SEBI plans to tighten public float norms for IBC firms

Our Bureau. Mumbai | Updated on August 19, 2020

Fallout of Ruchi Soya sale; with low public holding, company’s shares zoomed

In a bid to prevent Ruchi Soya-like share price rally, the Securities and Exchange Board of India proposes to tweak the minimum public shareholding (MPS) requirement for listed companies sold through the insolvency process.

One of the options suggested by SEBI is make it mandatory for such entities to meet a minimum public shareholding requirement of 10 per cent within six months of completion of debt resolution. Now, such entities have 18 months to achieve at least 10 per cent public shareholding and 25 per cent within three years.

Relax lock-in

SEBI has also proposed to relax the lock-in period for the incoming promoter under the resolution plan. Under current rules, new promoters cannot sell shares for at least one year. But to achieve the minimum public shareholding norm, SEBI proposes to free such shares from lock-in only to the extent of achieving the MPS norm.

The move was triggered after Ruchi Soya showed 8,764 per cent increase in its share price after the company was sold to Patanjali through the insolvency process. Patanjali group had bid ₹4,350 crore to acquire Ruchi Soya last year after which the public shareholding in the company was down to 0.97 per cent. “Such low public shareholding raises multiple concerns like failure of fair discovery of price of the scrip, need for increased surveillance measures, etc., and may, therefore, pose as 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,” SEBI said in a consultation paper released on Wednesday.

“Allowing no lower limit for minimum public shareholding in post-Corporate Insolvency Resolution Process (CIRP) cases may result in cases where the public shareholding would be extremely low, thus leading to less float, hampering the efficiency in the price discovery process of the scrip in the secondary market. Allowing continued listing of companies that have miniscule public float may therefore be counterproductive in providing opportunity to other investors,” SEBI added.

Three options

Current rules mandate that in case public shareholding of a listed company falls below 10 per cent because of a resolution plan, then it shall be increased to at least 10 per cent within 18 months and 25 per cent within three years from the date of resolution. SEBI has proposed that the 18 months be brought down to six months.

The other option proposed by SEBI is that post-CIRP, companies may be mandated to have at least 5 per cent public shareholding at the time of relisting. “A concern ... is that it may not be significant threshold to allay concerns... above. However, the positive side is that a lower threshold will incentivise companies from staying listed and any higher threshold may push for total delisting,”SEBI said.

The third option is to ask post-CIRP companies to have at least 10 per cent public shareholding at the time of relisting.

Published on August 19, 2020

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