Introduction
In its recent decision in Harsh Mehta v. Securities and Exchange Board of India[i], the Hon’ble High Court of Bombay addressed a crucial issue at the intersection of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) and the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2021 (‘Delisting Regulations’). The case examined the regulatory framework governing the delisting of equity shares during the corporate insolvency resolution process (‘CIRP’), raising significant questions about shareholder rights, legislative intent, and the supremacy of the IBC.
The dispute centred on the resolution process of Reliance Capital Limited, the corporate debtor (‘CD’) and the treatment of its equity shareholders under a resolution plan (‘Plan’) approved by the National Company Law Tribunal (‘NCLT’), which assigned a nil liquidation value to shareholders and provided for the delisting of all shares.
At the core of the case was the validity of reg. 3(2)(b)(i) of the Delisting Regulations, which exempts delisting pursuant to a Plan under the IBC from procedural safeguards otherwise mandated by the Delisting Regulations. The High Court examined whether this exemption was ultra-vires by the Security and Exchange Board of India Act, 1992 (‘SEBI Act’) or justified by the IBC’s non-obstante clause under s. 238, which grants the IBC overriding authority in cases of conflict with other laws.
Brief Facts
The factual matrix arose from the Reserve Bank of India’s (‘RBI’) exercise of powers under s. 45-IE of the Reserve Bank of India Act, 1934. On 29.11.2021, The RBI superseded the Board of Directors of the CD and appointed an Administrator. Subsequently, on 02.12.2021, the Administrator filed a petition before the NCLT to initiate the CIRP against the CD under the IBC. The NCLT admitted the petition on 06.12.2021, marking the insolvency commencement date (‘ICD’). The Administrator was simultaneously appointed as the resolution professional (‘RP’).
In November 2022, nearly a year after the initiation of CIRP, the petitioner, Harsh Mehta, acquired 6,700 equity shares of the CD, amounting to a negligible 0.003% of its total shareholding. The CD had 98.49% public shareholding as of 31.12.2023, while the committee of creditors (‘CoC’) reviewed and approved a Plan for the CD. On 27.02.2024, the NCLT sanctioned the Plan, which proposed to assign a nil value to all equity shares, leading to the cancellation of existing shares and their delisting.
Following the NCLT’s order, the RP made requisite disclosures to the stock exchanges, clarifying that the CD’s equity shares would be delisted as per the Plan since their liquidation value was nil. Consequently, no offer or payment would be made to shareholders. On 29.02.2024, the stock exchanges issued circulars suspending trading of the CD’s shares, effective 01.03.2024. Notably, no appeal was filed by the petitioner against the NCLT’s order despite the grievance about the loss of value for equity shareholders.
On 10.04.2024, the petitioner challenged the validity of reg. 3(2)(b)(i) of the Delisting Regulations, arguing that by exempting delisting under an IBC-approved Plan from the procedural safeguards, the regulation was ultra vires the SEBI Act. The petitioner further contended that this exemption undermined investor protections by permitting delisting without compliance with procedural safeguards and failing to provide an exit opportunity to public equity shareholders.
Additionally, the petitioner contested the NCLT’s order and the stock exchange circulars, asserting that the Plan unjustly disadvantaged public equity shareholders. The petitioner argued that delisting under the Plan, without adequate safeguards, was inconsistent with the objectives of the SEBI Act.
Held
The High Court upheld the NCLT’s decision to delist the shares under the approved Plan and affirmed the validity of the Delisting Regulations. It dismissed the petitioner’s challenge to the vires of the regulations, emphasising that the IBC, as a later-enacted legislation with a non-obstante clause, overrides the SEBI Act and the associated Delisting Regulations in case of conflict.
It was observed that the provisions of the SEBI Act and the Securities Contracts (Regulation) Act, 1956 (‘SCRA’) granted SEBI sufficient powers to regulate securities markets, including matters related to delisting. The Court held that SEBI, in framing the Delisting Regulations, acted within its regulatory scope, recognizing the interplay between SEBI’s regulations and the provisions of the IBC. It was noted that the SEBI regulations do not apply to delisting conducted as part of a Plan under the IBC, as per the impugned regulation. It further highlighted that SEBI framed the Delisting Regulations in recognition of the IBC’s comprehensive nature as a 'complete code,' which provides adequate safeguards and governs delisting in insolvency scenarios.
The High Court noted that the IBC is a comprehensive framework designed to resolve corporate insolvency efficiently and expeditiously. It observed that reg. 3(2)(b)(i) of the Delisting Regulations, which exempts the delisting of equity shares under an NCLT-approved Plan, aligns with the objectives of the SEBI Act. The Court further highlighted that the IBC provides adequate safeguards to protect shareholder and investor interests, rendering additional procedural requirements unnecessary.
Rejecting the petitioner’s claim that the impugned regulation violated principles of fairness and SEBI’s investor protection mandate, the High Court clarified that SEBI’s quasi-legislative authority includes aligning its rules with the IBC’s overriding framework. The petitioner’s arguments regarding procedural lapses and lack of exit opportunities for equity shareholders were dismissed, as the Plan approved by the NCLT had adequately addressed these issues, including assigning nil value to equity shareholders.
The High Court emphasized that delisting under an IBC Plan serves the greater purpose of facilitating corporate revival and ensuring asset maximization. It reiterated that the IBC provides a framework for prioritizing creditor interests, even if the Plan assigns a nil value to shares. It was concluded that the Delisting Regulations recognized the priority of IBC in cases where delisting results from a Plan under the IBC and that SEBI’s actions were consistent with this legal framework.
Our Analysis
This decision reflects the evolving relationship between the SEBI Act, the SCRA, and the IBC, particularly in the context of insolvency proceedings. The Court’s emphasis on the relative positions of these legislations highlights the complexities of dealing with overlapping regulations. The petitioner’s challenge in this case was based on a narrow view of investor protection, focusing on the exit opportunity for public shareholders. However, the Court correctly framed the issue within the broader context of insolvency and corporate restructuring, acknowledging that the IBC provides adequate protection to shareholders by attempting to maximize the value of assets.
Striking down reg. 3(2)(b)(i) would create regulatory inconsistencies between the SEBI Act, the SCRA and the IBC, undermining the efficiency of insolvency resolutions. The IBC’s comprehensive framework governs delisting in insolvency cases, avoiding procedural redundancies and ensuring statutory alignment. This decision highlights the need for harmonisation between the SEBI Act and the IBC to maintain coherence in their application and achieve efficient insolvency outcomes.'
The decision also highlights the limited role of courts in economic legislation, particularly in balancing investor interests with the overreaching goals of insolvency resolution. The High Court’s rationale also reinforces the idea that legislative or quasi-legislative policy decisions, especially in economic matters, often require courts to defer to the judgment of regulatory authorities, such as SEBI, which are entrusted with the responsibility of managing securities markets. The judgment overall clarifies the role of SEBI as a regulator in safeguarding the development of the securities market while recognizing the primacy of IBC provisions when dealing with distressed companies.
End Note
[i] [2024] 169 taxmann.com 129 (Bombay)[02-12-2024].
Authored by Siddharth Jha, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.