SEBI’s higher float proposal for IBC firms could run into hurdles

Under Securities and Exchange Board of India (SEBI) norms listed companies need to have atleast 25% of Minimum Public Shareholding (MPS). But for companies which undergo an insolvency resolution under the Insolvency and Bankruptcy Code (IBC) are granted a relaxation from this rule.

Based on the recommendation of primary markets advisory committee (PMAC), SEBI suggested three other options.

In a discussion paper titled ‘Recalibration of threshold for MPS norms, enhanced disclosures in Corporate Insolvency Resolution Process (CIRP) cases’, SEBI has proposed that companies should achieve at least 10% MPS within six months of re-listing. Currently the time frame is 18 months.

The regulator said that these relaxations for IBC cases was given to ensure revival of the company and accord it some listing gains. SEBI also proposed increasing disclosures of the resolution plan. According to SEBI, the disclosures should include shares allotted to income investor, source of funds, impact on existing shareholders, pre and post networth and shareholding of the company, names of promoters and key managerial personnel among others.

The regulator held that this information ‘may’ be crucial for public shareholders in ascertaining the actual value of shares on re-listing pursuant to CIRP.

The SEBI’s proposal to have at least 10% free-float for companies relisting after the insolvency proceedings could run into implementational difficulties according to several legal experts. Many experts plan to highlight the challenges in implementing all three options recommended by the SEBI in a discussion paper last week.

The second option given by SEBI is to entail companies to make sure they have 5% MPS post relisting, which needs to be hiked to 10% within a year and 25% in next two years. The third option entails companies having at least 10% public float at the time of relisting of their shares and 25% thereafter in three years.

According to experts, all the three options pose challenges for companies which are just out of CIRP. They feel that achieving any level of MPS is always a challenge. Even normal companies struggle achieving the MPS over the years and SEBI gives extension of the deadline in certain cases. In case of a CIRP company, the challenges would be even more, since the shareholders would need to have the risk appetite to invest in such a company.

SEBI’s relook at the MPS norms comes in the wake of stock movement observed in Ruchi Soya’s share after it relisted in January this year. Experts feel that the markets regulator would certainly need to re-look at the proposed timelines. The move to seek higher float was triggered by eye-popping rise in shares of Ruchi Soya Industries. The company’s shares had surged more than 450 times after it got relisted following the acquisition by Pantanjali Ayurved under the CIRP. Upon relisting, the company had less than 1% shareholding with the public.

Current regulations mandate one-year lock-in on incoming promoter shares. SEBI, however, has proposed to relax this rule.

Some experts also feel that there is scope for misuse if the new proposals are implemented. They felt that doing away with the lock-in requirements of one year may not be good option considering that there will be chances of increase in resolution bids by participants who want to purchase stressed companies at cheap prices to only sell them immediately after relisting without any restriction which may effectively fail the entire process of resolution under IBC.