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Exchanges tighten rules on trading in stocks of IBC firms

The exchanges will be monitoring on a regular basis the compliance of all companies under CIRP from a disclosure perspectivePremium
The exchanges will be monitoring on a regular basis the compliance of all companies under CIRP from a disclosure perspective

  • The guidelines come after the massive loss of money suffered by investors in Dewan Housing Finance Corp. Ltd (DHFL) shares
  • The stock had risen tremendously on manipulative trading, during the fag end of the resolution process in NCLT, before it was delisted in June

Mumbai: Stock exchanges on Friday moved to prevent losses for investors in companies undergoing insolvency resolution with a series of directions on timely disclosure and compliance, following the recent Dewan Housing Finance Corp. Ltd (DHFL) fiasco where small investors lost all of their investments.

In a joint statement, the National Stock Exchange and BSE said if an approved resolution plan wiped out the share capital, they would suspend trading in the stock as soon as the bankruptcy tribunal issues its oral order. The company in question must communicate the development to the exchange within 30 minutes, which will confirm it with the resolution professional (RP) and suspend the stock.

“In instances where the resolution plan provides that the value of the listed securities is considered zero and the company is to be delisted or where the entire equity capital is reduced, cancelled or extinguished without any payment to the existing equity shareholders, exchanges in coordination with each other, based on the intimation of the oral order from the company and RP confirming the aforesaid provision in the resolution plan, shall suspend the trading in the company on an immediate basis," the statement said.

The rules follow the delisting of DHFL, whose shares had shot up at the fag end of the resolution process. In the March quarter, retail investors held 42.19% in DHFL, sharply up from 21.55% in March 2019 and 38.67% in March 2020. Mint reported on 18 June that some retail investors of DHFL plan to approach the Supreme Court against the National Company Law Tribunal (NCLT) for allowing the delisting as part of the resolution. Investors plan to accuse NCLT and the Securities and Exchange Board of India (Sebi) of failing to adequately inform them about the impending delisting, part of Piramal group’s approved resolution plan.

Without specifying any case, the exchanges said in the recent past they have come across instances where the approved resolution plan allows delisting or write-off, cancellation or extinguishment of equity shares without any payout/consideration to existing shareholders. “However, it is observed that there is a considerable time lag between pronouncement of oral order by NCLT and final written order by NCLT. Companies generally hold on to the information and do not make any timely disclosure to the exchanges until receipt of a written copy of the order. By this time, the information may be available to a select group and may create information asymmetry and confusion," the statement said.

As soon as a firm is admitted to the Corporate Insolvency Resolution Process (CIRP), exchanges will identify and tag its security in a manner that will be easy for members and market participants to know that the security is undergoing insolvency. A list of such securities will also be available on the exchange websites.

Exchanges will also issue a detailed guidance note to CIRP firms, and the RP on compliance and disclosure requirements as per Sebi LODR (listing obligations and disclosure requirements) Regulation, 2015, which will be uploaded on the exchange website, and an email shall be sent to all companies that are under CIRP, informing them about the guidance note.

The RP must comply with the Sebi LODR regulations and disclose the approval of the resolution plan on oral pronouncement or otherwise of the order on an immediate basis and not later than 30 minutes.

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