[Nishant is a student at Hidayatullah National Law University.]
The primary aim of the insolvency and bankruptcy law is maximization of interests of all the stakeholders involved, be it creditors or debtors. The Insolvency and Bankruptcy Code 2016 (IBC) strives to prevent unnecessary liquidation of a debtor company while keeping the interest of creditors at the centre of the whole process. It is an undeniable fact that the IBC has proved to be the harbinger of an efficient corporate regime in the country. It has been pivotal in the rescue of many distressed entities.
However, there has been an emerging tussle between the rights of equity holders and the creditors of the entity undergoing the insolvency process. The primary concern of the equity holders is surrounded around the possibility of delisting of a company pursuant to the acceptance of resolution plan under corporate insolvency resolution process (CIRP). No relief is given to the equity holders in case the debtor company gets delisted after the insolvency process. Acting on these complaints and grievances, the Securities and Exchange Board of India (SEBI) has proposed a Framework for Protection of Interest of Public Equity Shareholders in Case of Listed Companies Undergoing Corporate Insolvency Resolution Process under the Insolvency and Bankruptcy Code. In this framework, SEBI has tried to address the concerns of public equity holders by giving them the opportunity to acquire shares of a new entity.
Concerns of Public Equity Holders
According to the Securities Contract (Regulation) Rules 1957 (SCRR), the minimum public shareholding (MPS) of a listed company has to be at least 25%. This means that after giving shareholding to the promoters, every listed company is required to give a minimum of 25% of shares to the public. Therefore, these public equity holders form a significant part of any listed company.
According to the framework given by SEBI, a listed company, pursuant to the approval of a resolution plan, either remains listed or gets delisted or liquidated varying from case-to-case basis. The IBBI report suggests that 28 listed companies have ended in liquidation after failing to resolve the insolvency, 52 listed companies have been delisted after the approval of the resolution plan, and 23 companies continue to be listed pursuant to the approval of resolution plan.
The primary concern of public equity holders revolves around the companies getting delisted or liquidated after the acceptance of the resolution plan. The grievances put forward by the equity holders to SEBI were as follows:
The converted share of the new entity formed after the new promoters take over the old entity, pursuant to the resolution plan, should be offered to the public equity holders.
All small shareholders should get optimum prices for their shareholdings in the debtor company.
The resolution plan which erodes the value of investment of the shareholders to zero, that too without any prior intimation is inequitable and unjustifiable, jeopardizing the rights of shareholders.
Framework by SEBI
After getting numerous grievances from public equity holders, SEBI has attempted to address their concerns. Recently, SEBI notified a framework in which it has proposed to incorporate the interests of shareholders of the debtor company in case of delisting or liquidation of the said company. The major proposals by SEBI are listed herein below:
Public equity shareholders of the corporate debtor would be given an opportunity to acquire the shares of the new entity at the price ceiling agreed by the resolution applicant. Such shareholding should not cross 25%, which is the MPS percentage of a listed company.
The framework also mentions certain groups which are to be excluded from the above proposal of SEBI. Such group includes all the promoters, family members of promoters, associate companies and the subsidiaries, directors of the company, trusts managed by the promoters of the company among others.
It is mandatory that at least 5% shares of the new entity should be given to the existing public equity shareholders. In case the new entity fails to muster the 5% of existing shareholders, then the new entity would be liable to be delisted.
The proposal by SEBI allows public equity shareholders to participate in resolution process at the same price available to the resolution applicant.
SEBI has formulated the proposal staying mindful of the interest of public shareholders who face uncertain future after the commencement of CIRP process against a corporate debtor. The offer to public shareholders would depend on the quantity of shares acquired by the resolution applicant pursuant to the CIRP. For instance, if the applicant acquires 100% shares of the entity, he would be liable to offer a minimum of 25% shares to public shareholders and the minimum acceptance of such shares should be 5%. The new entity would be delisted in case the acquirer shareholding is more than 95%. However, in case the acquirer’s shareholding stands at 75% or below, there would not be a need to offer any share to the public shareholders as they would automatically have the remaining 25% of the shares.
The Need for Such Proposal
When a corporate debtor undergoes the CIRP, the axe always falls on the public equity holders of the company. They are at the bottom of the list when it comes to the claim on the asset of the corporate debtor. There have been several cases where the equity shareholders have suffered and their investment has plummeted to zero overnight after the application of the resolution plan approved by the committee of creditors. One such case is that of Dewan Housing Finance Corporation Limited (DHFL). In this case, after the CIRP, Piramal Capital Housing Finance Limited won the bidding and took over the DHFL, leading to the delisting of the company. This delisting wiped out thousands of equity shareholders without any consideration. In another important case of Ruchi Soya, the company was undergoing the CIRP when Patanjali Ayurveda won the bid to acquire the company. After successfully bidding for Ruchi Soya, Patanjali Ayurveda reduced the public equity shareholding to as low as 1%. The promoters of Patanjali Ayurveda almost acquired the 99% of the share. Consequently, the original shareholders of Ruchi Soya suffered a significant dent in their investment.
These are some of the instances which depict the precarious position of public equity shareholders when it comes to the insolvency resolution process of their concerned entities. These situations encouraged SEBI to formulate a plan which would incorporate the interest of these equity shareholders. However, whether this plan by SEBI ushers the corporate regime in the right direction is yet to be explored.
Validity of the Proposal
The framework gives safety net to the equity shareholders who are often side-lined during the CIRP. It is in compliance with the regulations of SCRR which mandates an MPS of 25%. Also, the amendments in the SCRR notified by the SEBI state that the company that is undergoing CIRP should bring the MPS up to 25% in 3 years since such fall in the shares. Furthermore, in case the public shareholding falls below 10%, the company should strive to attain the MPS of 10% within 12 months of the fall. In any case, the MPS should be above 5% for the company to remain listed.
Hence, it can be observed that the rule for the minimum public shareholding already existed to ensure better liquidity and opportunity to trade in the stock market. SEBI, through its latest framework, has only tried to ensure that the existing shareholders should get an opportunity to be part of the minimum threshold rule.
The framework on the protection of interests of the public equity holder of companies undergoing the CIRP is a pragmatic step by SEBI. It safeguards the interest of shareholders of the company undergoing the CIRP. Majority of shares of a company is usually acquired by the promoters of the company. The remaining is allotted to the public shareholders. These shareholders comprise small investors who put their hard-earned money in a company with an expectation of glorious return. It also comprises veteran investors who react with the condition of market and the performance of companies in which they invest. A company undergoing insolvency proceedings can impact the decision of its investors to a significant extent. In these situations, many small investors lose their investments.
The SEBI, with its framework, has only tried to address the concern of the shareholders. The step is pragmatic and would address the issue at hand. There usually are instances where pursuant to the CIRP, the debtor company gets acquired by a different company forming a new entity or debtor company being delisted owing to a significant reduction in value. Apart from this, there have been instances when the company gets liquidated. In such cases, small investors are unlikely to get their investments back as their claim lies at the bottom of the list. It is highly inequitable for those investors who lose their earnings overnight without any opportunity of representation in front of the committee of creditors. These shareholders provide cash inflow in the company as investments play a significant role in generating finances. There is a large number of evidence showing the importance of public investments in the company, access to large capital being the most prominent one of them all. However, until now, no remedy existed in favour of public equity shareholders in case the concerned company faces insolvency proceedings. The proposed framework addresses these concerns of the small investors and, in the author’s opinion, would go a long way in supporting the investors in case their companies undergo liquidation or delisting.