Post its board meeting on March 28, capital markets regulator Securities and Exchange Board of India (Sebi) had issued a discussion paper on application of Sebi regulations on companies undergoing corporate insolvency resolution process (CIRP), posing various questions for consideration in relation to such companies.

Some of these proposals regarding application of Listing Regulations have been discussed in our previous article.

This article will deliberate upon few other recommendations given under the discussion paper and will examine the application of all other Sebi regulations on companies undergoing CIRP.

One of the major issues raised in the discussion paper is whether the securities of such companies which are undergoing CIRP must be allowed to continue trading on the stock exchanges.

Trading in shares on the stock exchanges allows price discovery of securities and provides a platform to the public shareholders to exit the company and transfer risk to those are willing to assume such risk.

Freezing trading may sound optically sound but will in fact completely block the exit doors when the building is on fire.

However, such shares should be put up to greater surveillance and scrutiny.

For example, trading in the Futures and Options (F&O) segment of the stock exchanges with respect to such securities may be prohibited, as this segment is more volatile and may create unnecessary fluctuations in the prices of the scrip of such entities with the tail wagging the dog.

Similarly, these scrips may be subject to a stricter intra-day price band while leaving the price otherwise flexible (price band across days will in fact be counter-productive as a security worth Rs 5 being offered at Rs 50 will not be traded, thus blocking trading completely).

In the alternate, the shares may be traded on a ‘call auction’ basis once a day/once a week.

Additionally, the trading window should be compulsorily closed during the period when only a handful of people have access to information that other do not have.

For example, during the period after tender of offers to purchase the company are received until the time the final results are announced to the public. This will not exceed a few days or a few weeks at the most.

Minimum Public Shareholding Norms

The Securities Contract (Regulation) Rules, 1957 mandates a public listed company to maintain at least 25% public shareholding every time.

On non-compliance, the company is required to pay hefty penalties. Not only the company, its directors and officers are also liable.

For the companies implementing a resolution plan, the discussion paper proposes that such companies can defer compliance with minimum public shareholding norms, which requires a listed company to maintain minimum 25% public shareholding at all times.

Similarly, the relevant takeover related norms that prohibit an acquirer from acquiring voting rights beyond 75% are also proposed to be relaxed.

At times, infusion of outside capital during CIRP may reduce the public shareholding below the statutory minimum of 25%.

For revival of the listed companies post-CIRP, this proposal of relaxing the limit of 75% is in the right direction.

The immediate obligation to fulfill the prescribed MPS norms may not be in the interest of a newly revived company.

Thus, the period of one year for compliance with the required MPS norms should be extended for such companies to five years or ten years.

For a company that has gone through the resolution process, the important agenda is to revive the company, for which it would require several years of nurturing.

Divestment, while the company is still struggling would not be an ideal outcome and for a company with a near-death experience, to revive and be partially divested would take a minimum of five years.

Application of Delisting Norms

The discussion paper proposes that the application of Sebi (Delisting of Equity Shares) Regulations, 2009 may be deferred in case the equity shares of a company are delisted pursuant to approval of a resolution plan.

Removal of such additional onerous formalities and procedures provided under the Delisting Regulations is an acceptable proposal for the companies which will be liquidated post CIRP. This will reduce unnecessary procedural formalities.

However, for the companies which will not be liquidated post CIRP and if their resolution plan provides for delisting of the equity shares, then the interest of public shareholders of such companies should be protected by providing an appropriate exit mechanism at the then fair price determined by National Company Law Tribunal or Sebi (ideally the former).

Sandeep Parekh is Partner and Deepika Goyal is Associate at Finsec Law Advisors.

First Published:May 17, 2018 8:12 PM IST