Updated: July 10, 2021 8:11:56 am
Stock exchanges — BSE and the National Stock Exchange (NSE) — have unveiled guidelines to safeguard the rights of investors, in a bid to bring transparency in trading of shares of companies undergoing Corporate Insolvency Resolution Process (CIRP).
Bourses said they will identify and tag the security in a manner that will make it easy for members and market participants to know that the security is currently under IBC proceedings. Further, exchanges will direct all brokers to alert their clients at the time of placing orders that the scrip is undergoing CIRP. The move by the bourses comes after investors lost heavily in companies that were under insolvency proceedings.
Resolution professionals (RPs) were directed to disclose the resolution plan on oral pronouncement on an immediate basis and not later than 30 minutes. RPs will also have to inform through the exchange platform the impact on the existing holders. “Since this alert will be available from the day of admission into CIRP till the day of suspension of the company/ exit from CIRP proceedings pursuant to National Company Law Tribunal (NCLT) order, the market participants shall be clearly aware of the status of the company and shall exercise necessary due diligence will trading in the security,” NSE said in a press release Friday.
The NSE and the BSE will put in place a system to coordinate between each other, and based on the intimation of the oral order from the company or RPs, suspend trading in the company on immediate basis. This will be done in instances where the value of the listed securities is considered zero or where the entire equity capital is reduced, cancelled or extinguished without any payment to the existing equity shareholders.
“Identifying and tagging securities as soon as the company is admitted to CIRP would enable market participants to make timely and fully-informed decisions,” said Sonam Chandwani, managing partner, KS Legal. “Companies were found to hold onto this information without timely disclosure to the exchanges until the receipt of the final order. However, those working for the company having knowledge of the same creates information asymmetry as exchanges and shareholders may not have a whiff of the same.”
The contention of the exchanges is that lack of timely disclosure creates information asymmetry and confusion in the market. Several shareholders suffered heavily while dealing in companies such as Dewan Housing Finance Corporation (DHFL), Jet Airways and Videocon Industries, amid lack of clarity with regards to the fate of existing equity holders. Investors had invested without knowing that shares of some of these companies will be delisted.
DHFL stock had risen sharply on manipulative trading, during the fag end of the resolution process in NCLT, before it was delisted in June.
According to analysts, there is a considerable time lag between the pronouncement of oral order and the final written order by NCLT. Companies usually wait to disclose to the stock exchanges until receipt of a written copy of the order, putting shareholders in a disadvantageous position as the information is available with a select group of investors.
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