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TMI Blog2024 (12) TMI 164X X X X Extracts X X X X X X X X Extracts X X X X ..... onal 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 is currently pending implementation. The Petitioner h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, 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 way beyond the scope and import of the SEBI Act. 10. Ms Gora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etition. 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 were to be wound up. He submitted that the Petitioner could not be said to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 delisting pursuant to a resolution plan approved under Section 31 of the IBC from the applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovisions 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 Authorities. 29. Mr Kadam submitted that the Petitioner was almost a busybody. Otherwise, he would hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 39. The admitted facts relevant to appreciating the Petitioner's challenges in this Petition are as follows: - (a) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 NCLT order dated 27 February 2024 directs delisting as per the conditions in the impugned order and the Delisting Regulations. Simply because the challenge to the impugned NCLT order dated 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Securities and Exchange Board of India Act, 1992 - SEBI Act. 47. SCRA was enacted to prevent undesirable transactions in securities by regulating the business of dealing therein and providing certain matters connected therewith. Section 21-A of SCRA is concerned with the delisti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erests 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 enactments upon the SEBI, which is constituted as the regulator to regulate the securities market and the matters incidental thereto or connected therewith. 54. Considering the objectives for enactment of SCRA and SEBI Act, the specific sections under which the Delisting Regulations have been f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 listed company made pursuant to a resolution plan approved under the IBC would result in entirely ignoring the investors' interest or withdrawing the greater protection earlier granted to the investors. 59. The above premise is incorrect because sufficient safeguards are also provided under the IBC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, 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 interface between the Real Estate Regulatory Authority Act and the IBC, which the Hon'ble Supreme Court had to resolve in the case of Jaypee Kensington Boulevard Apartments Welfare Association and others (supra). The Court, upon analysis of the two enactments and even in the absence of a provision like the Impug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -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 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onstitution 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 statutory effect of the provisions in Sections 30 and 31 of the IBC cannot be ignored. The relative positions of the different enactments dealing with the protection of investors and the regulation and development of securities markets is also significant. The Petitioner has not challenged any provisions of the IBC, perhaps consciou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 82. 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' ..... X X X X Extracts X X X X X X X X Extracts X X X X
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