2024 (12) TMI 164 - HC - SEBI

SEBI Delisting Regulation 3(2)(b)(i) upheld as valid exemption for IBC resolution plan delistings

Harsh Mehta Versus Securities and Exchange Board of India, Reliance Capital Ltd. and IndusInd International Holdings Limited.

The Bombay HC upheld the validity of SEBI Delisting Regulation 3(2)(b)(i), which exempts delisting under IBC resolution plans from standard delisting ... Validity of Regulation 3(2) (b)(i) of the SEBI (Delisting of Equity Shares) Regulations, 2021 (“Delisting Regulations”) as being ultra-vires to SEBI Act, 1992 - Applicability of the Insolvency and Bankruptcy Code (IBC) over SEBI Regulations - Petitioner challenges the Order which approved the Resolution Plan providing for the delisting of shares of Reliance Capital Limited (“RCL”) and the further consequent circulars issued by the National Stock Exchange and the Bombay Stock Exchange announcing suspension of trading in the scrip of RCL. HELD THAT:- As considering that IBC is a complete code containing a non-obstante clause, a delisting of equity shares pursuant to the approval of a plan under IBC would be governed by the provisions of the IBC and the regulations made thereunder. Therefore, if the SEBI felt that governing such delisting under the Delisting Regulations might not be appropriate, there is no question of SEBI acting ultra vires. Accordingly, the Impugned Regulation, i.e. Regulation 3 (2) (b) (i), providing that the Delisting Regulations shall not apply in the case of delisting of equity shares pursuant to a resolution plan approved under Section 31 of the IBC cannot be regarded as ultra-vires the SEBI Act or the rules made thereunder. Respondent contention about harmonious construction of the SEBI Act, 1992 provisions, the Delisting Regulations, the IBC and CIRP Regulations has considerable merit. By striking down the Impugned Regulations, we would introduce a conflict between the SEBI Act/Regulations on the one hand and the IBC/CIRP Regulations on the other. Even in such a conflict, in all probability, the provisions of the IBC/CIRP Regulations would prevail, given that the IBC is later legislation that has been given an overriding effect. In contrast, the SEBI is an earlier legislation, and Section 32 of the SEBI Act, as noted earlier, provides that the provisions of the SEBI Act, 1992 shall be in addition to, and not in derogation of, the provisions of any other law for the time being in force. The arguments based on the consultation paper or the review of 2009 are not grounds for declaring the Impugned Regulations as ultra-vires. Ultimately, these are suggestions for the formulation of policy. It is not as if such consultation papers or reviews bind the SEBI, particularly in exercising its quasi-legislative powers of framing regulations. The suggestions in the consultation paper or the review must be considered from the perspective that we are dealing with economic legislation based on experimentation where wide latitude must be given to the legislative bodies. The review of SEBI (Delisting of Equity Shares) Regulations, 2009 (Exhibit “F”) refers to the Primary Markets Advisory Committee’s (“PMAC”) suggestion to delete Regulation 3(2) of the Delisting Regulations as they then stood. Regulation 3(2), as it then stood, dealt with the non-applicability of Delisting Regulations made on the delisting made pursuant to the scheme sanctioned by the BIFR under Sick Industrial Companies (Special Provisions) Act, 1985 (“the SICA, 1985”) or by the NCLT under Section 424D of the Companies Act, 1956. It is evident that the Impugned Regulations neither represent any marked shift in policy nor could we say that the Impugned Regulations conflict with the recommendations of the PMAC. Based on a consultation paper or a review that, in any event, does not bind the SEBI or statutorily curtail its quasi-legislative powers to frame regulations, the Impugned Regulations cannot be considered ultra-vires. The Court has held that economic legislation is essentially empiric. It is based on experimentation and, therefore, cannot anticipate all possible situations or abuses. Complicated experimental economic legislation may contain crudities and inequities, but they cannot be struck down solely on that ground. The system of checks and balances must be used with the primary objective of accelerating economic growth rather than suspending it by doubting its constitutional efficacy at the threshold itself. The Bankruptcy Law Reforms Committee report refers to a company representing a contract between equity and debt. As long as the shareholders can service the debt, they have complete control over the company and the freedom to run it as they see fit. The report contained a draft of the Insolvency and Bankruptcy Code, intended to replace the patchwork of laws with a single comprehensive code. The Government accepted this report, and the Parliament passed the draft code as the Insolvency and Bankruptcy Code, 2016. The aim of the IBC is to rehab a company rather than liquidate it. The legislature made a conscious decision to accord priority to the financial creditors. A moratorium is provided during which period the company's creditors cannot sue it. However, some provisions effectively exclude