[Sambhawi Sanghmitra is a student at Chanakya National Law University, Patna, and Vijay Rohan Krishna is a student at National University of Study and Research in Law, Ranchi.]
With a low public shareholding of 0.97%, the share price of Ruchi Soya increased by 8,929% within 5 months of relisting after it was acquired by Patanjali Ayurved pursuant to the resolution plan approved under the Insolvency and Bankruptcy Code 2016 (IBC). In light of the above, on 19 August 2020, the Securities and Exchange Board of India (SEBI) released a consultation paper titled ‘Recalibration of threshold for minimum public shareholding norms, enhanced disclosures in corporate insolvency resolution process (CIRP) cases’.
This article discusses the recommendations of the consultation paper and delves into the efficacy of these recommendations.
Curious Case of Ruchi Soya
After Patanjali’s acquisition in December 2019, the shares of Ruchi Soya were relisted on 27 January 2020 at INR 17/share. In only 5 months, its share price increased by 8,929% to INR 1,535/share on 29 June 2020. However, it witnessed a decrease in its share price ever since it peaked.
The hike in Ruchi Soya’s share price can be best explained by Courlborn’s statement, “too much money chasing too few goods”. Despite the adoption of surveillance measures by SEBI such as the reduction in price band and shifting the share to trade-to-trade segment, the share price increased by 8,329%. The market capitalization of Ruchi Soya changed from INR 4,350 crore to INR 45,000 crore in just 5 months because the low public float created an artificial demand for its shares which increased its share price and market capitalization.
Extant Regulatory Relaxations in IBC Cases
Rule 19A of the Securities Contracts (Regulation) Rules 1957 (SCRR) stipulates that every listed company has to maintain 25% Minimum Public Shareholding (MPS). However, Regulation 3(2) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 (Takeover Regulations) provides that pursuant to the approved resolution plan, a buyer can acquire more than 75% in a company, i.e., more than the maximum permissible limit for non-public shareholding.
In line with Regulation 3(2) of the Takeover Regulations, Regulation 19A(5) of SCRR provides that if the public shareholding falls below 10% due to implementation of the approved resolution plan under IBC, then the listed company will have to increase the MPS to 10% in 18 months and then to 25% in 3 years.
Proposed Changes in MPS Norms
As per SEBI’s consultation paper, the Primary Market Advisory Committee (PMAC) has recommended three options to deal with the issue of MPS for firms seeking to relist after CIRP.
The first option proposes that the period of 18 months stipulated in Rule 19A (5) of SCRR should be reduced to 6 months to achieve 10% MPS from the date of the fall in MPS. The second option recommends that companies post-CIRP may be mandated to have at least 5% MPS at the time of relisting. Then it may be provided 12 months to increase the MPS to 10% and then another 24 months to increase it to 25%. The third option proposes that post-CIRP companies may be required to have at least 10% MPS at the time of relisting and then it can be increased to 25% in 3 years.
Exemption from Lock-In Period
Regulation 167(1) of SEBI (Issuer of Capital and Disclosure) Requirements 2018 (ICDR) provides that in case of preferential issue of shares to the incoming promoter under the resolution plan, the shares allotted in excess of 20% of the total share capital will remain under a lock-in period of at least one year.
The paper proposes that this lock-in period of one year should be discontinued so that immediate MPS compliance can be achieved by means of diluting or off-loading the shares of the incoming investor in the secondary market. This relaxation will free-up the shares of the incoming promoter from the lock-in period of one year and enable the incoming promoter to sell its shares to meet the MPS requirement.
Clause 16(k) of Part A of Schedule III to Regulation 30 of SEBI Listing Obligations And Disclosure Requirements Regulations 2015 (LODR) mandates only the disclosure of the salient features, not involving commercial secrets, of the resolution plan approved by NCLT. The paper stresses the need for a standardized reporting framework and mandates enhanced disclosures to help the public shareholders determine the actual price of the share of the debtor upon relisting.
Efficacy of the Proposed MPS Norms
Both private and public companies find it difficult to comply with MPS norms. Recently, SEBI granted an extension yet again for the fourth time to PSUs to comply with the 25% MPS norm. SEBI has also fined multiple private sector units for the delay in MPS compliance.
In light of the above, it becomes all the more difficult for companies to achieve MPS compliance after CIRP due to the fall in market value and risk factor associated with such companies which inhibits public investment. Factors like future liquidity of the shares, pricing of shares at the right price and volume of the relevant scrips need to be taken into consideration. For instance, due to inadequate demand, Tata Teleservices had to lower its floor price to sell 5.16 crores of its shares only to achieve 25% MPS.
The share price of Ruchi Soya increased by 8,929% only in 5 months, i.e., during the lock-in period of one year. So the first option can easily be manipulated as a company can have low public float during the 6 month period and then, with the lock-in period exemption, the promoter can dilute its shares to reach 10% MPS after 6 months. Therefore, compliance with a prescribed MPS is necessitated at the time of relisting itself. Further, as discussed above, a period of 6 months may not be enough for post-CIRP companies to achieve 10% MPS.
The third option which requires 10% MPS at the time of relisting may be too idealistic for most of the companies post-CIRP because of the low market value of such firms after insolvency. This option may be difficult to achieve for firms with a high volume of scrips and it also favours firms which are associated with strong brand value. For example, the once-bankrupt Alok Industries witnessed an increase in buy-orders and its share price increased by 330% in just 4 months after 37.7% of its stake was acquired by the big-shot Reliance Industries. The firm may have to reduce its floor price to comply with higher MPS. Also, sudden dilution of significant promoter shareholding may lead to high volatility of such shares.
The second option which requires 5% MPS at the time of relisting is the best option among the three options because the low 5% MPS requirement at the time of relisting will incentivize the firms to stay listed and a higher MPS threshold may prompt the company to opt for total delisting. The consultation paper shows that only 6 companies opted for relisting after CIRP (Annexure 2). The second option is also favourable for the post-CIRP companies because SEBI has been quite strict when it comes to MPS compliance which can also be a factor for the companies to opt for total delisting. For instance, in the matter of Tea Time Limited, SEBI imposed a penalty on the noticees for the delay in MPS compliance without taking into consideration the lack of investors and the deteriorating market conditions.
Although the 5% MPS may not be enough to address the concerns associated with the low public float it will not be too difficult to achieve at the time of relisting, especially considering the lock-in period exemption. Moreover, the gradual increase from 5% to 10% MPS in a year and then to 25% MPS in another two years does not burden the firm with higher MPS at the time of relisting, especially when the firm is looking at restarting operations after CIRP. The low 5% MPS requirement also favours companies with a high volume of shares as a lower dilution of shares will not cause volatility and it will not have to reduce the share price only to comply with a higher MPS. The current provisions enable a company to achieve 10% MPS in 18 months but the second option mandates 5% MPS at the time of relisting and then increase it to 10% MPS in a year, i.e., 15% MPS in 12 months. Therefore, the second option strikes a balance between the first and the third options as it necessitates 5% MPS at the time of relisting itself but at the same time does not burden the company with a higher 10% MPS on relisting.
Low public float affects the market integrity of companies and curtails equal access to the market. The case of Ruchi Soya has definitely raised a red flag for future cases and has necessitated the need to reconsider MPS norms for cases under IBC. The recommendations are a step in the right direction as they aim to strike a balance between the revival of the corporate debtor and the rights of the public shareholders and are likely to promote price discovery and market integrity.