Opportunity for public equity shareholders to acquire shares after CIRP- a measure for protection or an instance of myopia
Corporations face the problem of shareholder primacy governance which essentially rests on solving the debate around whether shareholders are the true owners of the corporation. Do they have the right to play a role in steering the resolution process of a corporate debtor? In Jaypee Kensington Boulevard Apartments Welfare Association and Ors. v NBCC(India) Ltd and Ors. the issues before the court were that the resolution plan approved by the Committee of Creditors (CoC) should give the minority shareholders a fair market value of the equity shares held by them, they have a right to know even if not participate in any compromise or arrangement and that delisting defeats the intent of IBC which is to keep corporate debtor as a going concern. The court held that the shareholder grievances, in this case, cannot be held as legal issues and there couldn’t be any cause of action to maintain their objection because the IBC scheme entitles the CoC and not the shareholders to structure and approve the resolution plan. The commercial wisdom of the CoC is not amenable to judicial review and as under the waterfall arrangement (section 53) of the IBC, the shareholders stand last in the priority list, even a nominal exit price for minority shareholders cannot be termed as unfair. BLRC observed that insolvency proceedings should be the last resort because, unlike the section 230 scheme which protects creditors and members as well, resolution plans are forced. IBC does not seem to justify its overall scheme by providing minimum value under the resolution plan for the protection of minority shareholders.
The market regulator SEBI in a consultative paper released on November 11, 2022, has proposed a framework to protect the rights of public equity shareholders in a listed company undergoing Corporate Insolvency Resolution Process (CIRP). It states that public equity shareholders should get an opportunity to acquire shares in the resultant entity post-CIRP. Under the current process, the shareholder’s post-CIRP are either squeezed out due to equity dilution or even delisting. SEBI has now proposed that the public equity shareholders be allowed to acquire a minimum of 5% and a maximum of 25% in the resultant new entity depending upon the shareholding pattern of the new acquirer. For example, if the new acquirer acquires 100% shareholding in the company, it has to float an offer of 25% to the public shareholders out of which the minimum acceptance required is 5%, failing which the resultant entity is delisted. Now as the proposal is to protect the interests of minority shareholders the 25% shareholding offer cannot be floated to associate companies, Key Managerial Persons, directors, and trusts managed by promoters.
Reasons for the proposed framework
This has come as a bold move as there have been many instances where the jurisdiction of IBC and SEBI have seen not coincided. In Bhanu Ram vs HBN Dairies and Allied Limited, it was held that IBC cannot cast an overriding effect through section 238, over SEBI since both the legislations are inconsistent in the sense that IBC regulates the Creditor-Debtor relationship and SEBI protects the interests of the investors in the securities market. The proposal in the notification is a praiseworthy one since it is a given fact that the number of listed companies going into liquidation since 2016 is on a rise adding another layer to the complexities addressed by the code. The burden on the new corporate debtor/resolution applicant is also lessened w.r.t raising capital for the new entity. It will ensure a smooth flow of capital for the post-CIRP entity without risking dilution.
The new framework has been proposed to further the primary goal of the regulator, i.e. protect the interests of retail investors. Take for instance the matter of Dewan Housing Finance Corporation (DHFL). In this case, investors moved the appellate tribunal against the NCLT order of delisting DHFL shares as a part of the resolution plan proposed by Piramal Capital and Housing Finance (PCHFL). The contention was against SEBI and NCLT that they failed to inform the investors regarding the resolution plan, in contravention to section 230 of the Companies Act, 2013 which provides power to compromise or decide which creditor of a company while stressing that shareholders have a right to know even if they are not part of the CoC. This resulted in losses faced by the investors who continued to buy shares even after the resolution plan had been approved. One of the speculated merits of the proposal is that it focuses on the issue of excessive float suffered by entities post-relisting to achieve the Minimum public shareholding (MPS) of 25%. The earlier proposals required achieving an MPS percentage within a year of relisting and then the 25% mark within two years. While this proposal leaves the whole 25% in the open market at once to be acquired by the investors.
Is the proposal a barrier to CIRP and the interests of the Resolution Applicant?
Despite the arguments in favour of the proposal it can be said to be not supported by the present legal regime as it does not guarantee any return on investment already made by the existing shareholders. The basic nature of equity vs debt is the risk in the future participation of the business. An investor’s arrangement is usually backed by buy-back obligations of the promoters at a pre-determined value. They always have an entry-exit option at their will. Whereas credit is supplied on pre-agreed terms and there is little option to exit. Credit returns are not linked to the performance of the company. Resolution under IBC is not limited and there can be various ways like the sale/transfer of assets, merger, amalgamation, demerger, consolidation, restructuring, etc thus there complying with the provisions may not be feasible in many cases. The amendment assures a public shareholder to get a minimum value of liquidation if the CD is sought to be delisted according to a resolution plan which does sound ironic because had there been a liquidation attributable to equity holders would have been no question of insolvency.
The allowance of delisting of the entity only if it fails to satisfy the 5% MPS requirement can leave Resolution Applicants in the struggle to calculate the exact capital infusion needs because it would be dependent on the offer’s proportionate acceptance. There is a high risk the bidder might not receive necessary public shares from the offer in many circumstances. The framework should specify that in case of failure to achieve the minimum requirement for a public offer will not affect the liability of the resolution applicant to infuse committed funds and settle the claim of the creditors. Issuance of equity to public shareholders will be against the fresh value and at the discretion of the shareholders so there is no need to make them part of the resolution process. Therefore, the proposed framework should be made applicable only if the resolution applicant wishes to keep the new entity as listed. In 2018 SEBI amended the SEBI delisting of equity shares regulations, 2018 to allow the delisting of shares without following the reverse book-building process (the process by which a company that wants to delist from the exchanges, decides on the price that needs to be paid to public shareholders to buy back shares). No MPS was prescribed in case a listed company undergoing CIRP continues to remain listed as per the resolution plan. This proposal was more in the interests of the resolution applicant. The framework on some fronts has been unfair to the resolution applicants as they take incredible risk in acquiring an insolvent entity and for it to offer shares to public shareholders at the same cost along with assuming all the risks would discourage them to bid at all. This might result in applicant bidding at a lower price as arrangements would have to be made to of a certain percentage of shares in the new entity to the existing shareholders.
The link between IBC and SEBI had been visited once again this time although leaving the loop open for further discourse. While we have to admit that both equity and debt are important for a business, they should each operate in their separate field. The interest of the creditor is paramount under IBC as the shareholders are directly or indirectly invested in the affairs of the company. The proposed framework of SEBI which aims to protect both the interest of the shareholders and creditors might be very difficult to implement as it would necessitate a change in the present set of established practices thus reducing the overall efficiency of the CIRP process. Any regulatory regime should aim at facilitating the process and should not burden the requirement of additional requirements. The core of the IBC process is the timely identification of stress in an organisation and the sale of that organisation as a “going concern” to maximise value. Minority shareholder protection proposed by Sebi would only be successful if the soul is retained. Hence, the SEBI proposal for public shareholders can be said to reflect a myopic view.