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Thursday, August 06, 2020

Rule change to help over 270 stressed cos raise funds, restructure finances

On June 22, Sebi eased its preferential allotment rules to help stressed companies raise capital, changed the pricing formula to reflect recent prices and exempted such companies from the open offer requirement.

Written by Sunny Verma , Sandeep Singh | New Delhi | Updated: July 7, 2020 5:25:29 am
preferential allotment, IBC norms eased, coronavirus impact on economy, indian economy, financial package Earlier, exemption from preferential issue pricing and open offer was available only for those companies whose resolution plan was approved under IBC. (Source: Bloomberg/Representational)

More than 270 stressed companies, having default ratings on their debt instruments, are expected to benefit from recent relaxations in regulatory norms, enabling them to raise funds through preferential allotment.

Even for those stressed companies which have not gone through the IBC (Insolvency and Bankruptcy Code) route, restructuring and fundraising has become easier after the Securities and Exchange Board of India (Sebi) relaxed regulations last month, industry sources said.

Stressed companies can now restructure their finances outside of the IBC leading to timely settlement and reconstruction.

On June 22, Sebi eased its preferential allotment rules to help stressed companies raise capital, changed the pricing formula to reflect recent prices and exempted such companies from the open offer requirement.

Earlier, exemption from preferential issue pricing and open offer was available only for those companies whose resolution plan was approved under IBC. However, the recent changes make these exemptions available even for those stressed companies that have not gone through IBC-led resolution.

Sources said the move enables resolution despite IBC being suspended for six months. To provide relief to companies in the backdrop of the economic stress caused by the COVID-19 pandemic, the government had suspended corporate insolvency resolution filing under IBC for six months for any debt default after March 25, 2020.

Even as more than 270 companies are already having default ratings on their debt instruments and other papers, the number of such firms is expected to rise as the economic lockdown that was imposed earlier had led to a deterioration in financial position of various companies.

While many companies took moratorium on their term loan instalments and MSMEs are being offered additional 20 per cent credit under the Emergency Credit Line Guarantee Scheme, fundraising through the capital markets is seen as a measure that will provide durable financial strength to a stressed company.

The revised Sebi norms are also in conformity with the IBC rules which prevents promoters and promoter group entities from participating in the restructuring of the company.

These restrictions are put in place to ensure that promoters do not settle their own dues at significant haircuts. However, Sebi has allowed promoters/ promoter group entities to attract outside investors for their companies.

Restructuring through this route is expected to be helpful at a time the IBC has been temporarily suspended.

The preferential issues pricing norms for stressed companies have been revised to average of recent two weeks, instead of the higher of the average of 26 weeks and two weeks prices.

For companies facing stress, the 26 weeks average price usually tends to be much higher compared to recent prices, dissuading prospective investors from picking up stake in a company due to fears of over valuation.

“The COVID-19 pandemic has pushed a lot of healthy companies into stress and worsened the situation for already stressed companies. Most of these companies have seen a rapid dive down in their share prices since March 2020 and are facing serious challenges in raising funds from investors,” sources said, explaining the rationale behind tweaks in the pricing norms.

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