More options by SEBI FOR corporate insolvency resolution process (CIRP)

Nov 26, 2020

The SEBI has recently proposed various changes concerning minimum public shareholding (MPS) requirements and enhanced disclosure of companies trying to re-enlist their shares after the Corporate Insolvency Resolution Process (CIRP). In August, the authorities proposed three possible options for CIRP companies who want to float their shares in the open market again. This was done after amending various regulations to provide dispensations for listed companies who underwent or are currently in the CIRP process under the Insolvency and Bankruptcy Code 2016 (IBC). The SEBI’s 2018 discussion paper laid out specific proposals aiming to adjust regulatory frameworks that allow listed companies to comply with corporate obligations imposed by security laws. 

The pre-existing law under SEBI guidelines states that listed companies will have to have a bare minimum of 25% shares floated in the public sphere. Therefore, any acquisition of shares by a private body will be restricted to a maximum of 75% under normal circumstances according to the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 (Takeover Regulations). In Extraordinary circumstances, however, such as the case of a sick company under financial distress, the listed stock value is extremely depressed, and any equity investment will dilute the holdings of pre-existing shareholders. With the new amendment, companies can now make additional investments in companies under the IBC resolution plan and take their holdings in the company to even 98%. 

The three new proposals by SEBI are options that companies can choose to comply with the MPS norms. The first option is that post-CIRP companies have to achieve at least 10% public shareholding within six months and 25% within three years from the day they breached the MPS norm. According to Rule 19A(5) of the SCRR, in case the public shareholding of a listed company falls below 10% as a direct result of implementing the IBC resource plan, it has to be brought back up to 10% within 18 months from the date of fall and 25% within three years from the date of fall. The 18 months can be brought down to 6 months. The second option is that post-CIRP companies may be mandated to have at least 5% public shareholding when they are re-listing their shares. These companies are allowed 12 months to achieve a 10% public shareholding and another 24 months to bring it up to 25%. Although a 5% threshold may not be too significant, it will incentivize companies from staying listed, and a higher threshold will only push for total delisting. The last option is that post-CIRP companies be mandated to have a minimum of 10% public shareholding when re-listing. These companies are then provided three years to bring up the margin to 25%. If it’s an Initial Public Offering (IPO), Rule 19(2) (b) mandates that there should be at least a 10% MPS. There are certain Lock-in requirements when it comes to the preferential issue of shares to the promoter under the resolution plan as these shares will be under lock-in for a minimum of 1 year according to ICDR Regulations. This will not help them achieve the MPS compliance by off-loading shares on the investor or promoter. So, they are permitted to free some shares from lock-in to achieve the MPS. 

To measure the progress of these companies in qualitative terms, the pre and post-net-worth of the company are noted down. A detailed account of the shareholding pattern is given assuming 100% conversions both before and after. The funds infused, creditors paid off, additional liability due to incoming investors and the impact on the investors is analyzed. A brief business strategy and a resolution plan, excluding confidential information are also prepared. In all cases, the disclosure of salient features of the resolution plan not including commercial secrets is mandatory concerning the LODR Regulations, 2015. These factors are taken into consideration while ascertaining the actual value of shares at the time of re-listing. 

Since the IBC is an evolving law, only six post-CIRP companies have been listed on the NSE. It has however been noted that because these companies have implemented the resolution plan, the public shareholding in such companies drops to ridiculously low levels, sometimes reaching as low as 0.97% while showing an S8764% increase in its share price. The exemptions provided for under the three options is, however, not applicable to all companies. It is mandatory to have at least 25% public shareholding or at least Rs. 400 Crores or at least 10% public shareholding in case the valuation of shares exceeds Rs. 4000 Crores, whichever is higher under a scheme of arrangement. This exemption is provided only to IBC cases to ensure the revival of the corporate debtor under resolution plan as well as to provide listing gains to the shareholders in the years to come. This helps in also maintaining market integrity. The reason for an MPS is that low public shareholding in post-CIRP companies will lead to less float and drastically affect the efficiency of the market price discovery process. Lastly, an exemption is granted from the applicability of delisting regulations in case it arises out of the resolution plan approved under the Insolvency Bankruptcy Code, 2016.