The Securities and Exchange Board of India’s (Sebi’s) proposal to have at least 10 per cent free-float for companies relisting after the insolvency proceedings could run into implementation hurdles.

Several legal experts plan to highlight the challenges in implementing all three options recommended by the regulator in a discussion paper last week.

In a discussion paper titled 'Recalibration of threshold for Minimum Public Shareholding (MPS) norms, enhanced disclosures in Corporate Insolvency Resolution Process (CIRP) cases', Sebi has proposed that companies should achieve at least 10 per cent MPS within six months of re-listing, down from 18 months allowed currently. The second option given by Sebi is to entail companies to make sure they have 5 per cent MPS post relisting, which needs to be hiked to 10 per cent within a year and 25 per cent in next two years. The third option entails companies having at least 10 per cent public float at the time of relisting of their shares and 25 per cent thereafter in three years.

Experts believe all three options pose challenges for companies just got of CIRP.

“Achieving any level of MPS is always a challenge. We have seen normal companies struggle achieving the MPS over the years, with Sebi extending the deadline over time. In case of a CIRP company, the challenges would be even more, since the shareholders would need to have the risk appetite to invest in such a company,” said Rajesh Thakkar, Partner & Leader - Transaction Tax, BDO India

“Having a 10 per cent public float pre-listing has multiples challenges around effective market for dilution, issues surrounding future liquidity and lastly effectively monitoring the actual status of these shareholders as public. The regulator would certainly need to re-look at the timelines proposed. Since dilution and public participation is dependent on the market conditions and volume of the relevant scrip,” added Moin Ladha, Partner, Khaitan & Co.

The move to seek higher float was triggered by eye-popping rise in shares of Ruchi Soya Industries. The company's shares had surged more than 450 times after it got relisted following the acquisition by Pantanjali Ayurved under the CIRP. Upon relisting, the company had less than one per cent shareholding with the public.

Jitesh Shahani, Partner, L&L Partners believes “the challenge in either of these scenarios would be finding market interest to achieve such dilution, and companies with strong brands or which benefit from a favorable industry or fundamental economic cycle could be expected to do better than those without.”

Current regulations regulations mandate one-year lock-in on incoming promoter shares. Sebi, however, has proposed to relax this rule.

Raj Bhalla, Partner, MV Kini & Co said there is scope for misuse if the new proposals are implemented.

“To do away with the lock-in requirements of one year may not be good option considering that there will be chances of increase in resolution bids by participants who want to purchase stressed companies at cheap prices to only sell them immediately after relisting without any restriction which may effectively fail the entire process of resolution under IBC,” he said.

So what are the other options before the regulator?

“Sebi could restrict trading in the stock or impose lower threshold of circuit breakers until the MPS has reaches say 5 per cent or 10 per cent,” said Shahani.

Ladha believes Sebi will have to relook at the timelines proposed. “Since dilution and public participation is dependent on the market conditions and volume of the relevant scrip.”