SEBI Amends Public Shareholding Norms For Insolvent Companies, Mutual Fund And FPO Regulations
The SEBI building in Mumbai. (Source: BloombergQuint)

SEBI Amends Public Shareholding Norms For Insolvent Companies, Mutual Fund And FPO Regulations

Chastened by the over 6,200% rise in the shares of insolvent Ruchi Soya, India’s market regulator has approved a change in minimum public shareholding norms for companies undergoing insolvency resolution.

The SEBI board has approved a minimum threshold of 5% public shareholding for listed companies at the time of their readmission for dealing on a stock exchange pursuant to a resolution plan approved under the Insolvency and Bankruptcy Code.

The Securities and Exchange Board of India, in its board meeting held today, has also approved changes in the regulations governing eligibility criteria and net worth of mutual funds, investment advisors and lock in period for promoters of issuers making a further public offer.

Here are the key changes approved by SEBI’s board....

Minimum Public Shareholding For Companies Undergoing CIRP

SEBI’s listing regulations require a listed insolvent company to maintain a minimum public shareholding. Presently, if the public shareholding in a such company falls below 10% during the corporate insolvency resolution process, a listed entity must bring it back to 10% within 18 months and 25% within 36 months.

However, the law does not prescribe any minimum public shareholding required immediately at the time of its re-admission for trading on a stock exchange. Like had happened with Ruchi Soya Industries Ltd. and a few others, the post relisting illiquidity or lack of a public float has sometimes artificially boosted share prices prompting a regulatory review.

To address such situations, SEBI has now proposed that:

  • Companies which continue to remain listed pursuant to a resolution plan must have at least 5% public shareholding at the time of their re-admission on a stock exchange.
  • Public shareholding must be at least 10 % within 12 months and 25% within 36 months after re-admission of the company’s shares on a stock exchange.
  • Lock-in period on equity shares allotted to a resolution applicant will not apply with respect to achievement of minimum public shareholding.
  • And lastly, such companies will be required to make additional disclosures relating to material liabilities imposed on a company or securities imposed on its assets.

Poornima Advani, managing partner at the law firm The Law Point, said that the changes are welcome. The amendment will help curb extreme inflation in the stock price of companies undergoing CIRP, she said. The period of 36 months to meet public shareholding of 25% will provide room for the company to ensure that it achieves those parameters where it is considered healthy, she added.

Manan Lahoty, partner at the law firm IndusLaw agreed. The change seeks to bring in a greater balance between providing flexibility for resolution process and to the incoming promoter along with safeguarding the interest of public investors and integrity of markets, he said.

Quite significantly, SEBI seems to be consistently drawing 5% float as the new baseline – which has also been recently mooted as the minimum float for IPOs by large companies. The timeframe to reach 10% and 25% may create conflict in case the resolution plan relates to a large company.
Manan Lahoty, Partner, IndusLaw

Changes In Mutual Fund Regulations

With an intent to promote innovation in mutual funds while safeguarding unitholders, SEBI has amended norms relating to eligibility criteria, net worth and segregation of a mutual fund’s assets.

As per the Mutual Fund regulations, any company intending to sponsor a mutual fund must have earned profits for at least 3 of the preceding five years, along with a positive net worth. However, some companies, especially startups such as Paytm and other fintech companies, may not meet the profitability criteria.

To address such situations, SEBI has now allowed a company to sponsor a mutual fund if it has a net worth of Rs 100 crore or more. Such companies must maintain the net worth till the asset management company earns profit for a consecutive period of 5 years.

The market regulator has also given a nod to a proposal which would require mutual funds to segregate and ring fence assets and liabilities of each scheme along with the existing requirement of segregating bank accounts and securities accounts.

This will aid transparency, limit losses on account of illiquid or bad assets to a particular scheme. It will also prevent funds from surreptitiously transferring such bad assets to prevent disclosure.

In a favorable move for investors, the market regulator has approved reduction of the maximum permissible exit load on mutual fund schemes and timeline for payment of dividends.

Yash Ashar, head for capital markets practice at law firm Cyril Amarchand Mangaldas & Co., told BloombergQuint that the changes will enable greater participation in sponsorship for mutual funds and put in place additional safety measures along with various procedural changes aimed at streamlining the operations of mutual funds.

Relaxations In Lock-in Period for Promoters

Another important change approved by the market regulator pertains to the removal of minimum promoter contribution and subsequent lock in requirements for issuers who intend to make a further public offer (FPO).

SEBI regulations currently require the promoter of an issuer to make a minimum contribution which is locked in a for a prescribed period. SEBI has relaxed this requirement for issuers if it meets the following criteria:

  • Issuer’s equity shares must have been frequently traded on a stock exchange for at least three years.
  • It must have been compliant with the listing regulations for three years and resolved at least 95% of the complaints received from investors.
These changes may make FPOs more attractive to listed companies,  and are available only to those that have shown a track record of good corporate governance and public dissemination of information. As such ,it is a welcome change which may lead to some FPOs taking place, which have been few and far between.
Yash Ashar, Partner & Head - Capital Markets, Cyril Amarchand Mangaldas

IndusLaw’s Lahoty explained that with the effective removal of minimum promoters’ contribution, SEBI has moved towards converging regulation for rights issues and FPOs, which will help more companies, especially those not having a track-record of distributing dividends, to consider FPOs as an option without relying on promoters’ willingness to invest more or being locked for a long time.

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