Improving disclosures on IBC stocks will curb insider trading and protect small investors
Stocks of companies undergoing corporate insolvency resolution process (CIRP) have been witnessing intense volatility in recent times. Many small investors have also been active in these stocks , lured by the large price movements. Speculative activity tends to be rife in such stocks with any information asymmetry exploited to the detriment of smaller investors. Market regulator, SEBI, has been trying to address these concerns through an amendment to the Listing Obligations and Disclosure Requirements regulations in 2018, and once again this January. A recent directive by stock exchanges asking Corporate Insolvency Resolution Professionals to speed up communication on NCLT orders to exchanges is another step forward in this direction. But regulators and exchanges should also work towards increasing investor awareness on risk involved in trading in such stocks.
Stock exchanges have done well to direct the resolution professional to inform the exchanges about the approval of resolution plan by the NCLT through an oral order or otherwise, within 30 minutes of the pronouncement of the order. Companies typically tend to wait for the written order of the NCLT before informing exchanges. The time lag between the oral and written orders would provide a window for persons privy to the information to engage in trading. Asking the resolution professional to inform investors about the impact of the order on the status of the security’s listing, write-offs, cancellations, extinguishment and so on through the exchanges, is also welcome. Such communication should be in simple language so that investors can grasp the significance of the event. There is also an ongoing debate about allowing trading in stocks under CIRP, since there is intense speculation on the outcome of the resolution process. SEBI has rightly not clamped down on trading in stocks during the CIRP. Suspension of trading in these stocks can prevent investors from exiting the stock. Instead, a middle path that allows for such securities to be traded, but with sufficient information and warnings to investors, seems advisable. Sending such alerts from the day the company is admitted under insolvency proceedings till its exit from CIRP proceedings will certainly help; but exchanges should ensure that trading members implement these rules.
There seems to be a lack of awareness among small investors about the extent of risk in these companies. SEBI and the exchanges should educate investors about how the dues of equity shareholders feature at the bottom of the creditors’ list on liquidation — after financial institutions, employees and other creditors. The exit to the shareholders under the IBC should be not less than the liquidation value, but this value is often nil, resulting in zero payouts to shareholders. Flagging these risks to investors could help protect them.