TaxTMI 
TaxTMI 
2024 (12) TMI 164
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....er dated 27 February 2024 of the Hon'ble National Company Law Tribunal ("Impugned Order") (Exh.B/pg.60), 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 dated 29 February 2024 ("Impugned Circulars") (Exh. C colly/pg.91) announcing suspension of trading in the scrip of RCL. 4. This Petition concerns the delisting of RCL's shares, which had a 98.49% public shareholding as of 31 December 2023. On 29 November 2021, the Reserve Bank of India (RBI) appointed Respondent No. 2 ("R2") as the Administrator of RCL. R2 applied to initiate the Corporate Insolvency Resolution Process ("CIRP"), which NCLT admitted vide an order dated 6 December 2021. R2 was appointed as the Resolution Professional ("RP") for RCL's CIRP. 5. The Resolution Plan submitted by Respondent No.3 ("R3") was approved by the Committee of Creditors ("CoC"). The NCLT, vide the impugned order dated 27 February 2024, has also approved the plan, which, among other things, nullifies 98.49% of RCL's public shareholding. According to the Petitioner, the plan ....
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.... things by the impugned provisions. Despite this recognition, she submitted that the Impugned Regulation continues, thereby seriously prejudicing the interests of the investors and shareholders. She submitted that such continuance of ultra-vires regulations is arbitrary and, therefore, the Impugned Regulations must be struck down. 9. Ms Goradia submitted that Regulation 3(2) of the Delisting Regulations of 2009, which existed prior to the Delisting Regulations of 2021, mandated a procedure for delisting under the BIFR Scheme. The SEBI (Delisting of Equity Shares) Amendment Regulations 2018, because of the IBC, amended the exemption in Regulation 3 to provide for a procedure to be laid down in the Plan to complete the delisting of a share. However, the impugned regulation has diluted or removed the procedural mandate, allowing delisting without any procedure. She submitted that allowing such delisting without any procedure or procedural safeguards prejudicially affects the interest of public equity shareholders and investors. Accordingly, at least under the SEBI Act, no such regulations could ever have been framed. The Impugned Regulations are ultra-vires the SEBI Act and travel ....
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.... for SEBI (Respondent No. 1) opposed the grant of any reliefs in this Petition. He submitted that the Petitioner purchased about 6,700 shares of RCL, corresponding to a minuscule percentage after NCLT admitted the RCL to undergo CIRP via an order dated 6 December 2021. Thus, the Petitioner invested with the full knowledge of the legal consequences that might follow if the CIRP plan was approved for RCL or if RCL were to go into liquidation. He submitted that a challenge at the behest of such a Petitioner should not be entertained. 15. Mr Doctor submitted that the admitted position of the liquidation value of the equity shareholders of RCL was NIL. He referred to the statement in paragraph 17 of the Petition made by the Petitioner to this effect. He submitted that this Court could not consider the Petitioner's contention about such valuation being improper or false in this Petition in the absence of the Petitioner producing any material or filing any appeal before the National Company Law Appellate Tribunal ("NCLAT") to impugn the order dated 27 February 2024 by which the NCLT accepted such valuation. Given this admitted position, the Petitioner would stand to no benefit if RCL w....
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....his Petition. He reviewed the chronology of events and made precise submissions as to why the Petitioner's challenges must fail. 21. At the outset, Mr Kadam pointed out that the Petitioner had not challenged any provisions of the IBC or the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations). He submitted that this was relevant since the entire legislative field concerning insolvency resolution of corporate persons and their reorganisation was wholly occupied by the IBC and CIRP Regulations that permit the submission and approval of resolution plans that may provide for NIL value and distribution to the existing equity shareholders as well as delisting and cancellation of their shares. 22. Mr Kadam pointed out that such resolution plans, by operation of law, are binding on all stakeholders, including members like the Petitioner. He submitted that these are statutory consequences that would override and prevail over anything inconsistent or contrary thereto contained in any other law, given the provisions of Section 238 of the IBC. He submitted that the Impugned Regulations, by exempting the delist....
