Sebi seeks to protect public shareholders' interests during CIRP

Non-promoter entities in bankruptcy-hit firms to be given opportunity to acquire shares

The Securities and Exchange Board of India (Sebi) has proposed a framework to protect the interests of public equity shareholders in case of listed companies undergoing insolvency proceedings.

In a discussion paper, the capital markets regulator has proposed that public equity shareholders should get an opportunity to acquire shares of the entity created, following the completion of the corporate insolvency resolution process (CIRP).

Sebi has said the price offered to these shareholders should be the same as the one agreed upon by the resolution applicant.

The framework, once in effect, will help small stakeholders get an opportunity to participate in the revival process of the company going through insolvency.

Under the current process, existing shareholders get squeezed out as the CIRP results in huge equity dilution and even delisting.

Sebi has proposed that public equity shareholders be given the opportunity to acquire a minimum of 5 per cent and up to 25 per cent in the new entity. The offer will depend on the shareholding the new acquirer gets as a result of the resolution plan.

For instance, if a new acquirer’s shareholding becomes 100 per cent pursuant to the CIRP process, the minimum offer required to be made for existing public shareholders will be 25 per cent and the minimum acceptance 5 per cent.

In the event there is no interest even for 5 per cent of shares, the resultant entity will be allowed to delist. If the acquirer’s shareholding in the resultant entity becomes 75 per cent pursuant to the CIRP process, there will not be any requirement to make an offer to public investors as their holding will already be at 25 per cent.

The offer to acquire shares of the resultant entity will not be available to associate companies, family members of promoter group companies, trusts managed by promoters, key managerial personnel, and directors.

Sebi’s latest proposal follows complaints and grievances that in case a company heads to delisting on approval of a resolution plan, the value of equity shares turns zero and it is not an acceptable process.

The public shareholders don’t get prior intimation or even the opportunity to present their case to a committee of creditors (CoC).

On numerous occasions, representations have been made before Sebi to intervene to protect the interests of existing shareholders.

However, under the Insolvency and Bankruptcy Code, equity holders are considered owners of the insolvent company, and thus fall last in the resolution plan approved by a court to receive any dues at the time of liquidation.

In case of insolvency, the CoC and the resolution professional steer the insolvency process since their rights are considered superior.

So far, 28 listed companies have ended in liquidation under CIRP. About 52 listed companies have been delisted according to the resolution plan and 23 companies continued to remain listed. About 70 listed companies are undergoing CIRP.

The new framework can help the regulator protect the interests of retail investors. For instance, in the matter of delisting of Dewan Housing Finance Corporation (DHFL), retail investors filed an appeal at the National Company Law Appellate Tribunal for adequate information. Thousands of shareholders of DHFL were wiped out.

“It is now felt that there is a need to take suitable measures to protect the interests of public equity shareholders in the case of listed companies undergoing CIRP. In this regard, a proposal taking into account the interests of all stakeholders, including minority public shareholders, while opening a new avenue for raising funds for the corporate debtor, without compromising the speed and efficiency of CIRP process, is placed for public consultation,” Sebi has said.

Public comments on the proposals are invited by November 24.