Safeguarding Public Shareholders under CIRP: SEBI’s Astigmatic Answer to a Long-Awaited Prayer

[By Shaurya Singh]

The author is a student of Jindal Global Law School.

Public equity shareholders usually have the least expectations from insolvency proceedings of a listed company, as fundamentally they are not positioned as the creditors- who are primarily protected under the Indian Bankruptcy Code, 2016 (“IBC”). To protect such non-promoter public shareholders, the Securities and Exchange Board of India (“SEBI”) recently floated a consultation paper which proposed reforms for the listed companies undergoing Corporate Insolvency Resolution Process (“CIRP”). SEBI’s suggested mends aim to provide protection to minority investors while maintaining the efficiency of the CIRP. However, it seems like a ‘pareto’ case whereby one cannot be made better off without making the other worse off. This piece summarizes the proposed framework and its impact on the rights of such public equity shareholders, while also extending to determine the practicality of these reforms.

SEBI’s Framework for Protection of Public Equity Shareholders

SEBI had come across several grievances regarding the companies which were delisted pursuant to the approval of the resolution plan. The major concerns were regarding the valuation of the corporate debtor and suppression of smaller stakeholders who are not renumerated fairly against their shareholding. Also, public shareholders are neither intimated nor provided with the opportunity to present their case before the Committee of Creditors (“CoC”) prior to the delisting approved by the resolution plan which brings the valuation of the company to naught overnight.

Similar grievances were raised in front of the Supreme Court and the NCLT in the cases of Jaypee Kensington Boulevard Apartments Welfare Association. v. NBCC and Keshav Agrawal vs Abhijit Guhathakurta by the minority shareholders but the Court’s stance added salt to their wounds as it was held that “the grievances as suggested by these shareholders cannot be recognised as legal grievances; and do not provide them any cause of action to maintain their objections” because the IBC only entitles the CoC to structure and approve the resolution plan, not the shareholders. According to section 53 of the IBC, in the event of a liquidation, shareholders would come last in the order of priority. Therefore, even a nominal exit price for minority shareholders cannot be deemed unfair or inequitable when the promoter’s shareholding is extinguished in its entirety without any consideration. Additionally, the court stated that the ‘commercial wisdom’ of CoC and is not amenable to judicial review. Also, it was held that all stakeholders must adhere to the authorised resolution plan under section 238 of the IBC.

Supreme Court’s take on the matter had put the minority shareholders in an impuissant position. Therefore, to safeguard the public equity shareholders, SEBI has broadly proposed the following measures:

  1. Providing the existing public equity shareholders of the corporate debtor an option to purchase a minimum of 5% and to the extent of up to the minimum public shareholding percentage (25%) of the new entity one the same price as agreed by the resolution applicant. The category of public equity shareholders would exclude:
    • Promoter and Promoter Group
    • Shares held by associate companies and subsidiaries
    • Family members of Promoter and Promoter group not covered under definition of promoter group
    • Trusts managed by Promoter and Promoter group
    • Directors and Director’s Relatives
    • KMPs of the Company
    • Public shareholder representing (nominating) member (i.e. Director) on Board
  1. The offer will be based on the percentage of shares that the new acquirer will get as a result of the resolution plan at the same price which is being offered to the resolution applicant.
  2. Shares provided to the resolution applicant in the new entity of the corporate debtor at the same price shall also be offered in the public offering.
  3. Minimum 5% public shareholding in the fully diluted capital structure of the new entity is required for it to stay listed.
  4. In the cases where the above-mentioned minimum shareholding is not achieved then before moving further with CIRP, the firm must delist in accordance with the cancellation of the offer made to the current public equity shareholders and must return the consideration obtained from them through the said offer.
  5. Exemptions from the SEBI (Delisting of Equity Shares) Regulations, 2021 shall only be granted in the cases where:
    • the corporate debtor has to undergo liquidation pursuant to CIRP
    • the shareholding of public equity shareholders remains less than 5% of the fully diluted capital structure of the new entity after having exercised the option provided to them to acquire the shares of the new entity up to the MPS percentage, on the same pricing terms as is applicable to the resolution applicant.

Secured Rights of the Shareholders: A Hinderance To CIRP?

SEBI had twin objectives while structuring these measures:

  1. Protection of minority shareholders
  2. Maintaining the speed and efficiency of the CIRP process.

The proposed framework aims to assist the shareholders largely by providing the minority stakeholders an opportunity to be a part of the resolution process on the same pricing terms as the resolution applicant. This would allow them to be proportionate shareholders post restructuring at a rather fair value, enabling them to have a standing in the new entity. Therefore, from the lens of investor protection SEBI seems to have achieved its motive, to a considerable extent.

However, even fundamentally strong companies are often seen struggling to meet the MPS requirements. Therefore, mandating it in companies pursuing CIRP might not give the desirable outcome which is intended by the securities regulator. Additionally, the central government has been keen on exempting the MPS requirements for Public Sector Undertakings (PSUs). PSUs can also go through CIRP as held in Harsh Pinge v. Hindustan Antibiotics Limited if they can be identified as ‘corporate person’ under S.3(7) of IBC. Hence, PSUs can technically circumvent this framework leaving their minority shareholders vulnerable.

SEBI has very little jurisdiction over CIRP proceedings and in an attempt to make the most from it, it might have sent more turbulence in the current restructuring regime. SEBI in the merits of the proposed reform has stated that such offers to public shareholder would reduce the burden on the resolution applicant as it would act as tool for fundraising, hence reducing the capital requirements along with easing out the process of meeting the minimum public shareholding.

But, it would over optimistic to assume that such public shareholders will shell out more money to acquire holding of a company which remains in such state. There is significant possibility that in a lot of cases the bidder would not get the desired public shareholding from the offer. Therefore, the bidder would struggle to determine the exact capital requirements in such cases because it would depend on the proportionate acceptance of the offer. Also, given the nature of restructuring, bidder might not want the presence of such non-promoter stake holders to make decisions with least possible interference and friction. In such cases, the mandate of making such offers would be detrimental to the overall efficiency of CIRP.

Conclusion

SEBI has theoretically provided relief to the minority public stake holders of listed companies undergoing CIRP by releasing this framework which primarily aims to address the issues of lack of opportunity in acquisition of the new entity and the irregularities in prices being offered to non-promoter public equity shareholders. From the point of view of  minority shareholders, this is indeed a much needed step. However, the regulator has portrayed its proposal to be beneficial for both investors as well as the resolution applicant, which seems true only on paper. The practical application of the same would be challenging as it demands alternation in the current set of established practises. This would have an adverse impact on the overall efficiency of CIRP. Eventually, this will negatively affect every stakeholder of the company including the minority shareholders. The problem of minority shareholders concerns IBC more than the securities regulator. Therefore, an ideal solution should first extend from the bodies overlooking IBC. By unilaterally mandating a framework involving the matters of the IBC, SEBI might have created more chaos than cure.

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