The market regulator has proposed relaxing norms pertaining to 25 percent minimum public shareholding for companies that undergo corporate insolvency resolution process and seek to relist afterward. SEBI’s proposal comes from the insolvency proceedings of Ruchi Soya Industries extreme share price movement after the company went through insolvency proceedings, the SEBI proposed to change the minimum public shareholdings norms for entities undergoing insolvency and asked for views of public and market intermediaries till Sept 18 in this regard.

On Aug 19th, 2020, capital market regulator SEBI has suggested three alternatives for companies going through the corporate insolvency resolutions process (CIRP) and accordingly required them to improve disclosure procedures for such companies.

The SEBI rules prescribe for such listed companies should have at least 25 percent of minimum public shareholding (MPS). But, it is usually observed that such companies face trouble in maintaining 25 percent public shareholding in initial years companies under the Insolvency and Bankruptcy Code (IBC) are granted a relaxation.

As per the relaxation of the companies, if after infusion of fresh funds, the MPS falls below 10 percent then the companies can raise it up after to the threshold within 18 months and later to 25 percent in three years.

What does the new suggestion by SEBI say?

It has been suggested for companies who’s MPS falls below 25 percent but is above 10 percent, need to bring it up to 25 percent in three years from the date of such lapse and the shares of the incoming investors also stay locked in for one year.

Under the first option, SEBI suggested that post –CIRP companies may be obligated to attain at least 10 percent public shareholding with six months and the remaining 25 percent within 3 years from the date of violation of the minimum public shareholding MPS standards.

Under the second option, the public shareholdings CIRP companies may be mandated to have at least 5 percent public shareholding at the time of relisting while the third option mandated such companies to have at least 10 percent public shareholding at the time of relisting. SEBI also suggested doing away from the lock-in-period, so as to help achieve MPS, but only to the extent to enable such compliance.

However, in terms of the relaxation available as described above, it is possible that pursuant to the implementation of the resolution plan, the public shareholding in such companies may drop to abysmally low levels;

In a recent case, it was observed that post-CIRP the public shareholding has decreased to 0.97% and showed a drastic increase in its share price in spite of additional preventive surveillance actions including a reduction in price band moving the scrip into a trade for trade-segment.

Earlier Ruchi Soya Industries was bought by Patanjali Ayurveda led consortium in 2019 through insolvency resolution process on March 31. Due to such lower public shareholding, the capital market regulator argued that such lower shareholding raises multiple concerns like a failure of the fair discovery of the price of the scrip, the need for increased surveillance measures, and may, therefore, pose an indication for future cases. Also, the low float also prohibits healthy participation in trading of companies due to issues related to demand and supply gap of shares. Such norms were necessary following the debacle created by Ruchi Soya Industries.

With investors suffering huge losses at the time of relisting of shares, a meticulous deliberation on the matter of recalibration of the threshold for Minimum Shareholding norms of companies that undergoing Corporate Insolvency Resolution Process and seeking to relist of its shares was the need of the hour.

Realizing such the capital markets regulator is taking into account various measures and norms that incentivized companies to remain listed and enforcement of Fair Market Value in the event relisting was on cards.

Where the suggestion does doesn’t hold well?

Such exemptions are not considered in the case of companies seeking listing pursuant to a scheme of arrangement. While the revival of the corporate debtor is essential for all stakeholders, it is also imperative to maintain market integrity in respect of such companies.

The capital market prescribed a rationale for providing such immunity only to Insolvency and Bankruptcy Code cases with an aim to the renewal of the corporate code was to ensure the revival of the corporate debtors in pursuance of the resolution plan and to provide any listing gains over the next three years to shareholders of the corporate debtor.

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