When Ruchi Soya Ltd. emerged from the insolvency process, the successful resolution applicant Patanjali Ayurved Ltd. ended up with a 99.03% stake in it. With a free float of less than 1%, Ruchi Soya saw an 8,000% increase in stock price despite trading restrictions imposed by the regulator.
Instances such as these prompted the Securities and Exchange Board of India to tighten its minimum public shareholding norms for listed companies which have seen a resolution under the insolvency law. And so, in December last year, SEBI laid down a minimum 5% public shareholding requirement for listed companies post the insolvency process. The regulator's proposal has now been notified.
Also Read: SEBI Amends Public Shareholding Norms For Insolvent Companies, Mutual Fund And FPO Regulations
Absence of a minimum public holding threshold, in cases where listed companies were revived post insolvency, resulted in inadequate price discovery, said Vishwas Panjiar, partner at Nangia Anderson.
Moin Ladha, partner at Khaitan & Co. concurred and said the 5% public shareholding requirement is likely to safeguard the public shareholders rights.
There is no clarity on how this 5% requirement will be met though. One possibility is that an exit option be given to shareholders. And the remaining shareholding can then be granted shares on a proportionate basis to meet the 5% level. It will really depend on the facts of each case.Moin Ladha, Partner, Khaitan & Co.
The requirement could translate into successful resolution applicants opting to delist the company post insolvency, experts pointed out.
The limit of 5% constrains the acquirers’ flexibility to optimally structure the capital of the company. They may have to now attribute some to the existing equity capital more than it is actually worth in insolvency, as the liquidation of equity is nil in most cases.Gaurav Gupte, Partner, Cyril Amarchand Mangaldas
A resolution plan, Gupte said, that does not comply with the initial 5% public shareholding requirement will not be approved by the company law tribunal. This may encourage successful bidders to delist the company after cancelling all of the existing equity shares which is permissible in insolvency proceedings, Gupte added.
In addition to mandating a compulsory minimum public float immediately after insolvency, SEBI has also crunched timelines to achieve a higher public shareholding.
So far, post insolvency resolution, a company had 18 months to achieve public shareholding of 10%. This has now been reduced to 12 months. And the statutory public shareholding of 25% will have to be achieved in 36 months.
Any failure to further increase public shareholding within the prescribed periods could invite penalties, freezing of promoter’s shareholdings or disqualification of directors, Gupte said.
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