APPLICABLE PROVISIONS OF SEBI (LODR) REGULATIONS, 2015 TO INSOLVENCY AND BANKRCUPTCY CODE, 2016

[Mr. M. GOVINDARAJAN]

Introduction

Insolvency and Bankruptcy Code, 2016 provides for initiation and conducting of corporate insolvency resolution process.  The Adjudicating Authority admits the application on filing of the application either by the financial creditor or operational creditor or corporate applicant and appoints the interim resolution professional who will continue or replaced for another resolution professional by the Committee of Creditors.  The interim resolution professional/resolution professional will take over the entire management and affairs of the company and the said professional shall comply with the provisions of applicable laws of the corporate debtor.  If the corporate debtor is a listed company the provisions of SEBI (LODR) Regulations, 2015 shall apply.   If the listed company is triggered insolvency resolution process, the Board of Directors will be suspended and the management will be taken over by the IRP/RP.  For the purpose of insolvency the Regulations were amended especially Chapter IV and Schedule III of the Regulations.

Chapter IV

Chapter IV of the Securities and Exchange Board (Listing Obligations and Disclosure Requirements) Regulations, 2015 provides the obligations that are to be undertaken by the listed entity which has listed its specified securities.

Specified securities

Regulation 2(1)(zl) defines the expression ‘specified securities’ as ‘equity shares’ and ‘convertible securities’ as defined under clause (zj) of sub-regulation (1) of regulation 2 of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009.

Applicability of Chapter IV

Regulation 15(2A) provides that the provisions as specified in regulation 17 shall not be applicable during the insolvency resolution process period in respect of a listed entity which is undergoing corporate insolvency resolution process under the Insolvency Code.

Regulation 17 provides for the constitution of Board of Directors.  The role and responsibilities of the board of directors as specified under regulation 17 shall be fulfilled by the interim resolution professional or resolution professional in accordance with sections 17 and 23 of the Insolvency Code.

Regulation 15(2B) provides that the provisions as specified in-

• Regulations 18 – Audit Committee;
• Regulation 19 – Nomination and Remuneration Committee;
• Regulation  20 – Stakeholders Responsibility Committee; and
• Regulation 21  - Risk Management Committee

shall not be applicable during the insolvency resolution process period in respect of a listed entity which is undergoing corporate insolvency resolution process under the Insolvency Code.  The roles and responsibilities of the committees specified in the respective regulations shall be fulfilled by the interim resolution professional or resolution professional.

Related party transactions

Regulation 23(4) provides that all material related party transactions shall require approval of the shareholders through resolution and no related party shall vote to approve such resolutions whether the entity is a related party to the particular transaction or not.  The requirements specified under this sub-regulation shall not apply in respect of a resolution plan approved under section 31 of the Insolvency Code, subject to the event being disclosed to the recognized stock exchanges within one day of the resolution plan being approved.

Corporate Governance

Regulation 24(5) provides that a listed entity shall not dispose of shares in its material subsidiary resulting in reduction of its shareholding (either on its own or together with other subsidiaries) to less than fifty percent or cease the exercise of control over the subsidiary without passing a special resolution in its General Meeting except in cases where such divestment is made under a scheme of arrangement duly approved by a Court/Tribunal, or under a resolution plan duly approved under section 31 of the Insolvency Code and such an event is disclosed to the recognized stock exchanges within one day of the resolution plan being approved.

Regulation 24(6) provides that selling, disposing and leasing of assets amounting to more than twenty percent of the assets of the material subsidiary on an aggregate basis during a financial year shall require prior approval of shareholders by way of special resolution, unless the sale/disposal/lease is made under a scheme of arrangement duly approved by a Court/Tribunal, or under a resolution plan duly approved under section 31 of the Insolvency Code and such an event is disclosed to the recognized stock exchanges within one day of the resolution plan being approved.

Conditions for re-classification of any person as promoter/public

Regulation 31A (9) provides that the provisions of sub-regulations 3, 4 and clauses (a) and (b) of sub-regulation 7 of this regulation shall not apply, if re-classification of promoter(s)/ promoter group of the listed entity is as per the resolution plan approved under section 31 of the Insolvency Code, subject to the condition that such promoter(s) seeking re-classification shall not remain in control of the listed entity.

Regulation 31(A) (3) provides that re-classification of status of a promoter/ person belonging to promoter group to public shall be permitted by the stock exchanges only upon satisfaction of the following conditions:

1. an application for re-classification to the stock exchanges has been made by the listed entity consequent to the following procedures and not later than thirty days from the date of approval by shareholders in general meeting:

1. the promoter(s) seeking re-classification shall make a request for re-classification to the listed entity which shall include rationale for seeking such re-classification and how the conditions specified in clause (b) below are satisfied;
2. the board of directors of the listed entity shall analyze the request and place the same before the shareholders in a general meeting for approval along with the views of the board of directors on the request; there shall be a time gap of at least three months but not exceeding six months between the date of board meeting and the shareholder’s meeting considering the request of the promoter(s) seeking re-classification.
3. the request of the promoter(s) seeking re-classification shall be approved in the general meeting by an ordinary resolution in which the promoter(s) seeking re-classification and persons related to the promoter(s) seeking re-classification shall not vote to approve such re-classification request.