the erstwhile owners from management. The Committee of Creditors (CoC), which comprises the corporate debtor’s financial creditors, can make significant decisions during the CIRP process. One of the most important decisions is considering and approving the resolution plan proposed by the prospective buyer. This resolution plan is expected to contain details about the company's revival, how various creditors would be paid off, the treatment of shares, and other financial decisions. Once approved, the resolution plan will bind all creditors and stakeholders. The challenge to the NCLT’s impugned order dated 27 February 2024 was premised upon such an order being based on the Impugned Regulation, which, according to the Petitioner, was ultra vires. This premise was misplaced. Still, now that we have found no infirmity in the Impugned Regulations, the challenge to NCLT’s impugned order dated 27 February 2024 fails and is liable to be rejected. The argument that the Petitioner was not given notice before the CoC voted to approve the resolution plan is misconceived, given the facts of the present case referred to in paragraph 39 above, the provisions of sections 30 and 31 of the IBC, and the provisions of regulation 37 of the CIRP regulations. This is possibly why the Petitioner avoided challenging the NCLT’s impugned order dated 27 February 2024 by appealing to the NCLAT. As the Hon’ble Supreme Court explained in Jaypee Kensington Boulevard Apartments Welfare Association and others (supra), the scope of judicial review in such matters is minimal. Issues Involved:1. Validity of Regulation 3(2)(b)(i) of the SEBI (Delisting of Equity Shares) Regulations, 2021 as ultra-vires to the SEBI Act, 1992.2. Legality of the National Company Law Tribunal's (NCLT) order approving the Resolution Plan for delisting shares.3. Compliance with investor protection provisions under the SEBI Act.4. Applicability of the Insolvency and Bankruptcy Code (IBC) over SEBI Regulations.Detailed Analysis:1. Validity of Regulation 3(2)(b)(i) of the SEBI (Delisting of Equity Shares) Regulations, 2021:The Petitioner challenged the validity of Regulation 3(2)(b)(i), arguing that it is ultra-vires the SEBI Act, 1992. The Petitioner contended that the SEBI Act's primary objective is to protect investors' interests, and the Impugned Regulation undermines this by allowing delisting without the procedural safeguards typically required under the Delisting Regulations. The court analyzed the powers conferred upon SEBI by the Securities Contracts (Regulation) Act, 1956 (SCRA) and the SEBI Act, 1992, concluding that the Delisting Regulations, including the Impugned Regulation, fall within the scope of SEBI's regulatory powers. The court emphasized that SEBI's role includes regulating the securities market, and the Impugned Regulation aligns with the legislative framework that allows for delisting under a resolution plan approved by the IBC.2. Legality of the NCLT's Order Approving the Resolution Plan:The Petitioner also challenged the NCLT's order dated 27 February 2024, which approved the Resolution Plan for delisting the shares of Reliance Capital Limited (RCL). The court noted that the Petitioner failed to appeal this order to the National Company Law Appellate Tribunal (NCLAT), thus weakening the challenge. Furthermore, the court found that the NCLT's order, which assigned a nil value to equity shareholders and directed delisting, was consistent with the provisions of the IBC, which takes precedence over other laws due to its non-obstante clause.3. Compliance with Investor Protection Provisions under the SEBI Act:The Petitioner argued that the Impugned Regulation violates the SEBI Act's investor protection mandate by exempting delisting under the IBC from the Delisting Regulations. The court found that while investor protection is a critical objective of the SEBI Act, it is not the sole purpose. The court highlighted that the IBC provides its safeguards and procedures to protect stakeholders' interests, including attempting to maximize asset value and resolve insolvency issues expeditiously. The court concluded that the Impugned Regulation does not contravene the SEBI Act's objectives.4. Applicability of the Insolvency and Bankruptcy Code (IBC) over SEBI Regulations:The court emphasized that the IBC is a comprehensive code with an overriding effect on other laws, including the SEBI Act, due to its non-obstante clause. The court noted that the IBC aims to rehabilitate companies rather than liquidate them and prioritizes financial creditors' interests. The court found that the Impugned Regulation appropriately recognizes the IBC's primacy in cases of corporate insolvency and delisting pursuant to a resolution plan approved under Section 31 of the IBC. The court concluded that SEBI acted within its powers in framing the Impugned Regulation, which harmonizes the SEBI Act and the IBC.Conclusion:The court dismissed the Petition, upholding the validity of the Impugned Regulation and the NCLT's order. The court found no merit in the Petitioner's arguments, emphasizing the legislative intent and the comprehensive nature of the IBC in addressing corporate insolvency and delisting issues. The court discharged the Rule without costs.