Volatility in shares relisting after insolvency process must be checked

SEBI’s discussion paper on recalibration of the minimum public shareholding threshold in companies that relist after undergoing corporate insolvency resolution process is much needed, against the backdrop of the rampant speculation witnessed in the stock of Ruchi Soya in recent months. Following the Patanjali group’s acquisition of the company under the insolvency process, the public shareholding in Ruchi Soya had shrunk to 1 per cent, with the promoter group holding 99 per cent stake. This, along with the improved prospects of the company, had made the stock price rally 8,764 per cent in the six months following re-listing this January. This undue volatility has served as a wake-up call to the regulator to address this issue. While generally, minimum public holding is mandated at 25 per cent, in cases where the fall in public shareholding is due to implementation of the IBC resolution plan, leeway has been provided to companies to improve the public shareholding to 10 per cent within 18 months and to 25 per cent within three years from the date of the fall in shareholding.

While the extra time and the relaxation from the MPS norm were given to allow the acquirer to preserve capital to turn around operations, the fall in free-floating shares is causing havoc in stock prices. SEBI has suggested three ways to address this issue in the discussion paper. One, companies should be given only six months after resolution to take the public shareholding to 10 per cent. Two, companies to ensure at least 5 per cent public shareholding while relisting after the insolvency process; and three, companies should have at least 10 per cent public shareholding while relisting. Option one is unlikely to help, as rampant speculation is typically seen in the months immediately after relisting. The third option is preferable, as mandating 10 per cent floating shares with public will ensure higher liquidity, compared to just 5 per cent. A higher floating stock will stop the stock price from shooting higher in a short time-span. Alternatively, a minimum value of shares with the public can also be prescribed, as is the rule in schemes of arrangement. Allowing the acquirer to offload the shares within the current lock-in period of one year in order to increase liquidity is, however, not a good idea. This leeway can be exploited by fly-by-night operators to acquire a company cheap under the IBC process — only to exit after making quick gains through stock price appreciation.

The proposal to mandate disclosure by the corporate borrower to stock exchanges regarding the funds infused, post-resolution liability, details about the promoter and management and the strategy to be followed to revive the business is welcome. A part of the stock price gyration is due to insufficient information available with public shareholders.

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