Minimum public holding norm: Drawing investors to relisting IBC firms will be a challenge, say experts

The consultation paper of SEBI on achieving minimum public shareholding of 25 per cent in companies relisting after insolvency process raises the issue of finding investors and the risks they will be exposed to, say experts.

SEBI has proposed three options including 10 per cent public shareholding at the time of relisting post-CIRP; two, achieve the 10 per cent limit within six months against the 18 months currently allowed, and, three, have 5 per cent minimum public float post relisting and raise it to 10 per cent in 12 months and further to 25 per cent in next 24 months.

Darshan Upadhyay, Managing Partner, Stratage Law Partners, said the main concern of new promoters of companies coming out of insolvency is the practical challenges in implementing any of the three SEBI options within the given timeline. It has always been difficult to find enough market interest for divestment to increase the public shareholding and companies have been seeking extensions because of market conditions and pricing issues, he added.

Unnecessary speculation

The rampant manipulation leading to a sharp rally in the share price of Ruchi Soya and Alok Industries post insolvency resolution hit many retail investors hard. This is what prompted SEBI to act.

Sameer Kaji, a consultant and senior advisor to various insolvent companies, said if at all SEBI wants to protect retail investors interest, it should give six months for companies relisting after insolvency process to meet the 25 per cent minimum public float rather than achieving it in a staggered manner over a period which leads to unnecessary speculation.

Drawing retail investors experience in Ruchi Soya, Kaji said by no stretch of imagination can the Ruchi Soya stock be valued at ₹1,535 a piece and within two months it has already fallen to ₹680, a level that itself looks overstretched. Uninformed retail investors who bought the stock at a high price will never return to market, he added.

Vasanth Rajasekaran, Partner, Phoenix Legal, said that in the case of Ruchi Soya the public shareholding dropped to 0.97 per cent leading to critical breach of minimum public shareholding norm. This raised concerns over the failure of fair price discovery of the scrip and the need for enhanced surveillance measures, he said.

Structural delays

“The threshold of 5 per cent would not be too idealistic for a company to meet at the time of relisting, and the graded increase first to 10 per cent within a year and then to 25 per cent in two years would establish measurable targets for a company,” he added.

Abhishek Gupta, Principal Associate, MZM Legal, said the benefits of minimum public shareholding for insolvent companies become secondary when restarting operations and the potential insolvency resolution itself is threatened by unpredictable structural delays plaguing almost all insolvency resolutions. The option of reducing minimum float to 5 per cent as an incentive to turnaround the company even while keeping it listed and following the SEBI prescribed norms appears to be more realistic, he added.

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