Market regulator Sebi and stock exchanges have announced further safeguards to protect small investors and curb price manipulation in shares of companies under insolvency resolution process.
The National Stock Exchange (NSE) and BSE said they have initiated several steps to curtail information asymmetry and confusion in the market when it comes to listed companies undergoing Corporate Insolvency Resolution Process (CIRP) as per the Insolvency and Bankruptcy Code (IBC)
In the past, several shareholders have got caught on the wrong foot while dealing in companies Dewan Housing Finance Corporation (DHFL), Jet Airways and Videocon Industries, amid lack of clarity with regards to the fate of existing equity holders.
To ensure investors are better informed, exchanges have said they “shall identify and tag the security in a manner, which will be easy for the members and market participants to know that the security is currently into IBC proceedings.”
Further, exchanges will direct all brokers to alert their clients at the time of placing orders that the scrip is undergoing CIRP.
“Since this alert will be available from the day of admission into CIRP till the day of suspension of the company/ exit from CIRP proceedings pursuant to National Company Law Tribunal (NCLT) order, the market participants shall be clearly aware of the status of the company and shall exercise necessary due diligence will trading in the security,” NSE said in a press release on Friday.
Also, NSE and BSE will put in place a system to coordinate among each other and based on the intimation of the oral order from the company or resolution professional (RPs) suspend the trading in the company on immediate basis. This will be done in instances where the value of the listed securities is considered zero or where the entire equity capital is reduced/ cancelled/ extinguished without any payment to the existing equity shareholders.
There is a considerable time lag between the pronouncement of oral order and the final written order by NCLT. As a result, companies typically wait to disclose to the stock exchanges until receipt of a written copy of the order. This puts a lot of shareholders in a disadvantageous position as the information is available with a select group which creates information asymmetry.
To overcome this issue, exchanges have directed RPs to disclose the resolution plan on oral pronouncement on an immediate basis and not later than 30 minutes. RPs will also have to inform through the exchange platform the impact on the existing holders.
“Identifying and tagging securities as soon as the company is admitted to CIRP would enable market participants to make timely and fully-informed decisions,” said Sonam Chandwani, managing partner, KS Legal. “Companies were found to hold onto this information without timely disclosure to the exchanges until the receipt of the final order. However, those working for the company having knowledge of the same creates information asymmetry as exchanges and shareholders may not have a whiff of the same.”
The latest move by the exchanges is part of the series of steps to deal with companies undergoing or coming out of insolvency.
Last month, the government had amended the Securities Contracts (Regulation) Rules to ensure that companies relisting after insolvency proceedings had at least 5 per cent minimum public shareholding.
This will have to be increased to 10 per cent within a year and 25 per cent in three years.
Team – Intellex Strategic Consulting Pvt Ltd
Economiclawpractice.com, Intellexconsulting.com, BuySellMergers.com
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