Conversion of Outstanding Dues to Equity Subject to 6-Month Lock-in Period under ICDR Regulations: SEBI

Informal Guidance No. SEBI/HO/CFD/CFD-PoD-2/OW/P/2023/20934/1, Dated 23.05.2023

The SEBI, in its reply to Informal Guidance, has clarified that the lock-in period of six months will apply to preferential equity shareholders as per Regulation 167(2) of the ICDR Regulations. Further, SEBI clarified that the issuance of equity shares, in this case would not fall under Regulation 163 of ICDR Regulations, which specifically pertains to the issuance of shares on a preferential basis against the swap of shares.

Query raised by the Applicant Company

The Applicant Company sought informal guidance regarding the conversion of money payables into preferential equity shares. The Company has outstanding dues towards its vendors, aircraft lessors and creditors. In view of the same, the Company has proposed issuing equity shares on a preferential basis to the aircraft lessors in order to restructure its outstanding lease liabilities towards certain aircraft lessors.

To carry out the above-mentioned transaction, i.e., the proposed issuance of equity shares while adjusting the money payments to be made to the aircraft lessors who will be the allottees of these new equity shares, the Applicant Company has sought informal guidance on the following queries:

(a) Whether the transaction will be covered by the provisions of Regulation 163(3) of the SEBI ICDR Regulations subject to other provisions of the SEBI ICDR Regulations relating to preferential issues and the relevant provisions of the Companies Act, 2013 being complied with?

(b) Whether the provisions of Regulation 167(2) of the SEBI ICDR Regulations will be applicable to the proposed issue of equity shares, and a lock-in period of six months from the date of trading approval will be applicable to such aircraft lessors?

Provisions specified in ICDR regulations

Regulation 163(3) read as follows:

“(3) Specified securities may be issued on a preferential basis for consideration other than cash:

Provided that consideration other than cash shall comprise only swap of shares pursuant to a valuation report by an independent registered valuer, which shall be submitted to the stock exchange(s) where the equity shares of the issuer are listed”

As per Regulation 163(3) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, it has been specifically provided in the proviso that consideration other than cash shall only include the swap of shares.

Regulation 167(2) read as follows:

“(2) The specified securities allotted on a preferential basis to persons other than the promoters and promoter group and the equity shares allotted pursuant to exercise of options attached to warrants issued on preferential basis to such persons shall be locked-in for a period of six months from the date of trading approval.”

Further, as per Regulation 167(2) of the SEBI (ICDR) Regulations, 2019, the specified securities allotted on a preferential basis to persons other than the promoter or promoter group shall be locked in for a period of six months from the date of trading approval.

SEBI’s observations

The SEBI was of the view that the applicant has an outstanding liability of paying rent to the aircraft lessors and has chosen to issue preferential equity shares to the lessors as a means of fulfilling its rental obligations. This would amount to issuing preferential shares in lieu of cash, which represents the monetary liability the company is obligated to pay.

SEBI reply

In response to the query, the SEBI clarified that the proposed issuance of equity shares, which will serve to offset monetary obligations owed to the aircraft lessors and will be allocated to these lessors as new equity shares, will not be covered under the provisions of Regulation 163(3) of the ICDR Regulations.

SEBI, further clarified that Regulation 167(2) of the SEBI ICDR Regulations shall apply to the proposed issuance of equity shares and a lock-in period of six (6) months will be imposed on such aircraft lessors from the date of trading approval.

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