[Owais Khan is a final year student at the Government Law College, Mumbai.]
Introduction
On 2 December, 2024 the Hon’ble Bombay High Court (‘HC’) in Harsh Mehta vs Securities and Exchange board of India (‘SEBI’) adjudicated in favor of SEBI in upholding the validity of Regulation 3(2)(b)(i) of the SEBI (Delisting of Equity Shares) Regulations, 2021 (‘Delisting Regulations’) providing for exemption of the provisions of Delisting Regulations for a Resolution Plan (‘RP’) approved under the Insolvency and Bankruptcy Code, 2016 (‘IBC’).
The article, in the light of this judgement, deliberates on the regulatory powers conferred upon SEBI, the clean slate theory for the Successful Resolution Applicant (‘SRA’) under IBC, the harmonious construction between the Securities and Exchange Board of India Act, 1992 (‘SEBI Act’) and the IBC, and finally on the presumption of constitutionality in favor of economic legislations.
Factual Background
The Petitioner was a public shareholder of Reliance Capital Ltd. (‘RCL’). The Reserve Bank of India (‘RBI’), by virtue of Section 45-IE of the RBI Act, 1934 superseded the board of directors of RCL and appointed an administrator. Later, RBI filed an application for admitting RCL into Corporate Insolvency Resolution Process (‘CIRP’) which was subsequently approved.
Induslnd Int. Holdings Ltd., one of the Respondent emerged as the SRA, post approval of his RP by the Committee of Creditors (‘CoC’) of RCL and subsequently by the National Company Law Tribunal (‘NCLT’) inter alia nullifying 98.49% of RCL’s public shareholding since the RP provided for delisting of public shareholding of RCL. The public shareholders contested the Impugned Regulation as violative of Section 11(1) of SEBI Act which imposes a duty upon SEBI to protect the interest of the investors. But there is no redressal to the public shareholders under the Delisting Regulations, in case of RP approved under IBC, if the RP provides for delisting of shares owing to the impugned regulation. However, the HC upheld the impugned regulation basis the averments deliberated below.
Analysis
The author believes that this judgement deserves wide appreciation for not limiting the adjudication only between the Delisting Regulations and SEBI Act, as contended by the public shareholders, but also taking the IBC framework into due consideration. The Delisting Regulations provides for removing the shares of a company from being traded in a stock exchange, whereas the IBC inter alia provides for protecting the interest of the creditors and reviving the Corporate Debtor (‘CD’), through a successful CIRP.
When a company gets the approval from stock exchange for delisting, post the letter of offer by the acquirer, the public shareholders are given a fair chance to sell their shares at a fair price by virtue of the Reverse book building process (‘RBBP’) as provided in Regulation 19 of the Delisting Regulations. An exit price is discovered, at which the acquirer buys the shares from the public shareholders. With this mechanism the interest of the public shareholders is protected. However, when a RP which provides for delisting of equity shares is approved by the NCLT, the above mechanism does not apply. The reasons for the same can be elaborated on the following grounds:
Firstly, when a RP is approved under CIRP, there is a deemed fiction that the shareholders have approved the RP under Section 30(2)(e) of IBC. Secondly, by virtue of the commercial wisdom of the CoC, the RP once approved shall be binding on all the stakeholders of the CD, which even includes the public shareholders as provided in Section 31(1) of the IBC which has been upheld in Ghanashyam Mishra & Sons Pvt. Ltd. vs. Edelweiss Asset Reconstruction Co. Ltd. Thirdly, the ambit of beneficiaries in case of a successful RP is much wider which includes the creditors, the employees, the SRA and even the government owing to the receipt of corporate tax, whereas in case of Delisting Regulations, it is only the public shareholders. Also, the exercise of the RBBP and exit price, might impede the SRA from proposing the RP in the first place. Finally, the non-obstante clause in Section 238 of IBC, which is discussed later.
