SEBI’s Proposals For Public Shareholders Reflect A Myopic View, Say Experts

In its latest effort to protect the interests of minority investors, the Securities and Exchange Board of India has proposed a framework that will allow public shareholders to participate in the resolution process of insolvent companies.

Non-promoter public shareholders should be allowed to acquire a minimum of 5% in the restructured entity on the same pricing terms as the resolution applicant, the regulator has proposed.

According to the experts BQ Prime spoke with, the proposals reflect a poor understanding of the insolvency regime in India.

The regulator has failed to take into consideration the fact that, in most cases, shareholders’ value in an insolvency-bound company has been completely eroded, said Anoop Rawat, a partner at Shardul Amarchand Mangaldas.

The very assumption that shareholders require protection is faulty, he said.

Abizer Diwanji, partner at Ernst & Young, concurred with this view.

According to him, the proposal is against the very grain of the Insolvency and Bankruptcy Code, as shareholders rarely have any economic interest left in an insolvent company.

SEBI’s view, as articulated in its proposals, is that small shareholders often fail to get appropriate value for their shares, when big players acquire companies at throwaway prices.

Moreover, shareholders are not informed prior to delisting, depriving them of the opportunity to present their case before the committee of creditors.

Besides proposing public shareholder participation, the regulator has also suggested that the existing lenient delisting regime be available only if the insolvent company is being liquidated or where the public shareholding remains less than 5%, even after they’ve been given an opportunity to acquire shares on the same pricing terms as the bidder in the restructured entity.

This is practically forcing the restructured entity to continue to be listed, experts said.

A process that requires the continuation of listing may not be in the best interest of the resolution applicant, said Gaurav Gupte, partner at Cyril Amarchand Mangaldas.

This will dissuade some people from bidding as there is a cost to staying listed, he said.

The proposal is also riddled with uncertainties, experts said.

One, there won’t be enough basis for public shareholders to invest in the new entity, as historical data would become irrelevant upon its resolution under the IBC process, Rawat said.

Two, the proposals also raise the question of whether they would pave the way for a new disclosure regime as the entity is essentially a new entity, with a new capital structure, promoters, management, business plan, and risk factors, about which investors have very little information, he said.

Three, from a market perspective, this can also result in an increase in volatility, Rawat highlighted.

Finally, the proposal could also result in an increase in the time required for resolution, since shares will need to be offered to the public, and the process could proceed once that process reaches fruition, experts said.