Sebi proposes to increase minimum free float for firms post-insolvency

Sebi proposal follows surge in Ruchi Soya stockprice; higher disclosure norms on the cards

The Securities and Exchange Board of India (Sebi) has proposed to increase the minimum free float for companies relisting after undergoing the corporate insolvency resolution process (CIRP). The capital markets regulator has also called for greater disclosures to ensure better price discovery and transparency.

The move is triggered by the extreme movement in the Ruchi Soya Industries' stock. The company's shares had surged more than 450 times after it got relisted following the acquisition by Pantanjali Ayurved under the CIRP. The sharp rise on the ultra-low free float of less than a per cent had sparked a debate whether Sebi and the stock exchanges should revisit rules to ensure fair price discovery.

In a discussion paper issued on Wednesday, Sebi sought the market's feedback on whether the threshold for minimum public shareholding (MPS) at the time of relisting should be set at 5 per cent or whether companies should be allowed to relist with any float on the condition that they will increase it to 10 per cent within six months.

At present, companies that get listed following their initial public offer (IPO) need to have at least 10 per cent public shareholding, and the same needs to be increased to 25 per cent within three years. However, companies listing after undergoing the insolvency resoulution process are not required to have any minimum free float. Ruchi Soya, for instance, had less than 1 per cent free float when trading resumed in the counter after relisting in January.

“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 has said in the discussion paper.

Currently, Sebi provides up to 18 months for companies listing under the CIRP to hike their MPS to 10 per cent and another 18 months to take it to 25 per cent.

Also, the regulations mandate one-year lock-in on incoming promoter shares. This rule prevents companies from increasing public float. Sebi, however, has proposed to relax this rule.

“Achieving MPS compliance through means involving off-loading of shares by the incoming investor or promoter within one year is not possible. Therefore, it may be permitted to free such shares from lock-in so as to help achieve MPS (only to the extent to enable MPS compliance),” the regulator has proposed.

Also, investors are often in the dark with regard to the business prospects of a company once it comes out of insolvency. This leads to irrational pricing of the stock. To tackle this issue, the regulator has prescribed a slew of disclosures. Some of them are: Pre and post net-worth of the company, detailed shareholding pattern, details of funds infused, creditors paid off, disclosure of financial ratios such as P/E, return on net-worth, names of the new promoters, key managerial persons, and brief description of business strategy.

“A meticulous deliberation on the matter of recalibration of threshold for minimum public shareholding norms in companies undergoing the CIRP and seeking relisting is the need of the hour. Picking lessons from the Ruchi Soya fiasco, additional disclosure requirements will enhance transparency of the CIRP and ultimately protect shareholders interest and regain investor trust and confidence,” said Sonam Chandwani, managing partner, KS Legal & Associates.