The Insolvency and Bankruptcy Code (IBC), 2016 seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy. The Corporate Insolvency Resolution Process (CIRP), detailed in Chapter II of the IBC, is the process through which resolution of insolvency of a corporate debtor is undertaken in accordance with the provisions of the IBC.
Under the IBC framework, when a company is undergoing CIRP, the board of directors of the company stands suspended and all powers of management of the company are vested in a ‘Resolution Professional’ (‘RP’). Section 30(2)(e) of the Insolvency and Bankruptcy Code stipulates that the resolution plan should be compliant with all the existing provisions of law. Accordingly, the regulations prescribed by Security and Exchange Board Of India (SEBI) need to be adhered to while contemplating and implementing a resolution plan.
Where the corporate debtor is a listed entity, certain regulations of SEBI might impose cumbersome obligations upon newly reconstituted entities. SEBI has proposed several disclosure requirements that listed corporate entities undergoing CIRP would be subject to. Market regulator Securities and Exchange Board of India (SEBI) has recently tweaked the 25 percent Minimum Public Shareholding (MPS) requirement for companies undergoing insolvency process.
The capital markets regulator has also segregated assets as well as liabilities of mutual funds and eased norms governing promoter participation in follow-on public offers. Under the new norms by SEBI, after the Corporate Insolvency and Resolution Process (CIRP), companies would have to maintain a minimum of 5 per cent public shareholding at the time of their beginning of trading on the stock exchanges.
The applicability of minimum contribution from promoters and subsequent lock-in requirement would not be applicable on Further Public Offer (FPO). Modifying the public shareholding norms would secure the revival of the corporate debtor pursuant to the resolution plan and will provide any listing gains over the next three years to shareholders.
In a recently released consultation paper, titled ‘Recalibration of threshold for minimum public shareholding norms, enhanced disclosures in corporate insolvency resolution process (CIRP) cases’. SEBI has provided sufficient float in listed entity Post- Corporate Insolvency Resolution process (CIRP). SEBI took this step after the recent case of Ruchi Soya, where the share price of the company having public shareholding of 0.97% was increased by 8,929% within 5 months of re-listing after it was acquired by Patanjali Ayurved pursuant to the resolution plan approved under the Insolvency and Bankruptcy Code, 2016 (IBC).
SEBI has also highlighted the low float barring healthy participation in trading of companies, due to the demand-supply gap of shares. SEBI on 19 August 2020, had proposed the following three changes to the existing MPS norms for companies aspiring to re-list post CIRP:
- SEBI seeks to reduce the time period specified under Rule 19A of Securities Contract Regulation Rules, 1957 (SCRR), from 18 months to 6 months, in order to attain 10% MPS from the date of the fall.
- Further, SEBI requires at least 5% MPS, for companies post-CIRP, at time of relisting subsequent to which they would also be given 12 months to raise the MPS to 10% & then another 24 months to raise it to 25%.
- Finally, SEBI provides an option to the companies who wish to relist post-CIRP, to have at least 10% at the time of relisting which could be raised to 25% in the next 3 years from such fall.
Regulation 38 of the Listing regulations requires a listed entity to comply with the Minimum Public Shareholding requirements as specified in Rule 19(2) and Rule 19A of the Securities Contracts (Regulation) Rules, 1957. However, this provision does not apply to entities listed on institutional trading platforms without making a public issue.
The term ”public shareholding” as defined in rule 2(e) of the Securities Contracts (Regulation) Rules, 1957 means, equity shares of the company held by the public including shares underlying the depository receipts, if the holder of such depository receipts has the right to issue voting instructions and such depository receipts are listed on an international exchange in accordance with the Depository receipts Scheme, 2014.
Clause (b) of sub-rule (2) of rule 19 of the Securities Contracts (Regulation) Rules, 1957 (SCRR) lays down limits of minimum offer and allotment to the public and Rule 19A lays down the requirement of maintaining minimum public shareholding at 25 percent. SEBI also specifies the manner of achieving the minimum level of public shareholding in regulation 38 of the Listing Regulations read with rule 19(2)(b) and rule 19A of the Securities Contracts (Regulation) Rules, 1957.
Non-Compliance with the minimum public shareholding requirements may attract penal action. A fine of Rs. 5,000 per day of non-compliance may be imposed on the listed entity till the date of compliance. In case, the listed entity continues to be non-compliant for a period of more than one year an increased fine of Rs. 10,000 per day of non-compliance shall be imposed till the date of compliance. SEBI also imposes penalties to the company which is non-compliant by freezing the promoter shares and barring promoters from any directorships.
The MPS rule ensures better liquidity, price discovery and governance in the stock market. After the newly released stricter norms, all assets and liabilities of each scheme shall be segregated and ring-fenced from other schemes of the mutual fund in addition to the existing requirement of segregating bank accounts and securities accounts.
Currently, companies undergoing a resolution process under the Insolvency and Bankruptcy Process are required to bring the public shareholding to at least 10% within 18 months and to 25% within 36 months of relisting. This will ensure such companies meet SEBI’s minimum public shareholding norm of 25% applicable to all listed companies.
The lock-in requirement on equity shares allotted to a resolution applicant will not be applicable to achieve the norm of 10% minimum public shareholding within 12 months. For the mutual fund segment, the SEBI has relaxed the profitability criteria and mandated a minimum Rs 100 crore net worth requirement for entities to become sponsors of mutual funds.
An insolvency professional shall exercise reasonable care and diligence and take all necessary steps to ensure that the corporate person undergoing any process under IBC complies with the applicable laws. Due diligence is a process undertaken usually by an acquiring/purchasing entity with or without the assistance of the experts in order to evaluate the target entity’s business, capabilities, assets as well as financial performance.
A director of the corporate debtor who knew or ought to have known before commencing the procedure that there was no prospect to avoid insolvency, failed to undertake necessary due diligence and minimise the potential losses is not excused. The director may have to make contributions to the corporate debtor’s assets as the tribunal sees fit.
If it is ascertained during the insolvency resolution process or liquidation process that, before the commencement of insolvency, a director of the corporate debtor failed to undertake due diligence to minimize potential loss to creditors, such director may be obliged by the tribunal to make such contributions to the assets of the corporate debtor as the tribunal deems fit.
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