An unfair deal for minority shareholders

Recent changes in delisting regulations for insolvency cases have handed them a raw deal

A protective framework for minority shareholders ensures a robust and dynamic secondary market for securities.

As such, the laws aim at shielding the rights of minority shareholders in disadvantageous circumstances, ensuring that the market is safe and that the possibilities of them losing out on their monies are unlikely except when the market goes red.

This holds true as conventional wisdom, and should be no exception facilitating the implementation of the Insolvency and Bankruptcy Code, 2016 (IBC).

Amendment

SEBI (Delisting of Equity Shares) Regulations, 2009, regulates the conditions and the procedure by which it is possible to delist the securities of a listed entity.

The delisting regulations provide for an exit opportunity for existing shareholders at a price determined through the reverse book-building process.

The exit opportunity thus ensures a fair bargain for the minority shareholders.

SEBI, recently through its SEBI (Delisting of Equity Shares) (Amendment) Regulations, 2018, has amended the delisting regulations.

The amendment provides that these regulations shall not apply to any delisting of equity shares of a listed entity made pursuant to a resolution plan approved under IBC, provided any of the following two conditions are fulfilled: one, the resolution plan lays down specific procedures to complete the delisting; or two, the resolution plan provides exit opportunity to the existing public shareholders at a specified price, which shall not be less than the liquidation value ascribed in accordance with Section 53 of IBC.

However, where existing promoters/any of the shareholders, whether directly or indirectly, are allowed exit at a higher price (that is, higher than the liquidation value), the public shareholders shall receive no less.

A careless concern

The amendment assures that the public shareholders will get a minimum of liquidation value if the corporate debtor is sought to be delisted, pursuant to a resolution plan. Interestingly, the expression “liquidation value to equity-holders” sounds like an oxymoron in the context of insolvent liquidations.

Had there been a liquidation value attributable to equity-holders, there would have been no question of insolvency. A positive liquidation value to equity-holders implies that there is enough for the debt-holders to have their dues paid off. So where is the insolvency?

Liquidation value attributable to an equity-holder in an insolvent entity, in usual cases, would not be more than nil.

Consequentially, the market value of the public shareholding comes down to zero. Hence, the exit opportunity at liquidation value is not even a deal for minority.

Minority to be blamed?

When a company goes insolvent, the creditors take control and the equity-holders take a back seat. So classification as a principal or a minority shareholder is irrelevant.

The amendment seeks to equalise the exit value available to minority shareholders with that offered to principal shareholders. The amendment says that if the existing promoters or any other shareholders are provided an opportunity to exit at better prices, the existing public shareholders shall also be provided exit opportunity, at least, at the same price. In liquidations under IBC, promoters’ equity being written off is not uncommon.

Hence, the utility of this provision in safeguarding the worth of minority shareholders’ investments is questionable.

Besides, this idea of keeping a principal and a minority shareholder at the same pedestal seems to neglect the very fact that minority shareholders have negligible say in the business decisions of the entity, even if they exercise their right to vote.

So, the eventuality of a principal shareholder not getting anything shall not preclude a minority shareholder from receiving his paper’s worth.

It may be noted that a similar exemption was there for schemes framed under the BIFR (Board for Industrial and Financial Reconstruction) regime, if the scheme provided an exit option to the existing public shareholders at a specified rate.

The intent was clear: protection of the rights of minority shareholders. Notably, there was no concept of ‘liquidation value’ during the BIFR regime.

This is evident of the underlying objective of such regulations — where an entity is sought to be delisted, those not agreeing to such delisting should be allowed to disagree (and therefore, exit), by taking their fair share.

What’s the solution?

Regulatory dicta like these seem to turn a Nelson’s eye to the basic tenets of law-making, including principles of natural justice and the fundamental democratic set-up of company law.

The fallacy of guaranteed liquidation values during the resolution phase might not work well in serving the interests of those who have not been parties to the resolution plan.

The big question is regarding determination of the value of the minority shareholding. The answer probably lies in the difference between the fair value of the entity and the total debts.

There was definitely a need for amending the delisting regulations and making things easier for the acquirer.

However, it is to be ensured that the same does not send negative ripples across the secondary market.

The writer is Senior Associate at Vinod Kothari and Company.

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