SEBI Proposes Minority Shareholder Participation In Bankruptcy Process

Insolvency regime is disadvantageous to minority shareholders, SEBI says, while proposing their participation in the new entity.

<div class="paragraphs"><p>SEBI building in Mumbai. (Photo: Shailesh Andrade/Reuters)</p></div>
SEBI building in Mumbai. (Photo: Shailesh Andrade/Reuters)

The Securities and Exchange Board of India has proposed in a consultation paper that public shareholders should be able to buy shares in the restructured entity at the same price as the resolution applicant.

The regulator's proposal has been prompted by numerous grievances from public shareholders of listed companies. Currently, the resolution process can result in the company getting delisted or continuing to be listed but with a significant reduction in capital.

This has proved disadvantageous to minority shareholders, the regulator has noted.

Small shareholders often fail to get appropriate value for their shares when big players acquire companies at throw away prices. Moreover, no intimation is made to them prior to delisting, rejecting them of even an opportunity to present their case before the committee of creditors.
SEBI Consultation Paper
Attention Shareholders Of Insolvent Companies - Here’s What Your Paper’s Worth

According to SEBI, this situation can be rectified by making the following amendments:

  • Non-promoter public shareholders should be allowed to acquire up to 25% of the restructured entity on the same pricing terms as the resolution applicant.

  • The new entity should attempt to achieve at least 5% public shareholding in the process.

  • The resolution plan must specify that the restructured entity will be allowed to be listed only if 5% of the fully diluted capital structure of the new entity is held by public shareholders.

  • If the successful bidder fails to get 5% public shareholding, it must delist after the cancellation of the offer made to the existing public equity shareholders. The entity must refund the amounts received from public equity shareholders before proceeding with the insolvency process.

The entire process of offering to the existing public shareholders to acquire the shares of the new resultant entity would be tech enabled at exchanges in a manner to ensure that the speed of resolution process is not adversely impacted...
SEBI Consultation Paper
Insolvent Companies: SEBI Makes Way For Easier Delisting 

The regulator has also proposed amending the current exemption under the Delisting Regulations available to listed companies facing insolvency. As per the proposal, insolvent companies should be allowed to delist without following the prescribed methods under the delisting regulations only if:

  • It's going into liquidation pursuant to CIRP, or

  • where the public shareholding remains less than 5% even after they've been given an opportunity to acquire shares, on the same pricing terms as the bidder, in the restructured entity.

According to the SEBI Consultation Paper, "The proposal aims to provide an opportunity for minority shareholders to participate in the resolution process on the same pricing terms as available to the resolution applicant ( up to a maximum of 25%)."

The regulator has pointed out that so far, 28 listed companies have ended in liquidation under insolvency law; 52 have been delisted post-approval of the resolution plan, and 23 have continued to be listed.

SEBI has asked stakeholders to share comments by Nov. 24.