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Sebi Allows Issuance of Preference Shares on Stock Exchanges

The Securities and Exchange Board of India (Sebi) has allowed issuance and listing of non-convertible redeemable preference shares on stock exchanges, making it easier for companies and banks to raise funds through this route.

In a series of decisions announced on Friday evening, Sebi also extended the initial offer period for schemes under the newly-launched Rajiv Gandhi Equity Scheme to 30 days from 15 days, simplified registration rules for brokers and announced its intention to review KYC norms for investors, both foreign and domestic.

ET had reported that Sebi might allow listing of preference shares in its edition dated March 7. The decision to allow listing preference shares will also help companies to increase their net worth and improve their debt-equity ratio, investment bankers said.

Preference shares are securities issued by a company which typically have no voting rights. It is similar to a fixed deposit in that it comes with a fixed tenure and a fixed dividend. Sebi said the proposed regulations will provide a framework for public issuance of non-convertible redeemable preference shares and also listing of privately-placed redeemable preference shares.

"Considering the risks involved in the instrument, certain requirements like minimum tenure of the instruments (three years), minimum rating ("AA-" or equivalent) etc. have been specified in case of public issuances. For listing of privately-placed non-convertible redeemable preference shares, the minimum application size for each investor is fixed at 10 lakh," Sebi said in statement issued late evening on Friday.

The regulator said the proposed norms will also cover perpetual preference shares and debt instruments issued by Indian banks to raise long-term capital. According to Basel III norms, banks can issue non-equity instruments such as perpetual non-cumulative preference shares and innovative perpetual debt instruments, which are in compliance with specified criteria for inclusion in additional Tier-I capital.

However, unlike plain-vanilla debt and equity, there was no express regulation under the existing framework for public issues and listing of preference shares though these instruments are widely prevalent. Companies are allowed to issue redeemable preference shares with a maximum tenure of 20 years as per the Companies Act.

Both investors and companies may find an advantage in issuing preference shares. "Companies would prefer to pay lesser rate of dividend compared to the coupon on their non-convertible debentures (NCDs) because interest on NCD is tax-deductible while dividend on preference shares is not eligible expenditure for tax purpose," said an investment banker. Besides, investors may also prefer preference shares as dividend received is tax-free in the hands of investors unlike interest received in case of NCDs. "Listing of preference shares will also provide an exit route to retail investors," said a senior depository official. According to data compiled from depositories, in the past 3 years, more than 25,000 crore was raised through preference share issuance by 295 firms. In FY12, 147 issuers tapped the market to raise 10,000 crore.

Economic Times, New Delhi, 09-03-2013