[Mallika Sen is a 2nd year B.A. LL.B. (Hons.) student at the National Law School of India University, Bangalore and Rudresh Mandal is a 3rd year B.A. LL.B. (Hons.) student at the NALSAR University of Law, Hyderabad.
On March 28, 2018, the Securities and Exchange Board of India (‘SEBI’) released a discussion paper on compliance with SEBI regulations by listed entities undergoing the ‘Corporate Insolvency Resolution Process’ (‘CIRP’) under the Insolvency and Bankruptcy Code, 2016 (‘IBC’). This comes in light of the circular issued by the Insolvency and Bankruptcy Board of India (‘IBBI’) on January 3, 2018, clarifying that any corporate person undergoing insolvency resolution under the IBC needs to comply with provisions of all applicable laws, unless specifically exempted or inapplicable in the given case. With an increasing number of corporate firms in various stages of the resolution process, it is evident that SEBI is seeking to streamline the process and minimise hurdles to ensure a time-bound resolution.
The discussion paper floated by SEBI essentially spans eight major issues. These are: (i) disclosure regulations, (ii) material related party transactions, (iii) disposal of shares in a material subsidiary (iv) dealing with assets of material subsidiaries, (v) re-classification of promoters, (vi) compliance with minimum public shareholding requirement, (vii) acquisition beyond maximum permissible non-public shareholding, and (viii) delisting pursuant to resolution plan/ liquidation.
This post examines the recommendations proposed by SEBI with regards to disclosure regulations over the three stages of the resolution process and also looks into the impact of the proposed amendments on minority shareholders.
The CIRP, detailed in Chapter II of the IBC, is the process through which resolution of insolvency of a corporate debtor is undertaken in accordance with the provisions of the IBC. Under the IBC framework, when a company is undergoing CIRP, the board of directors of the company stands suspended and all powers of management of the company are vested in a ‘resolution professional’ (‘RP’).
SEBI’s discussion paper proposes amendments across all three distinct stages of the resolution process, that is: (i) the pre-CIRP stage, i.e. the stage prior to the application for initiating CIRP being admitted by the National Company Law Tribunal (‘NCLT’), (ii) the CIRP stage, i.e. the period spanning from the admission of the application by NCLT and the approval of the resolution plan by the NCLT, and finally, (iii) the post-CIRP stage, i.e.- the period wherein the resolution plan, as approved by the NCLT is being implemented.
Amended Disclosure Requirements- A Step Forward in Transparency?
At present, there are no specific disclosure requirements with respect to CIRP in the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (the ‘LODR Regulations’). The lack of information available has resulted in shareholders having to rely upon speculative news reports, creating rampant speculation and uncertainty amongst minority shareholders regarding the future of their stockholdings.
SEBI has proposed several disclosure requirements that listed corporate entities undergoing CIRP would be subject to. In the pre-CIRP and the CIRP stages, an amendment is proposed to regulation 30 of the LODR Regulations, which prescribes disclosure of material information to stock exchanges.
The proposed change amends the regulation with respect to the pre-CIRP stage to specifically prescribe disclosure at every stage such as the filing of the CIRP application and the admission of the said application by the NCLT. A similar amendment has been proposed with regard to the CIRP stage, with regulation 30 of the LODR Regulations being amended to include disclosure of all the stages in the process, including the number of bids and the content and approval of the resolution plan.
This becomes important in light of recent instances such as that of Electrosteel Steels Ltd. Electrosteel’s disclosure to the BSE that creditors have initiated the insolvency process, was largely a discretionary act, and SEBI is now seeking to make such disclosure mandatory. Thereby, both the corporate debtor, its creditors and shareholders will be better placed to gauge the accountability of the debtor, facilitating greater transparency.
At present, the suspension of the board coupled with no disclosure requirements results in the creation of a severe information asymmetry, especially with respect to minority shareholders. Minority shareholders have little or no knowledge about any of the various steps in the resolution process or how far along the resolution process is. They should have access to material information such as conditions imposed on the company, capital restructuring being undertaken and the status of the insolvency resolution process, amongst other things, with the caveat that the same is subject to further orders by the NCLT. Further, disclosure of the decisions of the committee of creditors, and other information that is not a commercial secret can only help improve the conditions and protect the rights of minority shareholders. SEBI’s move to amend the LODR Regulations shall certainly balance the existing asymmetry to an extent, and promote greater transparency towards shareholders.
– Mallika Sen & Rudresh Mandal