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Corporate insolvency must not catch equity investors off guard

Corporate insolvency must not catch equity investors off guard

Corporate insolvency must not catch equity investors off guard
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By Reema Tendulkar  Apr 3, 2018 9:39 AM IST (Updated)

India’s rise by 30 places to the 100th position in the Easy of Doing Business rankings received much attention last year.

India’s rise by 30 places to the 100th position in the Easy of Doing Business rankings received much attention last year. The feat was celebrated, deservedly so, but one detail was nearly overlooked  -- India’s ascent to fourth place in the field of ‘Minority Investor Protection’.

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It is to the credit of the central government and capital market regulator Sebi that India stands out here. Ergo, it is surprising that Sebi has been slow to react to the changes brought about by the Insolvency and Bankruptcy Code, 2016 (IBC), given its impact on minority investors.
The IBC came into effect on May 28, 2016 and its substantive provisions dealing with corporate insolvency have been in force since December 2016.
Sebi, at a board meeting on March 28, 2018  -- exactly 22 months after the IBC took effect --  has commenced a consultation process for reviewing the requirements of the various regulations that are applicable to listed companies undergoing an insolvency resolution process under the IBC.
Sebi has sought public comments on a consultation paper until April 15, 2018, after which the necessary amendments to various regulations will be carried out.
In the meantime, several of the initial cases under the IBC will see conclusion. Many of these companies, including companies in the RBI's "Dirty Dozen", are listed.
Spare a Thought for Investors
The fate of the equity investors in these companies hangs in the balance. Under a resolution plan in the IBC, a new investor may choose to write down all the existing equity shares, or dilute them down to an insignificant percentage. An acquirer may even seek to delist the company.
In any event, in cases where secured creditors are taking a substantial haircut, there will certainly be no payoff to the equity holders.
It is true that equity holders are last in the queue to receive a payout in an insolvency. Investors understand this.
It is nobody’s case that equity investors should be assured any return or be protected from the ‘equity risk’ in any manner. However, it is equally true that such risk should be an informed risk.
It does not appear that investors today are fully informed or aware of this risk. What else could explain the increase in prices in the scrips of companies immediately after news of commencement of their insolvency becomes public?
The purely speculative nature of these trades, which have no correlation to the shares, should be a cause of concern.
Some Warning, Please!
In some other markets, trading in scrips of insolvent companies is suspended. It is not known yet whether Sebi will choose to go down this path as well.
If it does, it is imperative that investors have adequate warning about impending insolvencies so that they can assess their positions well in time. Sebi had proposed a rule requiring immediate disclosure of loan defaults by listed companies.
This would have helped investors take an informed decision early. However, the rule was put on hold one day before it was to have come into effect on October 1, 2017.
It is heartening to know that Sebi is said to be re-looking at introducing the default-disclosure rule. The sooner that happens, the better it will be for equity investors.
Reema Tendulkar is is an anchor and associate editor-research at CNBC-TV18 and has been covering the technology and telecom sectors for almost 10 years.
 
 
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