Firms returning to stock markets after insolvency resolution may have to face tighter public shareholding rules, following share price surges in some relisted companies.
Under existing norms, all listed companies must have at least 25% of minimum public shareholding, or MPS. However, companies emerging from the insolvency resolution process usually have low public floats since they issue new shares to an incoming investor for funds. In such cases, if their MPS falls below 10%, they can raise it to 10% within 18 months and further to 25% in three years. Companies with MPS below 25% but above 10% must raise it up to 25% in three years. Shares of incoming investors stay locked in for one year.
Based on the recommendations of its primary markets advisory committee (PMAC), the Securities and Exchange Board of India (Sebi) issued a discussion paper on Wednesday, proposing three options for such companies to raise public float quickly.
In the first option, post-corporate insolvency resolution process (CIRP), firms must have at least 10% public float at the time of relisting. In the second option, the 10% threshold should be achieved within six months against the existing 18-month timeline. In the third option, companies with 5% MPS post-relisting need to increase public float to 10% in 12 months and 25% in the next 24 months.
The discussion paper also suggested removing the one-year lock-in requirement to help achieve MPS compliance. The regulator has sought comments on the matter till 18 September.
In the past few months certain listed firms, including Ruchi Soya Industries Ltd, have seen a sharp rise in share prices after relisting. Shares of Ruchi Soya soared 8,764% in the six months since it relisted in January. In an article on 24 June, Mint pointed out that barring six trading sessions, the stock had risen by the maximum permissible limit each day post relisting and in terms of market capitalization, it was poised to overtake Marico Ltd. The reason behind the surge was the company’s limited public shareholding after bankruptcy resolution. However, after reaching a high of ₹1,535 per share, Ruchi Soya share price reduced in the month of July and August. On Wednesday it closed at ₹725.90 on NSE.
“In one recent case, it was observed that post-CIRP, the public shareholding has decreased to 0.97%, and showed an 8,764% increase in its share price in spite of additional preventive surveillance actions including reduction in price band and moving the scrip into trade for trade segment,” the discussion paper said.
“Such low public shareholding raises multiple concerns like failure of fair discovery of price of the scrip, need for increased surveillance measures, etc., and may, therefore, pose as a red flag for future cases. Low float also prohibits healthy participation in trading of such companies majorly due to issues related to demand and supply gap of shares,” Sebi added, saying these relaxations for IBC cases was given to ensure revival of the firm and accord it some listing gains.
