Introduction
When a company goes through insolvency proceedings, the public equity shareholders (non-promoter public shareholders) are the ones that profit the least since they are not considered “creditors” who are protected by the Insolvency and Bankruptcy Code, 2016 (IBC). Existing shareholders are squeezed out under the present procedure since the CIRP results in massive equity dilution and even delisting—a circumstance that arises as a consequence of the new acquirer’s shareholding attaining 100% as a result of the Corporate Insolvency Resolution Process (CIRP). To address this issue, the Securities and Exchange Board of India (SEBI) has issued a consultation paper. This paper proposes amendments for publicly listed companies going through the Corporate Insolvency Resolution Process. This piece would summarize the proposed framework, analyze its merits and downsides, and evaluate the feasibility of the suggested reforms.
SEBI’s Framework for Protection of Public Equity Shareholders
The main objective of this framework is to allow the participation of the public shareholders in the company which is undergoing the Corporate Insolvency Resolution Process (CIRP). Smaller stakeholders are not fairly compensated for their holdings. The public shareholders are neither informed nor is their case examined by the Committee of Creditors (“CoC”) before the approval of the resolution plan that brings the firm to a null overnight. A similar issue was raised in the Supreme Court by minority shareholders in the case of Keshav Agrawal vs Abhijit Guhathakurta, but the Court held that the issues raised by these shareholders couldn’t be recognised as legal grievances; and there couldn’t be any cause of action to maintain their objection because the IBC scheme only entitles the CoC, not the shareholders, to structure and approve the resolution plan. In the case of a liquidation, shareholders would come last in the order of priority, according to section 53 of the IBC. Also, it was held that all stakeholders must adhere to the authorised resolution plan under section 238 of the IBC.
The following are the proposals of SEBI:
1. Existing public equity shareholders will be offered equity in the new entity’s fully diluted capital structure up to the minimum public shareholding percentage (currently 25%).
2. The pricing will be the same as agreed by the resolution applicant.
3. A minimum of 5% public shareholding must be obtained through this type of offer to non-promoter public shareholders.
4. An equitable offer to buy shares/allotments would be made to such public equity shareholders.
5. If the procedure fails to meet the required threshold level of 5%, the entity must follow the current procedures for delisting. If the above-mentioned minimum shareholding is not met, the business must delist in compliance with the cancellation of the offer made to present public equity shareholders and refund the money collected from them through the said offer before proceeding with CIRP.
6. Mechanisms must be included in the resolution plan filed by the resolution applicant for all listed companies undergoing CIRP.
7. Exemptions will only be allowed when:
- the corporate debtor is required to liquidate under CIRP.
- Where, after exercising the option granted to public shareholders, the ownership of public equity shareholders remains less than 5% of the new entity’s fully diluted capital structure.
Reasons for the proposed framework
Safeguarding and maximising the value for the benefit of all stakeholders and the economy is a very important objective for any insolvency law. Given the aforementioned goal of any insolvency legislation, it is critical to recognise the rights and duties of equity vs debt. When opposed to an equity shareholder, creditors’ rights are undeniably distinct and superior (in terms of claims in the event of liquidation). The public shareholders are positioned in the last place in the waterfall mechanisms in the approved resolution plans for receiving any dues or sums at the time of liquidation of the company because the CIRP process under the Insolvency and Bankruptcy Code, 2016 is primarily concerned with protecting the interests of the creditors when the company becomes insolvent.
After the approval of a resolution plan, there are two possible outcomes__
- The Company may remain as a publicly listed company, but with severe capital reductions as part of a resolution plan approved by the NCLT.
- The company might get delisted as part of the liquidation process as approved by NCLT.
In the event of the delisting of the company after the approval of the resolution plan, the smaller stakeholders don’t get the fair value of their shareholding. The public shareholders are not even given the information to plead their case before the committee of creditors (CoC), which guides the insolvency process. Therefore, there is a need for appropriate steps to protect the interests of public equity shareholders when listed companies go through the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code. This framework addresses the issues of the public shareholders by considering the interests of all the stakeholders, including the minority shareholders while establishing a new path for the corporate debtor without jeopardizing the speed and efficiency of the CIRP process.
Is the Secured Shareholder Rights a barrier to CIRP?
Even large corporations are frequently observed straining to satisfy Minimum Public Shareholding (MPS) criteria. As a result, requiring it in companies pursuing CIRP may not result in the desired outcome desired by the regulator. SEBI has very little control over CIRP procedures, and in an attempt to make the most of it, it may have added to the present restructuring regime’s volatility. SEBI has said that such offers to public shareholders will decrease the burden on the resolution applicant by acting as a vehicle for fundraising, therefore decreasing capital requirements and streamlining the process of attaining the minimum public ownership.
However, expecting such public shareholders to pay additional money for purchasing a stake in a firm which is still in this stage would be very optimistic. There is a high risk that the bidder will not receive the necessary public shares from the offer in many circumstances. As a result, there would be a struggle for the bidder in calculating the exact capital needs in such instances because it would be dependent on the offer’s proportionate acceptance. Furthermore, given the nature of restructuring, bidders may not want such non-promoter stakeholders present to make judgements with the least amount of influence and friction. The obligation to make such offers would be damaging to CIRP’s overall efficiency in such circumstances.
Conclusion
By releasing this framework, SEBI has potentially provided relief to minority public stakeholders of listed companies undergoing CIRP, which primarily aims to address the issues such as the lack of opportunity in acquiring new entities and unevenness in prices being offered to non-promoter public equity shareholders. From the perspective of minority shareholders, this is a much-needed move. However, the regulator has characterised its plan as advantageous to both investors and the resolution applicant, which would be clear with time. The actual implementation of the same would be difficult since it would necessitate a change in the present set of established practices. This would have a negative influence on CIRP’s overall efficiency. This will eventually have a detrimental impact on every stakeholder in the organisation, even minority stockholders. Furthermore, the problem of minority public shareholders is primarily under the purview of the IBC rather than the SEBI. As a result, this might result in more turbulence than stability.
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(Mr Biprojeet Talapatra is a second-year law student at Campus Law Centre, University of Delhi)
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