Preferential Issue Pricing under Regulation 164 of SEBI ICDR Regulations

Preferential allotment is one of the most widely used fundraising mechanisms available to listed companies in India. Companies frequently adopt this route to raise capital from promoters, strategic investors, private equity funds, institutional investors, or other identified investors in a relatively faster and structured manner. However, because preferential allotments may significantly impact public shareholders through dilution and change in ownership patterns, the Securities and Exchange Board of India (“SEBI”) has prescribed detailed pricing regulations under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR Regulations”).

Regulation 164 of the SEBI ICDR Regulations forms the cornerstone of preferential pricing for frequently traded shares. The regulation establishes a transparent market-linked pricing framework based on historical trading prices and volume weighted average price (“VWAP”) calculations. The objective is to ensure that shares are not issued at artificially low prices to select investors at the cost of minority shareholders.

This article provides a detailed overview of preferential issue pricing under Regulation 164, including the concepts of 26-week VWAP, 2-week VWAP, relevant date, and frequently traded shares.

What is Preferential Allotment under SEBI ICDR Regulations?

A preferential issue refers to the issuance of specified securities by a listed company to identified investors on a private placement basis. In simple terms, the preferential issue meaning under the SEBI ICDR Regulations is the allotment of securities to a select group of investors instead of offering them to the public at large.

Preferential allotments are commonly used for:

• Promoter funding
• Strategic investments
• PE/VC investments
• Conversion of debt into equity
• Fundraising for expansion or acquisitions

Chapter V of the ICDR Regulations governs preferential issues by listed companies and prescribes conditions relating to:

• Pricing
• Lock-in requirements
• Disclosure obligations
• Valuation requirements
• Allotment procedures

Among these provisions, Regulation 164 specifically deals with pricing norms for frequently traded shares.

Applicability of Regulation 164

Regulation 164 of the SEBI ICDR Regulations applies where:

• A listed company proposes a preferential issue; and
• The equity shares are “frequently traded” on a recognised stock exchange.

The regulation primarily governs the minimum floor price at which shares can be issued under a preferential allotment. The framework is based on historical market trading prices and seeks to ensure fairness and transparency in capital raising transactions.

Where shares are not frequently traded, Regulation 165 becomes applicable and requires valuation-based pricing supported by an independent valuer’s certificate.

These pricing provisions form part of the broader regulatory framework governing valuation and pricing mechanisms applicable to listed companies under SEBI regulations. A detailed analysis can be explored in our guide on valuation and pricing norms under SEBI regulations for listed companies.

Understanding the Concept of “Relevant Date”

The “relevant date” is the reference date used for determining the floor price under Regulation 164. In most cases, it refers to the date 30 days prior to the shareholders’ meeting approving the preferential issue. Since market prices are calculated with reference to this date, it becomes a critical pricing determinant. Companies must carefully plan fundraising timelines because significant market fluctuations before the relevant date may materially impact the issue price.

26-Week VWAP and 2-Week VWAP Pricing Formula under Regulation 164

Regulation 164 prescribes that the preferential issue price for frequently traded shares shall not be lower than the higher of the following:

1. The average of weekly high and low VWAP of the related equity shares quoted on the recognised stock exchange during the preceding 26 weeks; or
2. The average of weekly high and low VWAP during the preceding 2 weeks,

preceding the relevant date.

This dual pricing mechanism reflects SEBI’s attempt to balance long-term historical pricing with short-term market trends.

Understanding VWAP

VWAP or Volume Weighted Average Price is the foundation of preferential pricing under Regulation 164 because it reflects both:

• Share price; and
• Trading volume.

Unlike a simple arithmetic average, VWAP reflects the actual traded value and market participation during a particular period. Consequently, it is considered a more reliable indicator of prevailing market value.

26-Week VWAP

The 26-week VWAP mechanism captures longer-term market trends and reduces the impact of temporary market volatility or price manipulation. By considering a broader trading history, SEBI ensures that preferential allotments are not made at prices substantially below historical market levels.

For example:

In such a case, the minimum issue price must be ₹135 since Regulation 164 requires adoption of the higher benchmark.

2-Week VWAP

The 2-week VWAP reflects more recent market movements and current investor sentiment. This provision prevents companies from relying solely on older historical averages where market prices may have risen substantially in the recent past.

The inclusion of the 2-week benchmark is particularly relevant during:

• Bull market phases
• Positive corporate developments
• Improved financial performance
• Sectoral re-rating

Why SEBI Uses the Higher of the Two Prices

The requirement to adopt the higher of the 26-week or 2-week VWAP is a critical shareholder protection mechanism. Without this safeguard, companies could potentially issue shares at lower prices during periods of temporary market weakness or rely on outdated historical averages despite recent price appreciation.

This preferential pricing framework seeks to:

• Prevent preferential treatment to select investors
• Protect minority shareholders from dilution
• Ensure fair capital raising practices
• Align issue price with prevailing market conditions

The framework also enhances transparency and reduces regulatory arbitrage in listed company fundraising transactions.

Frequently Traded Shares: Meaning and Importance

The concept of “frequently traded shares” is fundamental to Regulation 164. Shares are considered frequently traded if the trading turnover during the preceding 12 calendar months exceeds the prescribed threshold under SEBI regulations.

The rationale is simple: where sufficient trading volume exists, market prices are considered reliable indicators of fair value. Accordingly, SEBI permits formula-driven pricing mechanisms based on trading data. In contrast, illiquid or infrequently traded shares may not reflect intrinsic business value and therefore require valuation-based pricing under Regulation 165.

Preferential Pricing for Recently Listed Companies

Special pricing provisions apply where the equity shares have been listed for less than 26 weeks. In such cases, Regulation 164 prescribes alternate pricing benchmarks based on available trading history, IPO price, or other prescribed parameters.

The regulations also require re-computation of pricing after completion of 26 weeks from listing in certain situations where the revised price is higher. These provisions prevent recently listed companies from circumventing fair pricing principles immediately after listing.

Anti-Dilution Adjustments under Regulation 166

SEBI regulations further provide that the pricing determined under Regulation 164 must be adjusted appropriately in case of corporate actions such as:

• Bonus issues
• Stock splits
• Rights issues
• Consolidation of shares
• Certain demerger events

These anti-dilution adjustments ensure economic neutrality and maintain consistency in pricing calculations despite changes in the capital structure of the company.

Without such adjustments, preferential issue pricing could become distorted due to purely technical changes in share capital structure rather than actual changes in enterprise value.

Conclusion

Regulation 164 of the SEBI ICDR Regulations represents one of the most important pricing frameworks governing listed company fundraising in India. By linking preferential allotment pricing to both long-term and short-term market benchmarks through the 26-week and 2-week VWAP mechanisms, SEBI seeks to maintain transparency, fairness, and investor protection.

Understanding the preferential issue meaning, preferential pricing framework, and Regulation 164 of the SEBI ICDR Regulations is essential for listed companies planning capital raising transactions, as pricing compliance plays a central role in protecting shareholders and ensuring regulatory approval.

The concepts of relevant date, frequently traded shares, and anti-dilution adjustments further strengthen the integrity of the pricing framework and reduce the possibility of preferential pricing abuse.

As capital markets continue to evolve and fundraising transactions become increasingly sophisticated, proper understanding of Regulation 164 remains essential for listed companies, promoters, investors, and transaction advisors involved in preferential issue transactions.