The lot of minority shareholders of companies undergoing insolvency proceedings is a sorry one. The popular narrative might be one where the promoters (who are also the management) have mismanaged affairs or worse. In reality, since the company has defaulted on its loan and not the promoters, all shareholders, being owners, take responsibility. That’s why their board is suspended, and a resolution professional is in charge, acting on behalf of the committee of creditors (CoC).
Still, minority shareholders of listed companies deserve better, at least in terms of transparency. A certain restoration of rights is in order. The Securities and Exchange Board of India (Sebi) has floated a discussion paper on compliance with regulations by listed companies undergoing insolvency.
Take a small example. Electrosteel Steels Ltd announced on 1 April that CoC approved Vedanta Ltd’s resolution plan from the bids received in a meeting held on 29 March. Could it not have been disclosed on the same day or the next day? While its shareholders got to know a day early in any case, that’s because Vedanta is listed. Disclosures in the pre-bid finalization stage seem to vary from company to company. Monnet Ispat and Energy Ltd, for instance, did not disclose the list of bidders while some others did.
But these seem trivial compared to the bigger elephant in the room. Shareholders have no clue of what the actual resolution plan is, and while news reports point to the amount offered, the company announcements do not refer to it. Minority shareholders should know the deal structure, including details such as fund infusion, capital restructuring and conditions imposed on the company. This would all count as material information.
Sure, the resolution professional may be required to disclose the plan to the National Company Law Tribunal (NCLT) first, following the process. After that, there is no harm in disclosing it to the stock exchanges, even if in a truncated form, with the caveat that this is subject to NCLT orders and outcome of further litigation if any. This will end the suspense among minority shareholders on their fate, and also prevent insiders from taking advantage of this sensitive information leaking.
Sebi’s discussion paper calls for a framework to be put in place to ensure that even listed companies undergoing insolvency remain compliant with laws. It takes a position that the Insolvency and Bankruptcy Board of India has clarified that such companies are required to be compliant with all laws, unless there is a specific exemption.
In the pre-bid stage, the Sebi paper calls for disclosure at every stage such as filing of an application to initiate the insolvency process and ending with it being admitted at NCLT.
In the bidding stage, the paper has talked about shares continuing to trade and whether some restrictions on transferability should be imposed if companies cannot meet listing standards. That seems unnecessary as the insolvency process can drag on for three-quarters of a year, which is too long a time. Prospective bidders have called for suspension in trading as they claim it affects price discovery but that has not prevented them from bidding in the recent cases. Unless there is evidence of injury to minority shareholders in multiple cases due to trading continuing or manipulation of prices, there seems no valid reason to suspend trading.
Sebi has prescribed a number of disclosures in the bidding stage too, to ensure investors are kept updated on the developments. This should take care of the anomalies reflecting in the current disclosures. Here, one addition could be requiring the resolution professional to ensure that CoC decisions are communicated within a certain time, just as is required for board meetings. Sebi says anything that is not a commercial secret—revealed to bidders during the process—should be made available to shareholders.
The capital market regulator’s proposals will plug several of the disclosure gaps that exist in the current insolvency process pertaining to listed companies. It has asked for comments by 15 April. Since the insolvency process is under way, and is in an advanced stage in some companies, it should put out these regulations urgently. After all, justice delayed is justice denied.