Regulatory Superintendence of SEBI:
The HC held that SEBI has been conferred with the power to formulate the Delisting Regulation under Section 30 and 11(1) of the SEBI Act as well as the Section 31 and 21-A of the Securities Contract Regulation Act, 1956. While the former imposes a duty upon SEBI for protecting the interest of the investors and promoting the development of the securities market, the latter aims to prevent undesirable transactions in securities. Hence, the SEBI is well within its regulatory ambit to frame the impugned regulations, as none of the two parent acts provide that such an exemption would be in excess of the powers conferred to SEBI. This verdict resonates with the Judgement of Clariant International vs. SEBI, wherein it was held that the only limitations imposed upon the SEBI are the SEBI Act and the Indian Constitution. Thus, the HC upheld the power of SEBI to provide exemption within regulations.
Clean Slate Mechanism:
The IBC provides a clean slate for the SRA. This implies that the CD shall be free from all obligations of pre CIRP period, once the RP is approved. Section 32A of the IBC absolves the CD and its property from all offences and obligations prior to initiation of CIRP. In Manish Kumar vs Union of India, it was held that in the absence of this provision, the prospective resolution applicants would abstain from bidding on the CD. In the present case, the claims of the public shareholders constitute an obligation for the SRA and the HC held that the provisions of the IBC would be defeated if the contention of the public shareholders are accepted.
Harmonious Construction:
SEBI Act as well as the IBC are among the most imperative commercial statutes of the country. However, the legislature has bestowed superiority to IBC over other statutes owing to the non-obstante clause provided in Section 238 of IBC, which states that the provisions of IBC shall override other laws. SEBI Act on the other hand prescribes for a non-obstante clause in Section 28A (3) only for the purpose of recovery of amounts of penalty. Also, it is worth highlighting that the SEBI Act itself accords obeisance to other legislations by virtue of Section 32 of the SEBI Act which states that the provisions of the SEBI Act shall be in addition to, and not in derogation with other laws. Applying the Doctrine of Harmonious construction, it can be held that IBC shall prevail over SEBI Act and hence a RP approved by the CoC and NCLT will prevail over the Delisting Regulations, as held by the HC.
The superiority of IBC over SEBI Act was also upheld in various previous cases. In Anju Agarwal vs. Bombay Stock Exchange & Ors., it was held by the National Company Law Appellate Tribunal that Section 14 of the IBC dealing with moratorium shall prevail over Section 28A of the SEBI Act, a non-obstante clause in the SEBI Act dealing with recovery of penalty amounts imposed by SEBI. Thus, even the only non-obstante clause provided in the SEBI Act was nullified in this order upholding the superiority of moratorium over recovery of penalty imposed by SEBI. Similarly, in the case of DHFL vs. SEBI, it was held by the Securities Appellate Tribunal that no proceeding can be instituted under the SEBI Act when a moratorium is imposed.
Presumption of Constitutionality:
Finally, it has been an explicit stand of the judiciary to presume economic statutes as constitutionally valid. The constitutional courts have displayed judicial restraint in interpreting economic statutes. The rationale behind this restraint is to maintain and balance the delicate separation of powers between the judiciary and the legislature/executive as provided in the Indian Constitution. The HC held that sufficient safeguards are provided to protect the interests of shareholders in the IBC as it envisions a broad mechanism to maximize the assets of the CD and to resolve the insolvency of the CD expeditiously.
However, the HC outlined its limited role, by stating that the extent of protection to be granted or how much protection must be given are mainly legislative or quasi-legislative policy matters. It further reiterated the landmark words of R.K. Garg vs. Union of India which had held that “…. every legislation particularly in economic matters is essentially empiric and it is based on experimentation or what one may call trial and error method ... There may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid….”. (emphasis supplied). The same was followed in this case.
Conclusion
Thus, the judgement of the HC is surely a step in the right direction towards promoting a limited regulatory interference. No Doubt, the interests of the shareholders is imperative, but it cannot be allowed to impose a veto on the decision-making ability of other stakeholders of CIRP.
The successful commercial landscape in an economy is a cumulative outcome of protecting the interests of all stakeholders, as they can neither function nor can prosper without one other. The IBC, to an extent supersedes SEBI Act in this aspect to the extent that IBC provides for a much larger basket of beneficiaries, inter alia the CD, the SRA, the creditors and the employees.

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