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Special exemptions for rehabilitation of distressed companies

Finsec Law Advisors

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SEBI has recently amended the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 and SEBI (Issue of Capital and Disclosure Requirements) 2009, relaxing norms for acquisition of distressed companies and bringing these regulations in line with the Insolvency and Bankruptcy Code, 2016 (“IBC”).

SEBI has introduced an exemption from the requirement of making an open offer under the Takeover Regulations in regard to acquisitions made pursuant to a resolution plan approved under Section 31 of IBC. This exemption applies to acquisition of shares by lenders pursuant to conversion of their debt and to acquisition of shares by new shareholders while effecting change in ownership as part of a debt restructuring scheme. This is subject to compliance with ICDR Regulations pertaining to preferential issues.

Similarly, issuers making preferential issue pursuant to a debt restructuring scheme to lenders on conversion of their debt or at the time of effecting change in ownership from the lenders to new shareholders are not required to adhere to the chapter governing preferential issue of securities under the ICDR Regulations. The exemption is subject to certain conditions, such as, the conversion/ issue price should be certified by two independent valuers, the securities are to be locked in for a certain period, etc.

These relaxations under the Takeover Regulations and the ICDR Regulations for distressed companies is a welcome step as it was difficult to implement a resolution plan under the IBC without attracting onerous obligations under securities law which often hampered the recovery effort.