Norms tightened to check manipulation in firms under IBC
The Securities and Exchange Board of India (Sebi) and the stock exchanges have announced further safeguards to protect small investors and curb price manipulation in shares of companies under insolvency resolution.
The National Stock Exchange (NSE) and BSE have said they have initiated steps to curtail information asymmetry and confusion in the market when it came to listed companies undergoing the Corporate Insolvency Resolution Process (CIRP) in accordance with the Insolvency and Bankruptcy Code (IBC)
In the past, several shareholders were caught on the wrong foot while dealing in companies such as Dewan Housing Finance Corporation (DHFL), Jet
Airways, and Videocon Industries, amid lack of clarity with regard to the fate of existing equity holders.
To ensure investors are better-informed, the 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, the exchanges will direct all brokers to alert their clients at the time of placing orders that the scrip is undergoing resolution.
“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,” the NSE said in a press release on Friday.
The NSE and BSE will put in place a system of coordination and, on the basis of the oral order of the company or resolution professionals (RPS), suspend trading in the company immediately. This will be done in cases where the value of a listed security 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 an oral order and the final written order by the National Company Law Tribunal. As a result, companies do not disclose anything to the stock exchanges until they receive a written copy of the order. This puts a lot of shareholders in a disadvantageous position because the information is available with a select group, which creates information asymmetry. To overcome this problem, the exchanges have directed RPS to disclose the resolution plan on oral pronouncements within 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 the 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.