SEBI Consultation Paper on Minimum Public Shareholding in CIRP Cases
On August 19, 2020, SEBI released a Consultation Paper on ‘Recalibration of the threshold for Minimum Public Shareholding Norms in Companies which undergo Corporate Insolvency Resolution Process (CIRP)’.
The link to the consultation paper is: https://www.sebi.gov.in/reports-and-statistics/reports/aug-2020/recalibration-of-threshold-for-minimum-public-shareholding-norms-enhanced-disclosures-in-corporate-insolvency-resolution-process-cirp-cases_47360.html
Existing legal position: Relaxations provided to listed entities undergoing CIRP
For ensuring the smooth revival of the corporate debtor post-approval of the resolution plan, SEBI has provided relaxations under various regulations. These exemptions are exclusive to entities involved in IBC cases and are not even provided when companies seek approval for schemes of arrangement. They are:
Minimum public shareholding threshold: Rule 19A of the Securities Contract (Regulation) Rules, 1957 states that the minimum public shareholding for listed companies is 25%.
In cases where the decrease in public shareholding is as a result of a resolution plan being implemented under the IBC:
(a) If the public shareholding is below 10%, within
18 months- it should be 10% and within,
3 years- it should be 25%
(b) If the public shareholding is between 10%-25%, within
3 years- it should be 25%.[ii]
Preferential Issue[iii]: Listed entities undergoing CIRP are exempted from complying with preferential issue requirements mandated in the SEBI (ICDR) Regulations, 2018.[iv] Exception- However, this exemption does not extend to lock-in period provisions concerning the preferential issue. Therefore, shares allotted to an incoming investor under a resolution plan are subject to a lock-in period of at least 1 year.[v]
Concerns and Issues:
Extremely low public shareholding: As a result of the aforementioned relaxations, public shareholding in such listed entities went abysmally low post-implementation of resolution plans. This resulted in various issues such as inability to discover the fair price of the listed scrip, need to enhance surveillance measures, the prohibition of healthy trading etc. These concerns would linger until the minimum public shareholding is at least 10%.
Inability to dilute promoter shareholding: Owing to the lock-in requirements applicable on preferential issues, the incoming investor cannot sell its shares prior for at least 1 year. This, in turn, comes in way of the promoter selling its shares to the public for enhancing the public shareholding immediately.
In order to deal with the low public shareholding issue, three options have been proposed:
(a) Option 1: Mandate such companies to achieve-
10 percent- in six months
25 percent- in three years
(b) Option 2: Mandate such companies to achieve-
5 percent- at the time of listing
10 percent- in twelve months
25 percent- in twenty-four months
(c) Option 3: Mandate such companies to achieve-
10 percent- at the time of listing
25 percent- in three years
It has been recommended that offloading the locked-in shares can be permitted to the extent they enable compliance of the minimum public shareholding threshold of 25%.
A proposal has also been made to standardize reporting framework under SEBI (LODR) Regulations, 2015 pursuant to the approval of a resolution plan.
[i] Sara Jain is a Graduate of MNLU Mumbai and an incoming associate at Shardul Amarchand Mangaldas & Co. Her interest lies in Insolvency laws in furtherance of which she runs her own blog – Insolvency Simplified. [ii] Rule 19A(5), Securities Contract (Regulation) Rules, 1957 [iii] Preferential issue means an issue of specified securities by a listed issuer to any select person or group of persons on a private placement basis. It does not include ESOPs, depository receipts and sweat equity shares. [iv] Regulation 158(2), SEBI (Issue and Capital Disclosure Requirements) Regulations, 2018 [v] The lock-in period for shares contributing toward minimum promoter contribution i.e. 20% of total capital is 3 years. The lock-in period for any shareholding exceeding 20% is 1 year. Preferred Citation: Sara Jain, SEBI Consultation Paper on Minimum Public Shareholding in CIRP Cases, Arbitration & Corporate Law Review, Published on 28th August 2020.
(This article was previously published on her own blog here - https://www.insolvencysimplified.com/post/sebi-consultation-paper-on-minimum-public-shareholding-in-cirp-cases