September 2020
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Sebi proposes to relax minimum public shareholding norms for firms under insolvency
New Delhi: Markets regulator Sebi on Wednesday proposed relaxation in norms pertaining to 25 per cent minimum public shareholding for companies which undergo corporate insolvency resolution and seek relisting following the process.

Besides, it proposed enhanced disclosure for such companies.

Sebi said it is possible that pursuant to implementation of the resolution plan, the public shareholding in such companies may drop to abysmally low levels.

In fact, in one recent case it was observed that post corporate insolvency resolution process (CIRP), the public holding decreased to 0.97 per cent, and it showed 8,764 per cent jump in share price in spite of additional preventive surveillance actions, including reduction in price band and moving the scrip into trade for trade segment.

According to Sebi, such low public shareholding raises multiple concerns like failure of fair discovery of price of the scrip and need for increased surveillance measures and may therefore be a red flag for future cases.

Low float also prohibits healthy participation in trading of such companies majorly due to issues related to demand and supply gap of shares, the regulator added.

Accordingly, the regulator has proposed recalibration of threshold for minimum public shareholding (MPS) norms in companies which undergo CIRP and seek relisting of shares pursuant to implementation of the approved resolution plan.

It has sought views of public and market intermediaries till September 18 in this regard.

It has been suggested that post-CIRP companies may be mandated to achieve at least 10 per cent public shareholding within six months and 25 per cent within three years from the date of breach of MPS norm.

Currently, the norms mandate that in case public holding of such company falls below 10 per cent, then the same will be increased to at least 10 per cent within 18 months and 25 per cent within three years.

Another option which has been suggested is that post-CIRP companies may be mandated to have at least 5 per cent public shareholding at the time of relisting. Such firms may be provided 12 months to achieve public holding of 10 per cent and further 24 months to achieve public shareholding of 25 per cent.

Post-CIRP companies may also be mandated to have at least 10 per cent public shareholding at the time of relisting. Such firms may be provided three years to achieve minimum public shareholding of 25 per cent.

Such exemptions are not considered in case of companies which seek listing pursuant to a scheme of arrangement.

Sebi said the rationale for providing such exemptions only to Insolvency and Bankruptcy Code (IBC) cases was to ensure revival of the corporate debtor pursuant to resolution plan and also to provide any listing gains over the next three years to shareholders of the corporate debtor.

While the revival of corporate debtor is essential for all stakeholders, it is also imperative to maintain market integrity in respect of such companies.

Typically, in view of preferential issuance of shares to the incoming investor/promoter under the resolution plan, such shares would be under lock-in for at least one year.

Thus, achieving MPS compliance through means involving off-loading of shares by the incoming investor/ promoter within one year is not possible, Sebi said.

Accordingly, the regulator said it should be permitted to free such shares from lock-in so as to help achieve MPS.

Another aspect regarding post-CIRP cases is the details of disclosures made pursuant to the approval of resolution plan and aiding the price discovery mechanism in relisting post such cases, Sebi said.

Such firms should make disclosures about pre and post net-worth of the company, detailed pre and post shareholding pattern assuming 100 per cent conversion and details of funds infused and creditors paid-off.

Besides, they need to disclose about additional liability on the incoming investors due to the transaction or source of funding, names of the new promoters, key managerial persons and past experience in the business, among others.

Such disclosures could be crucial for public shareholders in ascertaining the actual value of shares on re-listing pursuant to implementation of the resolution plan, it added.

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