On 21 June, the Securities and Exchange Board of India ("SEBI") inter-alia, approved proposals to:
- ease the restructuring of stressed companies; and
- facilitate the exit of category II alternative investment funds ("AIF") (largely, private equity funds) post an initial public offering.
Facilitating restructuring of stressed companies
To facilitate the restructuring of stressed companies, SEBI had previously granted exemptions to lenders from certain obligations under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (the "ICDR Regulations") and SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (the "SAST Regulations") when they acquired equity in a distressed borrower.
Presently, banks and financial institutions were exempted from the applicability of conditions relating to preferential issue under ICDR Regulations at the time of conversion of their debt to equity pursuant to a strategic debt restructuring ("SDR") scheme. Subject to fulfillment of the conditions under ICDR Regulations, such lenders were also exempted from the obligation to make a mandatory open offer.
However, lenders that acquired shares pursuant to these relaxations were finding it difficult to divest such shares as new investors buying from them did not benefit from the above relaxations.
Therefore, the exemption for the requirement to make an open offer has now been extended to new investors acquiring shares in distressed companies pursuant to a SDR scheme subject to certain conditions like approval by the shareholders of the companies by special resolution and lock-in of their shareholding for a minimum period of 3 years.
In addition to the above, the relaxation from the requirement of making an open offer has also been extended to the lenders under other restructuring schemes undertaken in accordance with guidelines of Reserve Bank of India ("RBI") and to acquisitions pursuant to resolution plans approved by National Company Law Tribunal under the Insolvency and Bankruptcy Code, 2016.
This change is in line with the actions undertaken by RBI to facilitate banks and financial institutions to undertake actions against bad debts. Prior to these exemptions, investors buying distressed assets from banks and financial institutions were required to make an open offer at the time of such acquisition which in effect reduced the funds available to them for investing in the stressed company to bring about its financial turnaround. These exemptions are likely to facilitate further investment in restructuring of stressed companies.
Relaxations for private equity funds may aid exits
Currently, in case of an initial public offering, shares of promoters and other persons are subject to lock-in period of 3 years and 1 year, respectively from the date of the public issue.
However, AIF-category I (which include venture capital funds, angel funds, SME funds, social venture funds and infrastructure funds) and foreign venture capital funds are exempted from such lock-in restrictions under regulation 37 of the (ICDR) Regulations. The SEBI has now extended this relaxation from lock-in provisions to Category II AIFs (i.e. private equity funds) also.
The rationale for introducing such lock-in period for shares of promoters was to ensure that the promoters do not exit following a value-event like listing. However, such restrictions in case of private equity funds tend to interfere with the exit timeline of the funds. This relaxation is likely to aid exits by private equity funds and may consequently encourage greater capital being committed for Indian investments. However, this relaxation has been extended only to registered AIFs. The lock-in restrictions shall continue to apply to offshore funds and funds that are classified as category III AIFs.
Shinoj Koshy is a partner at Luthra & Luthra Law Offices, New Delhi. He focusses on mergers and acquisitions, foreign direct investment and shareholder disputes.
Sukanya Bhattacharya is an associate at Luthra & Luthra Law Offices, New Delhi and works with Shinoj Koshy.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.