Recently, SEBI has issued an informal guidance to PC Jeweller Limited (“Applicant”) in relation to the lock-in requirements of the pre-preferential allotment shareholding of an allottee of unlisted convertible securities under Regulation 78 of the SEBI (ICDR) Regulations, 2009 (“SEBI ICDR Regulations”).

In the matter of M/s PC Jeweller Limited

Facts

The Applicant is a public limited company listed on BSE and NSE. On 24 May, 2016, the Applicant allotted 42,69,984 compulsorily convertible debentures (“CCDs”) to DVI Fund (Mauritius) Ltd. (“DVI”) by way of preferential allotment on a private placement basis. DVI was not part of the promoter or promoter group of the Applicant. DVI had the option to convert the CCDs into equity shares at the price of Rs. 380/- per equity share within 18 months from the date of allotment. The relevant date for the determination of the price at which the CCDs would be convertible into equity shares, as per Regulation 71, was taken to be 30 days prior to the date of the shareholders’ meeting on which the resolution pertaining to issuance of CCDs to DVI was passed, i.e. April 08, 2016 (“Relevant Date”). The Applicant did not wish to list the CCDs on any stock exchange prior to its conversion. Prior to the allotment of CCDs, DVI held equity shares constituting 3.72% of the then issued and paid-up capital of the Applicant.

In light of this, the Applicant sought to clarify the lock-in requirements of the equity shares amounting to 3.72% that was held by DVI prior to the allotment of CCDs under Regulation 78(6) of the SEBI ICDR Regulations. Regulation 78(6) of the ICDR Regulations provides as follows:

Reg. 78(6): The entire pre-preferential allotment shareholding of the allottees, if any, shall be locked-in from the relevant date upto a period of six months from the date of trading approval.”

SEBI’s Informal Guidance

SEBI clarified that as per Regulation 78(6) of the SEBI ICDR Regulations, the lock-in period for the pre-preferential allotment shareholding of DVI would commence from the Relevant Date and would extend to six months from the date of allotment of the CCDs to DVI.

It is pertinent to note that Regulation 78(6) specifies that the lock-in period for the pre-preferential allotment shareholding of an allottee would commence on the Relevant Date and extend to a period of six months from the date of the “trading approval”. However, the CCDs that were allotted to DVI were not proposed to be listed until they were converted to equity shares at the option of DVI.

Previously, in the matter of Kesoram Industries Limited, SEBI had clarified that when unlisted convertible securities are allotted by an issuer, the lock-in period for such unlisted convertible securities under Regulation 78(2) of SEBI ICDR Regulations shall commence from the date of allotment of the convertible securities and would extend to a period of one year from thereon, for non-promoter or promoter group allottees. SEBI had also clarified that if the allottee wished to convert the convertible securities into equity shares prior to the expiry of one year, the equity shares allotted pursuant to the conversion would be under lock-in for the remainder period of that one year.

Extending the same rationale, SEBI clarified that since the CCDs were not proposed to be listed till their conversion, the phrase “date of trading approval” under Section 78(6) will mean the date of allotment of CCDs.

Analysis and Conclusion

We believe that the interpretation offered by SEBI in this case is indeed correct in law. If the words “date of trading approval” been interpreted to mean trading approval granted to the equity shares pursuant to conversion of CCDs, it would led to an absurd situation where the pre-preferential allotment shareholding of DVI would be locked-in for a period of six months from the date of receipt of trading approval for the equity shares allotted to DVI post conversion of CCDs when the equity shares allotted to DVI post conversion, themselves would not be under any lock-in, assuming DVI converted the CCDs after one year from the date of its allotment.