2.  the promoter(s) seeking re-classification and persons related to the promoter(s) seeking re-classification shall not-

1. together, hold more than ten percent of the total voting rights in the listed entity;
2. exercise control over the affairs of the listed entity directly or indirectly;
3. have any special rights with respect to the listed entity through formal or informal arrangements including through any shareholder agreements;
4. be represented on the board of directors (including not having a nominee director) of the listed entity;
5. act as a key managerial person in the listed entity;
6. be a ‘willful defaulter’ as per the Reserve Bank of India Guidelines;
7. be a fugitive economic offender.

3.  the listed entity shall-

1. be compliant with the requirement for minimum public shareholding as required under regulation 38 of these regulations;
2. not have trading in its shares suspended by the stock exchanges;
3. not have any outstanding dues to the Board, the stock exchanges or the depositories.

Regulation 31(A) (4) provides that the promoter(s) seeking re-classification, subsequent to re-classification as public, shall comply with the following conditions:

1. he shall continue to comply with conditions mentioned at sub-clauses (i), (ii) and (iii) of clause (b) of sub-regulation 3 as specified above at all times from the date of such re-classification failing which, he shall automatically be reclassified as promoter/ persons belonging to promoter group, as applicable;
2. he shall comply with conditions mentioned at sub-clauses (iv) and (v) of clause (b) of sub-regulation 3 for a period of not less than three years from the date of such re-classification failing which, he shall automatically be reclassified as promoter/ persons belonging to promoter group, as applicable.

Regulation 31(A) (7) provides that re-classification of promoter as public shareholders shall be subject to the following conditions:

1. Such promoter shall not, directly or indirectly, exercise control, over the affairs of the entity.
2. Increase in the level of public shareholding pursuant to re-classification of promoter shall not be counted towards achieving compliance with minimum public shareholding requirement under rule 19A of the Securities Contracts (Regulation) Rules, 1957, and the provisions of these regulations.

Regulation 37(7) provides that the requirements as specified under this regulation and under regulation 94 of these regulations shall not apply to a restructuring proposal approved as part of a resolution plan by the Tribunal under section 31 of the Insolvency Code, subject to the details being disclosed to the recognized stock exchanges within one day of the resolution plan being approved.

SR equity shares

Regulation 41A (3) (vi) provides that the SR equity shares shall be treated as ordinary equity shares in terms of voting rights (i.e. one SR share shall only have one vote) in initiation of a voluntary resolution process under the Insolvency Code.

Schedule III

Schedule III to the Regulations has 5 parts.  Part A of the Schedule III provides the events which shall be disclosed without any application of the guidelines for materiality as specified in sub-regulation (4) of regulation (30).

Clause 16 provides that the following events in relation to the corporate insolvency resolution process (CIRP) of a listed corporate debtor under the Insolvency Code:

• Filing of application by the corporate applicant for initiation of CIRP, also specifying the amount of default;
• Filing of application by financial creditors for initiation of CIRP against the corporate debtor, also specifying the amount of default;
• Admission of application by the Tribunal, along with amount of default or rejection or withdrawal, as applicable ;
• Public announcement made pursuant to order passed by the Tribunal under section 13 of Insolvency Code;
• List of creditors as required to be displayed by the corporate debtor under regulation 13(2)(c) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016;
• Appointment/ Replacement of the Resolution Professional;
• Prior or post-facto intimation of the meetings of Committee of Creditors;
• Brief particulars of invitation of resolution plans under section 25(2)(h) of Insolvency Code in the Form specified under regulation 36A(5) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016;
• Number of resolution plans received by Resolution Professional;
•  Filing of resolution plan with the Tribunal;
• Approval of resolution plan by the Tribunal or rejection, if applicable;
• Salient features, not involving commercial secrets, of the resolution plan approved by the Tribunal, in such form as may be specified;
• Any other material information not involving commercial secrets.

Part E of Schedule III provides for disclosure of events or information to stock exchanges about security receipts.  Clause 20 of Part E provides that initiation or status update with respect to reference to National Company Law Tribunal under the Insolvency and Bankruptcy Code 2016 of any underlying assets shall be disclosed by the listed entity without any application of guidelines of materiality as soon as reasonably possible but not later than twenty four hours from occurrence of event or information.

Conclusion

The Regulations impose obligations on the interim resolution professional/resolution professional to comply with the provisions of these regulations in respect of a listed company.  In the time frame given in the Code the interim resolution professional/resolution professional has to take care of and comply with all the required provisions of these regulations.