The insolvency regime prioritizes the interests of creditors and hence, the interest of minority shareholders of an entity undergoing CIRP remains largely ignored. They occupy the lowest position in the ‘distribution waterfall’. They don’t have any representation in the CoC. The minority shareholders of DHFL and Sintex Industries suffered huge losses when the resolution plans suggesting for the delisting of the entities were approved by the NCLT and they were left with no recourse.
The public shareholders are denied a fair bargain by providing an exit opportunity at a market-determined price and are instead left at the mercy of the Resolution Applicant (RA).
The provision that existing public shareholders be given exit opportunity at a price which equal to or more than what is offered to the promoters is of little help considering that promoter’s equity is often written off, making it highly unlikely that public shareholders will receive any value. Further, in insolvent liquidations, there is no liquidation value attributable to equity-holders.
Another amendment in the Securities Contracts (Regulation) Rules, 1957 (SCRR) in 2021 mandated a minimum of 5% public shareholding for an entity to remain listed post-CIRP. Such a mandate disincentivises the new entity post-CIRP to be listed and hence, they go for delisting which again is against the interest of minority shareholders.
Therefore, once a RP is approved for a listed company, the possible scenarios are:
-
Liquidation of the company in which case they get virtually nothing;
-
Continuation of the company with or without listing, based on the resolution plan which largely results in dissolution of shares again squeezing out the shareholders.
In both the scenarios, the existing public equity shareholders get squeezed out and usually end up with almost nothing.
Need for protection of minority shareholders
One could argue that the treatment of such shareholders is justified if they chose to remain interested in the company even when the company had reached at that stage. While this reasoning is not misplaced, it is also important to consider that the shareholders are often misled hoping that they might end up getting a better deal.
The minority shareholders argue that they don’t have much say when equity owners run down the company. Further, most of such minority shareholders are retail or small shareholders who don’t possess the awareness and the level of information to make a timely decision.
Another concern is that the CIRP can be triggered on a mere default and the company need not be balance sheet insolvent.
The SEBI consultation Paper
Addressing the concern of the minority shareholders, SEBI came out with a framework for protection of interest of public equity shareholders in case of listed companies undergoing CIRP. The key recommendations are as follows:
Opportunity for Public Equity Shareholders: Public shareholders will have the opportunity to acquire equity in the new entity that is formed post CIRP. Promoter and promoter group, KMPs etc. would be excluded while identifying such public equity shareholders.
Minimum and Maximum limit: The acquisition of equity by public shareholders will be minimum 5% and a maximum of 25% of the capital structure. The pricing terms for this acquisition will be the same as those agreed upon by the resolution applicant.
Mandatory Delisting on failure to achieve minimum Shareholding: For the company to continue as a listed entity, at least 5% of the fully diluted capital structure must be held by public shareholders. If the resolution applicant fails to achieve the 5% public shareholding, the company will be delisted, and the consideration received from public equity shareholders will be refunded.
Exemptions from Delisting Regulations: The recommendation also states that exemptions from Delisting Regulations will be applicable only in cases of liquidation or if the public equity shareholding remains below 5% of the new entity after the offer.
Source: Out of Focus: SEBI’s Distorted Lens on Shareholder Protection in the IBC Landscape - CBCL
Subscribe To Our Free Newsletter |