Trading Suspension For Insolvent Companies If Resolution Plan Reduces Equity To Zero

National Stock Exchange of India Ltd. (NSE) building in Mumbai, India (Photographer: Dhiraj Singh/Bloomberg)

Trading Suspension For Insolvent Companies If Resolution Plan Reduces Equity To Zero

The National Stock Exchange and Bombay Stock Exchange have outlined key steps to bring more transparency and timely data to investors in companies undergoing insolvency resolution. These range from issuing a guidance note to insolvent companies and resolution professionals to tagging companies under insolvency resolution and even suspending their shares in certain circumstances.

The NSE has directed the following actions:

Immediate Disclosure Of Approval Of Resolution Plan

While SEBI regulations require certain disclosures, the exchange has noticed time gaps in some price-sensitive disclosures.

Typically, there is a time lag between when the NCLT's oral order approving a resolution plan is pronounced in open court and the detailed written order is issued. Companies usually make the disclosure to stock exchanges only when the written order is received. "By this time, the information may be available to a select group of people and may create information asymmetry and confusion in the market," the NSE statement notes.

To rectify this, NSE will issue a guidance note to insolvent companies and their resolution professionals directing:

  • Disclosure of approval of resolution plan to stock exchanges within 30 minutes of oral pronouncement of order or otherwise.

  • Disclosure of any impact on existing holders and investors of listed securities. This includes status of listing, the value of holding of existing holders, and whether any security is being written off cancelled or extinguished without any payment to such holders.

  • Confidentiality of resolution plan to be maintained until details not submitted on the exchanges.

The BSE has also issued a similar guidance note on its website. In addition to the disclosures mandated by NSE, the BSE also requires prior intimation of at least two working days of the NCLT hearing date where the resolution plan will be considered.

Insolvent Company Scrip To Be Tagged

To ensure that the investors are aware of the status of the company and able to exercise due diligence while trading, the NSE will identify and tag the security of an company admitted into insolvency.

The list of securities so tagged will also be available on the exchange website.

The exchange will alert at the time of order entry, informing market participants that the security is in insolvency resolution. Members have also been advised to incorporate this alert in their front-end systems.

The alert will be available from the day of admission into insolvency till the day of suspension of the company or conclusion of insolvency resolution process.

Suspension of Trading

Trading in shares of insolvent companies will be suspended immediately upon approval of resolution plan, if under the approved resolution plan:

  • Value of the listed securities is considered zero and company will be delisted; or

  • The entire equity capital is reduced, cancelled or extinguished without payment to the existing equity shareholders.

The suspension will take effect on immediate basis once the oral order approving the resolution plan is informed by the company or the resolution professional to the stock exchange.

While only the NSE mentions this in its statement, it makes clear that the exchanges will take coordinated action.

"...Exchanges in coordination with each other, based on the intimation of the oral order from the Company/RP confirming the aforesaid provision in the Resolution Plan, shall suspend the trading in the company on immediate basis." - NSE statement

Non-compliances with the above directions will be reported to SEBI for further action, said the NSE statement.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.