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....s that the provisions of the SEBI Act shall be in addition to, and not in derogation of, the provisions of any other law for the time being in force. He pointed out that the legislature was aware of the SEBI Act of 1992 when the IBC was enacted in 2016. Therefore, he submitted that there was no question of the Impugned Regulations being either ultra-vires or arbitrary. 27. Mr Kadam submitted that but for the Impugned Regulations, the listing regulations, to the extent they conflicted with the IBC or the CIRP Regulations, might have been vulnerable and, in any event, inapplicable to any delisting under the IBC. He submitted that the Impugned Regulations had only clarified the legal position; therefore, no case was made for striking down the Impugned Regulations. 28. Mr Kadam submitted that the petition did not even press the contention that there was no notice before the Adjudicating Authority approved the resolution plan on 27 February 2024. In any event, he submitted that such a contention was misconceived since Sections 30 and 31 of the IBC do not provide for any prior notice to the equity shareholders of the CoC voting on the plan or sanctioning it by the Adjudicating Auth....
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....in addition to complying with the IBC and CIRP Regulations, the Delisting Regulations would have to be complied with. She submitted that the Impugned Regulations allowed delisting without any procedure or safeguards to protect the interests of investors like the Petitioner. 35. Mr Goradia submitted that the liquidation value argument is irrelevant to the challenges raised in this Petition moreso since the company is not being liquidated. She submitted that the main challenge is not to the nil consideration in the resolution plan but to delisting without any exit opportunity or without following any procedure that would have safeguarded the interest of the investors and shareholders. 36. Ms Goradia submitted that the decisions relied upon by the learned counsel for the Respondents were inapplicable. She submitted that if the Impugned Regulations are struck down, the NCLT's order dated 27 February 2024, which is based upon the Impugned Regulations, would not survive and will have to be set aside. 37. For all the above reasons, Ms Goradia submitted that this Petition be allowed, and the reliefs prayed for be granted. 38. The rival contentions now fall for our determination....
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....ed Regulations and the NCLT's impugned order dated 27 February 2024. 40. In the rejoinder, Ms Goradia contended that the liquidation value had no bearing on the main challenge in the Petition. She submitted that even if the liquidation value remained nil, the Petitioner is entitled to challenge the Impugned Regulations because they permit delisting without following the provisions under the Delisting Regulations and without providing any exit opportunity to public shareholders like the Petitioner. 41. If, ultimately, the liquidation value is to remain nil, then we fail to comprehend the need for a challenge to the Impugned Regulations and that too, by a Petitioner, who purchased a minuscule percentage of shares in RCL well after the RCL was admitted to CIRP. Indeed, the Petitioner was aware and, in any event, deemed aware of all the consequences arising from the admission of RCL to CIRP under the IBC. 42. In the Petition, at least, a challenge is thrown to the NCLT's impugned order dated 27 February 2024, which holds that the liquidation value of the equity shareholders is nil and, therefore, the equity shareholders will not be entitled to any payment. Again, the impugned ....
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....solution plan approved under section 31 of the Insolvency Code, if such plan provides for: (i) delisting of such shares; or (ii) an exit opportunity to the existing public shareholders at a specified price: Provided that the existing public shareholders shall be provided the exit opportunity at a price which shall not be less than the price, by whatever name called, at which a promoter or any entity belonging to the promoter group or any other shareholder, directly or indirectly, is provided an exit opportunity: Provided further that the details of delisting of such shares along with the justification for the exit price in respect of the proposed delisting shall be disclosed to the recognized stock exchange(s) where the shares are listed within one day of approval of the resolution plan under section 31 of the Insolvency Code." 46. The Delisting Regulations, containing the Impugned Regulations, have been made by the SEBI in the exercise of powers conferred by: - (i) Section 31 read with Section 21-A of the Securities Contracts (Regulation) Act, 1956 - SCRA; and (ii) Section 30, Section 11 (1) and Section 11-A (2) of the Secur....
