- Wealth PMS (50L+)
We’re written a lot about bankrupt companies and how it’s dangerous to buy them. Current shareholders have felt cheated by the stocks’ movement after the resolution. (Read) Some of the objections to our assessments were:
SEBI has now changed all of this. They made some gazette notifications that specifically allow the two things that were previously disallowed. And that changes the game.
The current rule in SEBI was that bankrupt companies will be taken over, but no one could buy more than 75% of a company.
The change (read here) is that the 75% limit is not applicable for any acquisition of shares based on an NCLT resolution.
Remember that Tata Steel only bought 72% of Bhushan Steel in equity, while having the ability to convert 9,000 cr. to equity later. (Read our post) They couldn’t have converted, in regular circumstances. Now they can.
(The SEBI rule now says “pursuant to a resolution”, so it’s not relevant WHEN the resolution happened, but the issue of equity shares – conversion of debt or fresh purchase – should happen after the notification. Meaning: It doesn’t matter that Bhushan Steel was resolved earlier to the SEBI change – Tata Steel can still convert and own a higher percentage than 75% now.)
The amendment of delisting norms (read here) says that:
In this context Electrosteel Steels will be delisted. (Read our post)
Current shareholders will receive Rs. 0.19 per current share. Actually, right now, 50 shares will be converted to 1 new share. And shareholders will get Rs. 9.54 per new share. Which is equivalent to Rs. 0.19 per current share.
And then, the shares will be delisted. You could continue to hold, of course, but note that you can sell it back to the buyers at nineteen paise per share. Continuing to hold has the issue that
a) You don’t know if there will ever be a buyer at more than 0.19 per share
b) The company can see continued dilution with Vedanta buying more and more shares and you can’t do diddly squat about it.
Continues to be this: We would not suggest buying Bankrupt Companies.
There’s no “saviour” in the form of some SEBI rule or the other. Now a buyer can take more than 75% after a resolution, and SEBI will not object. And they could also delist without going through a long process. This is detrimental to minority shareholders.
Bankruptcy is simply this: The company is liquidated or sold, and the money is used to pay back people who the company owes DEBT to. If anything is left, equity holders get the rest. In most cases, nothing is left, so shareholders should expect zero. That they get something is a good thing – but it’s not going to be much.