SEBI’s Proposal for “Recalibration of Threshold for Minimum Public Shareholding Norms on Relisting”

Navdisha Sehgal

16 Mar, 2021

As a measure to provide sufficient float in a listed entity post- corporate insolvency resolution process (CIRP), the Securities & Exchange Board of India (SEBI), has on 19 August 2020, released a consultation paper titled ‘Recalibration of threshold for minimum public shareholding (MPS) norms, enhanced disclosures in corporate insolvency resolution process (CRIP) cases’.

The article focuses on the key recommendations highlighted in the consultation paper on Recalibration of threshold for Minimum Public Shareholding norms in light of the Ruchi Soya case.

Let us know see what really happened in Ruchi soya case.

Ruchi Soya Case and the need of revision in Minimum Public Shareholding (MPS)

Ruchi Soya’s company shares were acquired by Patanjali Ayurved Ltd. in December, 2019 as a part of CRIP and were relisted in January 2020 at Rs. 17 per share.  Within 5 months of relisting, the share prices hiked to Rs. 1535 per share on 29^th June 2020, which is equal to 8929% increase. The rise in share price happened even after additional preventive surveillance actions were taken by the regulatory body, which includes reduction in price band & moving the scrip into trade for trade segment.

This resulted in market capitalization of Ruchi Soya from Rs. 4350 crores to Rs. 45000 crores in just 5 months. This hike was even higher than the market capitalization in companies like Ambuja Cement, Tata Steel, and Bharti Infratel.

One of the reasons behind such a hike is low level of free float, which means the shares left for the public to trade is very less. The shares available for public trade are even less than 1%, as Patanjali holds 99.03% after CRIP. This resulted in high demand and in turn resulted in increase in share price.

The Proposed Changes in Minimum Public Shareholding norms

The market regulator has proposed three changes to the existing Minimum Public Shareholding norms for companies aspiring to relist post-CIRP. 

• The first option seeks to reduce the time period specified under in Rule 19A of SCRR, from 18 months to 6 months, to attain 10% MPS from the date of the fall. 
• The second option requires at least 5% MPS, for companies post-CIRP, at time of relisting subsequent to which they would also be given 12 months to raise the MPS to 10% & then another 24 months to raise it to 25%. 
• The last option provides the companies who wish to relist post-CIRP, to have at least 10% at the time of relisting which could be raised to 25% in the next 3 years from such fall.

Lock in period exception

SEBI in its consultation paper proposed to relax the lock-in period prescribed under ICDR regulations, for incoming investors/promoters under the resolution plan.

As per Regulation 167(1) of SEBI (ICDR) Regulations, 2018^[1]; the minimum lock in period for an incoming partner is at least 1 year. Therefore, this change would allow the dilution of promoters’ shareholding which would ease it for the companies to comply with the Minimum Public Shareholding norms. Earlier, the dilution was not possible upto for 1 year.

Enhanced Disclosure

According to regulation 30 of LODR regulations, 2015, it was mandatory to disclose the salient features of the resolution plan approved by NCLT, except for the commercial secrets. But the market regulator felt a need to disclose some important aspects of the plan including shares to be allotted, source(s) of funds (if any), terms of such allotment etc., as this could provide assistance to the public shareholders in determining the true value of shares.

Therefore, SEBI proposed a standardized reporting framework pursuant to approval of the resolution plan which includes all the above mentioned aspects.

Analysis of new Minimum Public Shareholding norms

Earlier, SEBI has fined many companies for non-compliance with the Minimum Public Shareholding norms. This compliance becomes difficult to comply with after the CRIP because of full market value & lack of investor’s confidence in such companies.

In the Ruchi Soya case, it took only 5 months for the shares to get increased to 8929% post relisting pursuant to CRIP.

Therefore,

• The first option, it gives a period of 6 months for the shares to increase the MPS to 10% post relisting. Hence, it becomes inevitable to prescribe some MPS requirements from the starting of the relisting process. Moreover, a period of 6 months (in place of 18 months) may not be sufficient to comply with the MPS requirements.
• Achieving 5% MPS at the time of relisting is easier than 10%. Moreover, it is not difficult for the companies to achieve 10% in the next 1 year & the remaining in the next 2 years.
• 10% requirement is difficult to achieve at the time of relisting for the companies that underwent insolvency. Moreover, an instant dilution of large number of shares of the promoters can also lead to high volatility of shares, which in turns results in high risk.

Conclusion

The proposed Minimum Public Shareholding was the need of the hour in the light of Ruchi Soya Case. SEBI has prescribed 3 ways to curtail the issue of low float. Therefore, the recommendations are useful as they adjust between the right of shareholders and revival of companies as well as promote effective price discovery and market integrity.

Read our article: Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) (Second Amendment) Regulations, 2019 for Startups