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.... connected with or incidental thereto. 52. The SCRA aims to prevent undesirable transactions in securities by regulating the business dealing in them and providing for certain other matters connected therewith. Similarly, the SEBI Act establishes the Board not just to protect the interests of investors in securities but also to promote the development of and regulate the securities market and for matters connected therewith or incidental thereto. 53. The two parent Acts, therefore, confer substantial powers on the SEBI to enact regulations, including the Delisting Regulations covering all aspects of delisting of equity shares of listed companies. The Impugned Regulation, i.e. Section 3 (2) (b) (i), provides that the Delisting Regulations shall not apply to the delisting of a listed company made pursuant to the resolution plan approved under Section 31 of the IBC if such plan provides for delisting of such shares or an exit opportunity to existing public shareholders at a specified price. There is nothing in the objects of the two parent enactments or its specific provisions to suggest the grant of such an exemption would be in excess of the powers conferred by the two enactme....
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....ourt approved this decision in the case of Franklin Templeton Trustee Services (P.) Ltd vs. Amruta Garg and others (2021) 9 SCC 606. 57. The legislature has employed expressions like "to promote the development of, and to regulate, the securities market", "to prevent undesirable transactions in securities by regulating the business of dealing therein" or "to carry out the purposes of this Act" or "by such measures as it thinks fit" when it comes to dealing with the powers of SEBI generally and in matters of framing regulations. Considering the expressions' width and the powers conferred on the SEBI to regulate the securities markets, we are not prepared to accept that the Impugned Regulation travels beyond the parent Acts and is consequently ultra-vires. 58. The protection of the investors, upon which Ms Goradia laid maximum stress, is not the only objective of the SEBI Act or the SCRA. That is one of the objectives. The other aim is regulating the stock market to promote the development of the securities market. Besides, the Petitioner's argument proceeds on a highly narrow premise that making inapplicable the delisting agreements to the delisting of equity shares of a liste....
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....ve effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having the effect by virtue of any such law. 63. Besides, the IBC is a later legislation and is presumed to have taken cognisance of the former legislation, the SEBI Act. Therefore, the doctrine of ultra-vires would not be attracted where the Delisting Regulations of 2021 take cognizance of the relative positions of the IBC and SEBI Act and provide that the Delisting Regulations shall not apply to delisting pursuant to a resolution plan approved under the IBC. 64. But for the Impugned Regulation, a controversy might have arisen regarding the application of the Delisting Regulations made under the SEBI Act and SCRA to the delisting of shares made pursuant to a resolution plan under the IBC. The SEBI, conscious of the relative positions of the SCRA and SEBI Act on the one hand and the IBC on the other, chose to let the IBC and its regulations govern the delisting under the resolution plan approved under the IBC. In doing so, the SEBI cannot be said to have exceeded its powers or acted ultra vires. 65. A somewhat similar controversy arose in the ....
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....w. The whole effect must be given to the legal fiction created by the legislature, and such effect must not be cut down or diluted by applying the delisting regulations to a delisting pursuant to a resolution plan approved under Section 31 of the IBC. 69. Thus, 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. 70. Mr Kadam's 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 i....
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....ers to frame regulations, the Impugned Regulations cannot be considered ultra-vires. 74. Ms Goradia argued the matter ably but was unclear about why the Impugned Regulations contravene Article 14 of the Constitution of India. In Association for Democratic Reforms (Electoral Bond Scheme) vs. Union of India (2024) 5 SCC 1, the Constitution Bench held that even the charge of manifest arbitrariness of subordinate legislation must be primarily tested in relation to its conformity with the parent statute. 75. Since there is no conflict between the parent statute and the Impugned Regulations, the charge of violating Article 14 or manifest arbitrariness cannot be upheld. Besides, the Impugned Regulation, which excludes the application of the Delisting Regulations under well-defined conditions spelt out in Regulation 3 (2) (b) (i), can hardly be criticized as lacking any determining principle or logical consistency. The Impugned Regulations cannot be styled as capricious, irrational or excessively disproportionate. 76. The argument that no procedure is required is also flawed. Under the IBC, an elaborate procedure is provided before any resolution plan is prepared and approved. The....
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.... see fit. However, corporate governance demands that if the shareholders cannot service the debts, thereby jeopardizing the interests of the creditors, they lose their right to run the company. This is especially important in highly leveraged companies where the promotor shareholders have only a small shareholding percentage. In such a case, the promotor has little personal interest in successfully running the business since most of the creditors are at risk. The report noted how most of these issues were not effectively handled by legislation like the Sick Industrial Companies Act 1985. 81. 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. 8....