shares as mentioned/ quoted on the recognized stock exchange during 12 weeks prior to the relevant date; or
  2. The average of the weekly low and high of the volume weighted average price of the related equity shares as mentioned/ quoted on the recognized stock exchange during 2 weeks prior to the relevant date.

In current pandemic situation and economic crises, the new temporary pricing method is a welcome step for the entity, as the pricing method will now allow the entities to raise funds at a more realistic price.

Comparison of existing pricing method and new temporary pricing method

It is interesting to note here that the new regulation has not replaced the existing pricing method. In fact, the regulation has given an option to the issuer to select between the existing pricing method and the new temporary pricing method. In view of the same, it is important to understand and compare both the pricing method, which is explained hereunder:

Existing pricing methodNew 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 volume weighted average price of the related equity shares as mentioned/ quoted on the recognized stock exchange during 26 weeks prior the relevant date; or

·       The average of the weekly low and high of the volume weighted average price of the related equity shares as mentioned/ quoted on the recognized stock exchange during 2 weeks prior 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 volume weighted average price of the related equity shares as mentioned/ quoted on the recognized stock exchange during 12 weeks prior the relevant date; or

·       The average of the weekly low and high of the volume weighted average price of the related equity shares as mentioned/ quoted on the recognized stock exchange during 2 weeks prior the relevant date.

Other important provisions

  • The above pricing method shall be availed in case of the allotment by preferential issue made between 1st July 2020 (or from the date of the notification of regulation) and 31st December 2020.
  • The specified securities allotted on the preferential basis using the above pricing method shall be locked-in for a period of 3 years.
  • The same pricing method is to be followed for all the allotments arising out of the same shareholders.

Post by poonamgandhi

CA Poonam Gandhi is a Chartered Accountant and a Lawyer. With a wide practice experience and deep understanding of different laws and taxes, she has been an independent professional writer in the field of taxation, finance and laws.