Preferential Allotments Liberalized for Certain Institutional Investors

Over the years, SEBI has gradually tightened the regime relating to preferential allotment of shares in order to prevent possible abuse of the process and to thereby protect the interests of minority shareholders in listed companies. One of the requirements pertains to lock-in on shares of allottees. There are currently three types of lock-in applicable to persons who are allotted shares on a preferential basis (although the requirements are more onerous for promoters):

1. At the outset, persons who have sold shares in a company in the previous 6 months are ineligible to be allotted shares on a preferential basis;

2. Allottees’ pre-existing shares in the company held prior to the allotment will be locked in for a period of 6 months;

3. The shares issued as part of the preferential allotment will be locked in for a period of 1 year.

By way of a press release issued last week, SEBI has made conditions 1 and 2 inapplicable to preferential allotments made to insurance companies and mutual funds “which are broad based investment vehicles representing the interests of the public at large”. This is likely to provide additional avenues to such institutional investors to obtain shares in companies through preferential allotments rather than through the secondary markets. The policy rationale is understandable because these institutions generally represent broader investors and not just the proprietary interests of a limited group of investors.