IBC delisting norms: Small shareholders ask Sebi for review

Investor protection bodies say new rules force minority stockholders to part with their holdings at a token price

Minority shareholders are miffed at the lenient delisting process for companies facing insolvency proceedings under the Insolvency and Bankruptcy Code (IBC). 

According to sources, several investor protection bodies have written to the Securities and Exchange Board of India (Sebi) for a review of the norms, which they say are anti-minority shareholders. The special delisting norms for companies under the IBC, released earlier this week, offer a raw deal to minority shareholders who will be forced to tender their shares virtually free.

As per the new rules, a company under the IBC is no longer required to follow the reverse book building (RBB) process for price discovery and all the shareholders will have to tender their shares at a fixed price. The offer price for delisting is the liquidation price minus the dues that need to be paid as a priority under the IBC.

Investor groups say the pricing formula is detrimental to minority shareholders as they will be stripped off any gain the company makes due to a turnaround under the new management.

"Compelling a shareholder to tender his stake is unfair and against the interests of investors. The Sebi should ensure rights of investors are protected even in special cases like IBC (proceedings), where a company has gone bankrupt but you cannot rule out a turnaround," said Santosh Agrawal, president, Bhopal Stock Investors Association, a Sebi-recognised investors' body.

The most recent example of such a deal is the case of Electrosteel Steels, which was acquired by Vedanta Star through the IBC process. While there is a chance of a turnaround, the company has already announced that it will delist from the stock exchanges by paying minority shareholders a meagre 19 paise per share. The company has over 50,000 shareholders. Same is the case with Bhushan Steel, the stock which has hit lower circuits anticipating a similar deal.

“We have already written to the Sebi seeking a rethink of the new rules as they are unfair for minority shareholders. Some of them bought the shares of bankrupt companies while they stable and have stayed with the company. Now, they should not be asked to exit simply because the new management wants them to,” said a source.

Sources say in the majority of the cases, the liquidation value is less or marginally higher than the dues to be paid for debtors. Often it can be negative. Hence, a bidder can oust the shareholders by paying almost nothing to them.

Legal experts say the laws of insolvency are based on the rights of creditors and hence, equity investors are not awarded any special safeguards even though thousands of small-time investors will lose their investment.

“In an insolvent company, there is no right for shareholders. The interest of creditors is the most important criterion in IBC companies. In such a scenario, marginal compensation for shareholders is better than no compensation since a large number of companies might not see a business turnaround,” said Sandeep Parekh, founder, Finsec Law Advisors.

The liquidation value of a company is the estimated realisable value of assets, determined on the basis of revenue streams of the company. Experts say the liquidation value should not be considered as the benchmark for giving exits to shareholders since it does not consider any turnaround or upside in the company’s business.

“The liquidation value, which has become an anchor for recoveries, is 1-1.5 times of the normalised Ebitda (earnings before interest, tax, depreciation and amortisation) of the companies. Once turned around, these companies will be valued at 4-5 times their normalised Ebitda,” said Eight Capital, an asset management firm, in a note to its clients.