The law applicable to listed companies
needs to be relooked at when such companies are going through the near death
experience of resolution and insolvency. SEBI has come out with a paper to
solicit views on how to deal with various extant regulations in respect to such
companies. The companies deserve a light regulation approach. As the poet
William Blake said, the same law for the lion and the ox is oppression.
The
seven ages of resolution
For a company going through severe
distress, it experiences financial haemorrhaging, departure of senior
management and lack of compliance with multiple regulations. Clearly, little
information about the true condition of the company is available in public
domain before and after it enters resolution. A company in such process
undergoes several stages, from filing of an application before the company law
tribunal for resolution, appointment of a resolution professional (RP) to
replace the board of directors, consideration of revival plans by the creditors
in consultation with the RP, receiving bids from suitors, choosing the best
bidder, restructuring capital based on the bids and injection of capital by the
bidder, conversion of some or all debt into new equity and a route back to a
smaller but healthier company with new management, or liquidation if revival is
impossible.
The RPs are expected to collect information
about the company in a matter of weeks and also take it through the
resolution/insolvency process within a very aggressive timelines. While the RPs
are entitled to appoint financial and legal professionals, their main objective
is to revive the company. In many if not most cases top management has
departed, the board of directors have by law been superseded by the RPs and
much of the information that is relevant to investors does not really exist in
a well documented form because of the stress in the company and departure of
key people.
Best
effort disclosure of past events
A materiality threshold should be
applicable on the disclosures which may be lower than regular listed companies.
Being price sensitive information, events such as filing of application for
initiation of resolution, admission of such application by NCLT, terms of the
bids once the winning bid is announced should be mandatorily disclosed by the
listed corporate debtor under the listing regulations. Other routine
disclosures may be relaxed, for instance quarterly financials. In addition,
some level of protection must be provided to RPs for disclosures made in good
faith and diligently, as they may not be able to disclose routine information
as mandated. They should disclose all relevant information after they have
taken over though.
Trading
in stock exchanges.
Trading should be allowed to be continued
subject to enhanced restrictions, such as intra day circuit filters of 5%,
restriction on trading in Futures and Options segment, etc. Trading permits
those who wish to exit, to transfer the risk of success or failure of the company to those who can
better bear the risk return mix. There is a risk that trades occur at, above or
below fair valuation, but that is a price worth paying. Freezing trading may appear
optically sound but will in fact completely block the exit doors when the
building is on fire. Other mechanisms could also be used like a ‘call auction’
or batch mode trading, say once a week to focus liquidity. In any case, there
should be no inter-day circuit limit as that would also be akin to locking the
doors. If the consensus price is say Rs. 50 (based on new information about
resolution chances) and the last traded price the previous day was Rs. 30, trade
will not edge up slowly within a 5% circuit limit per day, but would completely
clot the arteries of stock orders. This is because no seller would sell at Rs.
30, that which they think is worth Rs. 50. Conversely, trading should be
stopped for the few days when the bids are received till one has been accepted,
as the information asymmetry becomes huge between a handful of RPs with
creditors and the rest of the investor community.
Re-classification
of Promoters
The existing promoters whose shareholding
in the listed corporate debtor undergoing resolution has reduced significantly
may be automatically re-classified as public shareholders. Post resolution,
there would be various stakeholders including creditors converting their debt
into equity, sometimes acting as a group or consortium of investors, who may
acquire substantial shareholding of the listed corporate debtor, replacing the
erstwhile promoters. It is suggested that SEBI may prescribe a test for
determination of ‘promoters’ which is flexible. Typically, there would be mix
of new acquirers getting shares and the creditors whose loans would stand
converted into shares partially or fully. Ideally, the two should not be
clubbed together as they are not acting in concert except for the purpose of
taking the corporate debtor out of its near-death existence.
Compliance
with Minimum Public Shareholding
Infusion of outside capital during resolution
may reduce the public shareholding below the statutory minimum of 25%. The
immediate obligation to fulfil the prescribed MPS norms may not be in the
interest of a newly revived company. Thus, the period of 1 year for compliance
with the required MPS norms should be extended for such companies to 5 years or
10 years. For a company which has gone through the resolution process, the
important agenda is to revive the company and for which it would require
several years of nurturing. Divestment while the company is still struggling
would not be an ideal outcome and for a company in such position to revive and
be partially divested would take a minimum of 5 years.
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