What to do with defaulting firms’ shares?

KS Badri Narayanan Chennai | Updated on January 12, 2018

Investors should be aware that shareholders are placed at the bottom of the liquidation pyramid

With the Reserve Bank of India reaching the end of its tether and forcing banks to initiate insolvency proceedings against big-ticket defaulters, bankers are evaluating options for 12 large corporate borrowers under the Insolvency and Bankruptcy Code.

Under NCLT priority list

The RBI’s action for bankruptcy proceedings comes after the enactment of the Insolvency and Bankruptcy Code 2016 (IBC). ABG Shipyard, Alok Industries, Amtek Auto, Bhushan Steel, Bhushan Power, Electrosteel Steels, Era Infra, Essar Steel, JP Infra, Jyoti Structures, Lanco Infratech and Monnet Isspat are the 12 non-performing accounts referred by the RBI.

Following this move, these cases will be accorded priority by the National Company Law Tribunal (NCLT).

Once referred to the NCLT, the resolution of the case in terms of either a sell-off of assets or revival or winding up will have to be completed within 180 days.

So, are you a shareholder in any of the companies that are facing impending insolvency? Are you expecting that insolvency will fetch you some value for your already battered shares?

Long & winding path

If you think so, then you are being too optimistic, as shareholders are placed at the bottom of the pyramid when companies are liquidated and their assets parcelled out.

The first claims from any proceeds from the sale of assets of these firms will be for the costs of the insolvency process and liquidation.

The second priority for the official liquidator is to settle secured creditors’ dues (any creditor or lender who takes collateral for the extension of credit, loan or bond issuance). Dues to employees (up to 24 months) and other dues up to 12 months come next.

Individuals or institutions that lent money without obtaining collateral (unsecured creditors) will get the next slice of the pie. Next in the queue for receiving funds would be the government (up to two years dues of municipal tax dues and so on).

After this long line-up preference shareholders of the company will receive their share. Only then do common shareholders come into the picture. They will get their dues, if anything is left after the above process.

So, what are the options left for shareholders? If you are lucky, you can sell out the shares through the secondary markets. That is, however, difficult, as these stocks have been regularly hitting the lower circuit (only sellers).

For the unfortunate investors who have held these dud shares for long, there may be no choice but to cling on to them, hoping for a silver lining.

Published on June 23, 2017

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