Sebi Tightens Preferential Issue Norms

Promoters hit as cancellation of warrants leads to one-year ban
The Securities and Exchange Board of India (Sebi) on Monday further tightened rules for preferential allotment of shares by companies, disallowing them from issuing fresh warrants to promoters if they have failed to exercise earlier ones.

The ban will be effective for a year from the date of expiry of the current warrant or cancellation of warrants.

The Sebi board, which met in Mumbai, also decided that if any member of the promoters or promoter group has sold shares in the previous six months, then they would be ineligible for allotment on preferential basis, its chairman CB Bhave said at a news conference.

Sebi had earlier raised the advance payment to be made by promoters in preferential allotments from 10 per cent to 25 per cent, and had said that promoters would have to forfeit the advance amount if they did not subscribe to the full issue.

“About two years back, when this issue was first considered by Sebi, there was quite a bit of discomfort in the market about this preferential issue business. At that time we had taken this issue to our primary market advisory committee and one of the things that was suggested at that time was to hike the margin collected. What else could be done was also under consideration. That has come in the form of a proposal and finally a decision has been taken by the board,” said Bhave.

The last bull run saw many companies making preferential allotments to promoters. But, after the crash in early 2008, the conversion price became less attractive. As per reports, promoters of about 50 companies let their warrants lapse between April and October 2009.

“Obviously, Sebi is making the rules more stringent,” said Promod Gubbi, head of sales at Execution Noble. “There have been several instances of promoters letting the warrants lapse during the last market crash. Several companies had announced preferential allotments to promoters during the rally.”

According to Capitaline, a data provider, nearly 250 companies, including Bajaj Holdings, Religare Enterprises, Indiabulls Real Estate, HDIL, RPG Life Science and Rane Brakes, have issued warrants to promoters or promoter group in the past two years.

Girsh Vanvari, executive director at KPMG, said the new Sebi rule was “one more disincentive” for promoters against non-conversion of warrants. “It is a good step for individual shareholders as they get more commitment from promoters. Promoters have to live up to their commitment,” said Vanvari.

Jagannadham Thunuguntla, strategist at SMC Global Securities, said, “This is a step with the right intention.” According to him, even after the hike in upfront payment to 25 per cent, some promoters have let their warrants lapse. “This may be the reason behind the stricter regulation,” said Thunuguntla.

Financial Chronicle, New Delhi, 26-10-10.