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Regulation of insolvent firms' shares still remains a dilemma
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SME Times News Bureau | 17 Apr, 2021
As India's Insolvency and Bankruptcy Code (IBC) evolves at a fast pace, a
hard nut to crack for the market regulator has come up with regulations
in terms of trading in the shares of companies going through resolution
under IBC.
Several concerns have been raised in terms of trading
in the stocks of insolvent companies as many of them gained
substantially amid the bull run in the past one year.
Amid
concerns for public shareholders and the need for transperancy, the
capital market regulator has also enhanced the disclosure norms for
companies under bankruptcy and they now have to inform the exchanges on
any approved resolution plan.
Ashish Chhawchharia, Partner and
National leader - Restructuring Services, Grant Thornton Bharat, is of
the view that trading in shares of insolvent comapanies should be
suspended.
"In several markets which have a mature insolvency
regime, trading of shares of insolvent companies is immediately
suspended upon commencement," he said.
He noted that while there
is some merit in continuing trading to allow exit mechanism for small
shareholders, the same investors can also be susceptible to high risks
due to speculation. Overall, it may be better to suspend trading of such
companies, Chhawchharia told IANS.
Despite steps by the
regulator, several concerns exist regarding manipulation by the
promoters, who might have lost the control of the company but are still
are the promoter shareholders of the company.
Manoj Kumar of
Corporate Professionals said that although there are such concerns
regarding the promoters, most of the times promoter shares are pledged
in light of the financial stress of the bankrupt company.
"Existing
promoters can also play, obviously, but in most of the cases their
shares are pledged so they cannot sell it and obviously they dont want
be in light. They might be playing but off the book shareholding, if
any," he said.
Kumar noted that earlier there was no mention on
the sites of the stock exchanges or the brokerage firms that the company
is under insolvency, but now the insolvency status of the company is
informed on the sites, which is a move in the right direction as it
would inform the shareholders and retail investors and they can take a
calculated risk.
Regarding the option of suspending trade on the
shares of an insolvent company, he said that such a move would be "very
harsh because just before the day who might have bought would not have
any opportunity to sell".
"It is a dilemma for SEBI," he said.
Experts
are also of the view that disclosure of all applications received for
acquisition of insolvent companies may also not turn out fruitful as
there might be instances in which the applicants are frivolous or bogus.
Therefore, sector experts feel that it is a very tough situation to handle.
"It
is a very dicey situation. Nobody knows what will happen ultimately. In
some situation company goes into liquidation, some becomes delisted,
and some companies majority of thes shares are extinguished and minor
shares are given to the public shareholders. Still people want to take
risk, there is a dilemma with the regulator," Kumar told IANS.
Companies
which are undergoing insolvency with their shares trading on the stock
exchanges include Jet Airways, and Jaypee Infratech.
Shares of
Jet Airways on the BSE surged over 350 per cent in the past one year and
those of Jaypee Infratech have increased over 100 per cent during the
period.
Another matter which the Securities and Exchanges Board
of India has taken cognisanse of and come up with strict regulations is
that regarding public shareholding of companies which have been resolved
under IBC.
Last December, the capital market regulator tweaked
the minimum public shareholding norms for listed companies facing
bankruptcy under the IBC and which get relisted on the stock market.
Now,
such companies are mandated to have at least 5 per cent public
shareholding at the time of their admission to dealing on stock
exchange, as against no minimum requirement earlier.
Earlier, in
case of Corporate Insolvency Resolution Process (CIRP) where the public
shareholding falls below 10 per cent, such listed companies are required
to bring the public shareholding to at least 10 per cent within a
period of 18 months and to 25 per cent within 36 months.
Further,
such companies are provided 12 months to achieve public shareholding of
10 per cent from the date such shares of the company are admitted to
dealings on stock exchange and 36 months to achieve public shareholding
of 25 per cent.
The lock-in on equity shares allotted to the
resolution applicant under the resolution plan shall not be applicable
to the extent to achieve 10 per cent public shareholding within 12
months.
Concerns were raised after shares of Ruchi Soya a whopping 8,800 per cent during January-June last year.
Shares
of Orchid Pharma also have been on a dream run as they have surged a
mammoth 9,000 per cent since their relisting on the exchanges last
November, after the company's resolution under the IBC.
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