Corporate Insolvency Resolution Process and Implications on Securities Laws: Recent Changes

[Guest post by Yogesh Chande, Partner, Shardul Amarchand Mangaldas. View of the author are personal]

SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Regulations”) 

The newly inserted provision in regulation 10 of the Takeover Regulations, notified on 14 August 2017, exempts an acquisition pursuant to a resolution plan approved under section 31 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) from triggering a mandatory open offer under regulations 3 and 4. However, the Takeover Regulations do not specifically exempt a resolution professional appointed under the IBC from making an open offer. 

The purpose of appointing a resolution professional under the IBC is to carry out the corporate insolvency resolution process. Under section 17(1)(b) of the IBC, the powers of the board of directors are suspended, and they are instead exercised by the interim resolution professional. Thus, the resolution professional exercises “de facto” control over the target company. 

Under the Takeover Regulations, there are certain trigger levels (e.g., acquisition of voting rights) beyond which an open offer needs to be made (regulation 3). The Takeover Regulations also deal with a situation where an open offer is triggered on acquisition of control, irrespective of acquisition or holding or shares or voting rights in a target company (Regulation 4). 

The term “control” under the Takeover Regulations is defined to include the right to appoint a majority of the directors or to control the management or policy decisions exercisable by a person or person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner. The exception in the definition of control under the Takeover Regulations is only available to a director or officer of a target company and they are not considered to be in control over the target company, merely by virtue of holding such position. 

Regulation 10 of the Takeover Regulations provides for certain specific situations where the acquisition of voting rights of a particular nature and by a specific category of acquirers is exempted from the requirement of making an open offer, subject to such acquisitions and the acquirers fulfilling certain conditions prescribed therein pre- and post-acquisition. However, as mentioned earlier, regulation 10 of the Takeover Regulations does not “specifically” provide for an exemption from an open offer to a resolution professional. Although it may appear technical in nature, this appears to be an unintended consequence.  

Under regulation 11, the Securities and Exchange Board of India (“SEBI”) is permitted on a case to case basis to grant exemptions from making an open offer, if the acquirer prior to the proposed acquisition makes an application to SEBI. SEBI may grant an exemption from making an open offer after passing a reasoned written order, and subject to such conditions as it may deem fit to impose in the interests of investors in securities and securities market. Under regulation 33 of the Takeover Regulations, SEBI also has power to remove difficulties in the interpretation or application of the provisions of the Takeover Regulations and can issue directions through guidance notes or circulars. 

SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009

Regulation 70 of chapter VII of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, dealing with preferential issue of shares, amongst others, exempts the applicability of the said chapter in case of a rehabilitation scheme approved under the IBC, provided the preferential issue by a listed corporate debtor is of equity shares. Such an exemption is therefore not available to preferential issue of convertible securities other than equity shares, which may place a proposed resolution plan involving convertibles in a disadvantageous position and may affect the deal dynamics especially from the perspective of a resolution applicant. 

Conclusion

Amendments/clarifications by SEBI in relation to the above will be a welcome move and will go a long way in resolving the corporate insolvency in an efficient and time bound manner, and ensure that interest of all the stakeholders is taken care of without any ambiguities from the perspective of securities regulation. 

– Yogesh Chande