Minimum public holding in CIRP cases: Market-cap based dilution may benefit all

KS Badri Narayanan | Updated on September 28, 2020 Published on September 25, 2020

The Securities and Exchange Board of India recently came out with a consultation paper on minimum public shareholding norms for companies that are seeking relisting after a corporate insolvency resolution process (CIRP) under the Insolvency and Bankruptcy Code.

So far, six companies – Electrosteel Steels, Monnet Ispat & Energy, GB Global, Ruchi Soya Industries, Alok Industries and Bafna Pharmaceuticals – have been listed on the exchanges after CIRP; shares of Electrosteel Steels were delisted.


After the CIRP, public shareholding in the companies usually drop to low levels as in the case of Ruchi Soya which was acquired by Baba Ramdev-owned Patanjali Ayurveda.

Price swings

The public shareholding had decreased to 0.97 per cent and as the stock attracted a fresh set of buyers on recovery hopes, the stock price zoomed 8,764 per cent in spite of additional preventive surveillance actions by the stock exchanges including reduction in price band and moving the scrip into the trade for trade segment. The stock sky-rocketed from around ₹18 from January end to ₹1,519 by June end. Currently, the stock is ruling around ₹420.

Similarly, the stock of Alok Industries, acquired by Reliance Industries, surged from ₹3.80 to a high of ₹58.50 within three months in July. Since then, the stock has been on a decline and is currently ruling at ₹22.

“Low (public) float… prohibits healthy participation in trading of such companies majorly due to issues related to demand and supply gap of shares,” the consultation paper said.

Currently, companies have three years time to meet the minimum public holding of 25 per cent if it falls below 25 per cent, but stays above 10 per cent. If the shareholding drops below 10 per cent, companies need to achieve a 10 per cent public shareholding within 18 months.

In the light of these experiences, SEBI has come out with a paper to prevent stock price manipulation and volatility in trading of shares post relisting.

SEBI’s 3 options

The market regulator has suggested three proposals in the paper for CIRP companies to comply with the minimum public shareholding norm of 25 per cent. One option is making companies to have at least 10 per cent public holding for relisting and achieve 25 per cent over three years. The second option is allowing relisting with a minimum 5 per cent public shareholding and raise it to 10 per cent and 25 per cent over one and three years respectively. the third option would give the company time of six months to raise public shareholding to 10 per cent and three years to raise it to 25 per cent.

Instead of uniform norms for all, SEBI could consider options based on market capitalisation. Shares with less than ₹50 crore market capitalisation can be allowed to gradually increase public shareholding from 2 per cent to 5 per cent to 10 per cent and then eventually to 25 per cent. For companies between ₹50 crore and ₹500 rore, the second option may be considered i.e. 5 per cent minimum public holding at the time of relisting. For over ₹500 crore, SEBI can consider direct relisting with 10 per cent holding.

SEBI’s other proposals on disclosure requirements such as details of funds infused and creditors paid off under the insolvency resolution, and provide details of additional liabilities on the incoming investors due to the transaction or source of funding are welcome.

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Published on September 25, 2020
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