INTERSECTION OF IBC AND SEBI – MINIMUM PUBLIC SHAREHOLDING IN COMPANIES UNDER CORPORATE INSOLVENCY RESOLUTION PROCESS – Eshwars
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INTERSECTION OF IBC AND SEBI – MINIMUM PUBLIC SHAREHOLDING IN COMPANIES UNDER CORPORATE INSOLVENCY RESOLUTION PROCESS

SEBI has released a Consultation Paper, proposing three (3) options, with respect to listed companies that have a resolution plan approved by the NCLT, in respect of the minimum pubic shareholding (“MPS”) in such companies, and also suggestions of additional disclosures by such companies pursuant to the approved resolution plan.

Here we look at the proposed options and also the present relaxations to listed companies that have an approved resolution plan. The present exemptions have been given to ensure revival of the corporate debtor pursuant to resolution plan, and also to provide any listing gains over the next three years to shareholders of corporate debtor.

Existing regulatory relaxations:

a. Relaxations have been provided from all provisions of Chapter V of the SEBI (Issuer of Capital and Disclosure) Requirements, 2018 (‘ICDR Regulations’) pertaining to preferential issue such as conditions for eligibility, pricing, conditions for consideration and allotment, etc. except lock-in provisions.

  • This results in the shares being allotted through a preferential issue, to the successful Resolution Applicant, to be under lock-in for a period of at least 1 year (for allotment more than 20% of the total capital of the company).

b. Relaxation has also been provided in Regulation 3(2) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (‘Takeover Regulations’).

  • This allows the successful Resolution Applicant to breach minimum public shareholding norms.

c. With respect to fall in public shareholding below the present 25%, due to implementation of the resolution plan approved under IBC, 2016, the relaxation under SCRR is as follows:

(i) In cases where the public shareholding falls below 10 percent, then such listed company shall bring public shareholding to at least 10 percent within a period of eighteen months, and to 25 percent within three years from the date of such fall.

(ii) In cases where the public shareholding falls below 25 percent, but is above 10 percent, such listed company shall bring its public shareholding to 25 percent within three years from the date of such fall.

d. Relaxation has also been granted from applicability of delisting regulations in case of delisting arising out of resolution plan approved under the IBC, 2016. The minimum value that the shareholder can receive in such cases is the liquidation value, or the price at which existing promoters/ shareholder are being granted exit.

  • It is possible in case of delisting under the resolution plan, the shareholders may not get sufficient/any value as compared to the potential value that may be realised over a period of time after the implementation of the resolution plan if the shares continue to remain listed.

Concerns pertaining to permitting such exemptions:

a. Allowing lower limit for minimum public shareholding in post- CIRP cases, resulted in an instance where the public shareholding was extremely low, and the less floating stock hampered the efficiency in the price discovery process of the scrip, and thereby volatility in the scrip, which in turn resulted in increased surveillance measures.

b. Any increased surveillance measures may act as a deterrent for a successful Resolution Applicant to continue the listing of the scrip.

c. In case, the resolution plan involves allotment to the successful Resolution Applicant, who will be the new promoter, then in terms of Regulation 167(1) of the ICDR Regulations the shares are to be locked-in for a period of at least 1 year, which will not facilitate dilution of promoter shareholding to achieve immediate compliance with at least 10 percent public shareholding.

In light of the above, SEBI is now considering recalibration of the threshold for minimum public shareholding norms, and in its Consultation Paper (inviting comments on the same by 18th September 2020), has proposed the following options:

Options proposed for MPS in the consultation paper:

a. The Resolution Applicant to achieve MPS of 10% within 6 months, and 25% in 3 years from the date of breach in MPS;

b. Mandate post CIRP listing to be with a minimum of 5% MPS, and require them to achieve 10% MPS in 12 months, and in 36 months from the date of breach of MPS reach 25% public shareholding;

c. Mandate 10% MPS at the time of relisting after approval of resolution plan, and be allowed a period of 3 years to reach 25% public shareholding.

LOCK IN REQUIREMENTS:

Generally, in case of issuance of preferential shares to the Resolution Applicant under the resolution plan, such shares would be under lock-in for at least 1 year in terms of ICDR Regulations. SEBI has proposed doing away with the lock-in period of 1 year for the Resolution Applicant, to the extent of complying with the MPS norm.

DISCLOSURES RELATING TO RESOLUTION

Under the IBC, while the order approving the Resolution Plan is a public document, the plan is not made available to the public. Hence, SEBI in the Consultation Paper has proposed standardising the disclosures, including details of funds infused, amounts paid to creditors, impact on the investors such as revised Price to Earnings ratio, Return on Net Worth, and also the resolution plan without the confidential information and commercial secrets.

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