The SEBI Bhavan, Head Office of Securities and Exchange Board of India in Mumbai (Photographer: Jimmy Vikas)

Insolvent Companies: SEBI Makes Way For Easier Delisting 

In a move that will bring relief and clarity to acquirers of insolvent companies, SEBI has said these companies can be delisted without following the prescribed methods under its delisting regulations.

The Securities and Exchange Board of India notification has exempted companies facing insolvency proceedings under the Insolvency and Bankruptcy Code, 2016, only if the resolution plan

  • Lays down any specific procedure to complete delisting of shares, OR
  • Provides an exit option to existing public shareholders at a price specified in the resolution plan.

The exemption will be available to those resolution plans that explicitly mention delisting and all shareholders should exit at the same price, explained Sourav Mallik, joint managing director at Kotak Investment Banking.

According to the notification, the exit price will be liquidation value minus the dues that need to be paid as per the priority laid down under the insolvency code.

Exit to the shareholders should be at a price which shall not be less than the liquidation value as determined under the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 after paying off dues in the order of priority as defined under Section 53 of the Insolvency and Bankruptcy Code. 
Gazette Notification

By linking the exit price for shareholders with the liquidation value of the company, the amendment reinforces the concept of erosion of shareholder’s value in an insolvent company, Anshul Jain, a corporate law partner at Luthra & Luthra pointed out.

It effectively means that equity shareholders will get something only after all the dues of the creditors have been paid, and if there is anything left in the company as they come at the end of the waterfall. In almost all the cases under insolvency code, the liquidation value due to them may usually be nil, which thereby implies that a resolution applicant can seek delisting and take out all the shareholders by paying nothing to them. 
Anshul Jain, Partner, Luthra & Luthra

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But if the existing promoters or any other shareholders are given an opportunity to exit at a price, by whatever name called, that is higher than this price, it will apply to public shareholders as well, the notification states.

The pivotal principle in SEBI’s regulations is that public shareholders should never be worse off than any other shareholder and that’s what the regulator has done here, Mallik said.

You now have full flexibility in terms of corporate restructuring and if the court has approved a scheme whereby the principal shareholder is receiving a certain consideration, SEBI is saying the public shareholder should receive the same consideration. 
Sourav Mallik, Joint Managing Director, Kotak Investment Banking

By that logic, if the principal shareholder or banks are receiving no consideration, then there’s no reason why a public shareholder should get anything, Mallik said. The debt-holders have the first charge on the cash flows of the company and if he is not getting paid in full, then the equity shareholders cannot stand to receive anything.

The intention to delist an insolvent company, along with the justification for exit price, will need to be disclosed to the stock exchanges within one day of the resolution plan being approved, the notification says.

SEBI’s current delisting regulations require price discovery via reverse book building and impose other conditions such as shareholder approval. And while the regulations did provide a similar exemption to sick industrial companies as per earlier provisions of law, no modification had been made to include resolution plans under the IBC.

This exemption from delisting regulations will provide bidders – vying for listed companies under insolvency – relief from considerations in relation to timing, pricing and process practicalities for the delisting of the target entities; these changes were awaited and are welcome, Nilang Desai, an insolvency law partner at AZB said.

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