IBC: SEBI’s Proposals For Public Shareholders Reflect A Myopic View, Say Experts
SEBI proposes public shareholder participation in resolution process for bankrupt companies.
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.
This is unfair to the resolution applicant. The resolution applicant takes an incredible risk in acquiring an insolvent entity. Expecting them to offer shares to public shareholders at the same cost, while assuming all the risk, would further discourage them from taking part in the bid at all. This reflects a misunderstanding of the insolvency regime in our country.Anoop Rawat, Partner, Shardul Amarchand Mangaldas & Co.
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.
The regulator has failed to understand that the enterprise value of the entity doesn’t reflect shareholders' interest in the entity, but is a sum of equity as well as debt. In most cases, the debt stays on the balance sheet when there is no equity value.Abizer Diwanji, Partner, EY
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.
In Diwanji's opinion, a shareholder is not entitled to anything. The resolution applicant is assuming the debt in the company, which the shareholder is not, he pointed out.
This will result in the resolution applicant bidding at a price lower than its fair value, as arrangements would have to be made to offer a certain percentage of the shares in the new entity to the existing (non-promoter public) shareholders.Abizer Diwanji, Partner, EY
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, Gupte 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, Gupte added.
Three, from a market perspective, this can also result in an increase in volatility, Rawat highlighted.
The general public would keep on trading during insolvency, just so they could acquire shares post-restructuring. This would act as an artificial price maker in the market.Anoop Rawat, Partner, Shardul Amarchand Mangaldas & Co.
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.
(Corrects an earlier version that misattributed Gupte's quote)