A lot has been said and written on the Indian insolvency law—the Insolvency and Bankruptcy Code, 2016 (IBC). It is one of the big-bang reforms of the Modi government that seems to have started yielding tangible results. All the action and media attention has been focused on the 12 large stressed companies, which were referred to under the IBC to the National Company Law Tribunal (NCLT) by the financial creditors, and which are in various stages of completion, although some of them are stuck in some litigation. Various corporate groups and investors have shown a keen interest in acquiring these stressed companies. It has also been a continuous learning process for all the stakeholders, whether it be the government, the banks, the insolvency resolution professionals, the prospective bidders, other regulators, as well as for the community of lawyers and advisors. The government has been very proactive in bringing about changes to the code as well as the regulations, in most cases through the ordinance route.
Of course, the insolvency process, as a whole, has its implications under various allied laws and regulations. Taxation is one of the key areas and some key amendments were made in the Finance Act, 2018. The other key area was the securities law, as most of the large cases are listed on the stock exchanges.
Few pivotal issues that have been bothering potential bidders are:
– Whether acquiring a listed company undergoing the resolution process will trigger the provisions of the takeover regulations?
– Whether any special concession is available for the companies undergoing the resolution process to either remain listed or get delisted?
-Whether pricing for capital infusion needs to adhere to market price guidelines or is it flexible, given the underlying economic realities of the stressed companies?
-Any acquisition, especially of a stressed company, may involve steps such as a merger, demerger, capital reduction, sale of subsidiaries, among others. Does this require separate stock exchanges’/ SEBI approval as well as shareholder’s approval?
As several IBC cases went to the NCLT, bidders and their advisors made several representations to SEBI to address these issues in a manner which ultimately helps in achieving the objectives of the code. In this connection, SEBI came up with a discussion paper during the month of March, 2018, and has now issued four separate notifications amending its relevant regulations, effective from June 1, 2018.
As per the takeover regulations, the acquirers of the stressed companies were treated at par and no person could acquire shares or voting rights beyond the maximum non-public shareholding ,i.e. beyond 75% (unless the acquisition is under a delisting offer). This was a problem as the acquirers are providing all the funds to the stressed company to revive it and, hence, are uncomfortable where they do not control more than 90% of the equity shares/ voting rights. The acquirer has an option to seek relaxation from the strict compliance of the takeover regulations under the resolution plan but it remained within the powers of SEBI, whether or not to accept such relaxations.
Considering the above, an amendment has been made in regulation 3(2), by inserting a proviso enabling the acquirer holding 25% or more shares or voting rights in a listed company, to acquire shares or voting rights beyond 75% of the share capital of the listed stressed company subject to, and in accordance with, the resolution plan approved by the NCLT. However, no relaxation has been granted in complying with the minimum public shareholding norms and such an acquirer would need to comply with the requirement of bringing the public shareholding to 25% within one year from the date it acquires the company, or it would need to apply for delisting of the securities from stock exchanges.
The current delisting regulations require adherence to onerous compliances such as the reverse book building process, fixation of the floor price, minimum number of equity shares to be acquired for delisting, appointment of a merchant banker, issuance of an offer letter, seeking approval of the shareholders, among others, for delisting of its securities. Most acquirers, given the reasons cited above, would like to acquire full control and delist the company, but the above regulations make that a virtual impossibility. Sensibly, SEBI has now significantly relaxed the delisting regulations so that the acquirers can choose to delist securities of such an acquired stressed company without following the intricate delisting procedure, where such a delisting process (in compliance with certain conditions), is a part of the resolution plan approved by the NCLT (which means the delisting plan need not be in compliance with existing delisting guidelines).
The amendments now provide that even if no process of delisting is mentioned in the resolution plan, the company can be delisted if the minority shareholders are given an exit and no class of shareholders or promoters have a preference in the exit pricing. However, it is worth noting that the exit price to the public shareholders should not be less than the liquidation value (after paying off dues) as per the code. This is a significant liberalisation and a bold step from SEBI. How the minority shareholders of these companies react, remains to be seen.
Further, in a very prudent move, and to ensure the timely implementation of the resolution plan approved by the NCLT, SEBI has done away with requirements of pricing, shareholder approval, disclosure, tenure, among others. for preferential issue of equity shares and convertible instruments under the SEBI ICDR Regulations. Further, SEBI has also clarified that where the preferential issue is made in terms of the resolution plan approved by the NCLT, no shareholders’ approval is required under SEBI LODR Regulations with respect to material-related party transactions, disposal of shares in material subsidiary, dealing with assets of material subsidiary and re-classification of shareholding of erstwhile promoters as public holdings. All such approvals are deemed to be granted as long as they are a part of the resolution plan. Additionally, any restructuring undertaken by way of a scheme of arrangement/ amalgamation approved under a resolution plan shall not be subject to an approval of SEBI and the stock exchanges where such securities are listed.
Other requirements for such restructuring such as seeking majority approval of the minority shareholders, obtaining a valuation report and a fairness opinion, will also not apply. Limited disclosures with respect to such plans are to be made to the stock exchanges within one day of the resolution plan being approved by the NCLT. The lock-in provisions under the SEBI ICDR Regulations shall continue to apply in order to prohibit the short-term profiteering by the incoming shareholder/acquirer. These are welcome changes made by SEBI and will go a long way in making India’s bankruptcy regime a more robust one.