As a financial market regulator tasked with both shareholder protection and orderly functioning of markets, Securities Exchange Board of India (SEBI) has had to walk a tightrope on companies under IBC (Insolvency and Bankruptcy Code). Since 2018, in an attempt to reduce the compliance burden for acquirers taking over distressed companies, SEBI has exempted them from open offer requirements, relaxed its 25 per cent public float rule and allowed them to delist without going through the complex reverse book-building process.
But these relaxations, which smoothed the way for acquirers in IBC proceedings, have had some public shareholders up in arms. In cases where resolution plans entailed delisting or sale of indebted firms at a distress price, retail shareholders have complained of their equity value being summarily written off and their being squeezed out. Such protests seem to have prompted SEBI to come up with a new framework for protection of equity shareholders in IBC companies.
A consultation paper put out by SEBI proposes that, in cases where a company under IBC is set to be acquired after approval by creditors, the acquirer has to mandatorily make an offer of shares to existing public shareholders, so that they can participate in the new entity. This mandatory offer has to be made at the price at which the acquirer himself bought the shares and the equity offered to the public can range from zero to 25 per cent, depending on the acquirer’s own equity stake. While SEBI has (pragmatically) not specified any minimum level of response, it has decreed that the new entity will remain listed if this offer garners a 5 per cent public shareholding. If it doesn’t, the acquirer can refund the proceeds and seek delisting. To ensure that promoters of a defaulting entity don’t stage a re-entry through this route, SEBI has mandated that the company’s old promoters, their family members, its key managerial personnel and directors cannot be offered shares under this rule.
SEBI seems to believe that these rules, apart from giving small shareholders a shot at participating in turnaround IBC cases, will be welcomed by acquirers because it would reduce their financial outlay by roping in public investors. But during its public consultation process, SEBI will need to verify if this assumption is indeed true. For one, acquirers of a distressed company may, above all, seek operational autonomy to implement their resolution plan without prying eyes of the media or minority shareholders tracking their quarterly progress. Two, they may like to function at least for a limited time frame, without the compliance burden imposed by SEBI’s stringent LODR regulations. It would be unfortunate if these considerations put off genuine acquirers seeking to bid under IBC. SEBI must also reckon with the fact that retail investors have been taking irrational punts on companies entering IBC, even as institutions were exiting, in the hope that the penny stocks would turn multi-baggers. Any proposal that protects such opportunistic investors against the value erosion which is an inherent part of an indebted company’s bailout, can create moral hazard.