[Dhruv Kohli is a 4th year B.A.LLB student and Sanya Singh a 4th year B.S.W LLB student, both at Gujarat National Law University]
Ever since the enactment of the Insolvency and the Bankruptcy Code, 2016 (IBC), there has been a shift in the debt resolution mechanism in India. Unlike its predecessors, the IBC is a creditor-centric legislation, which can be ascertained from the fact that once there is advent of corporate insolvency resolution process (CIRP) under the IBC, it is the committee of creditors (CoC) which assumes all the powers and undertakes all the decisions pertaining to the corporate debtor. The decisions as taken by the CoC are said to possess the “commercial wisdom”, through which they can be questioned only if they are against the provisions of IBC or its objectives. In cases where publicly listed companies undergo CIRP, the CoC often approves resolution plans that involve delisting the company and a complete write-off of equity shares. This significantly impacts non-promoter public shareholders (minority shareholders), who bear the brunt of such decisions. In response to concerns raised by minority shareholders, the Securities and Exchange Board of India (SEBI) has introduced a protection framework to safeguard their interests during CIRP of public-listed companies.
The present post analyses the protection as proposed by SEBI. It seeks to explore the present position of minority shareholders and the feasibility of the protection as proposed. The authors conclude by finding that not only is the protection representative of a myopic view of the IBC but it is also legally untenable.
Present Position of Minority Shareholders under IBC
Presently, minority shareholders occupy a relegated position under IBC. Neither do they have any representation before the CoC nor is their consent required for any act as it is “deemed” to be given. Additionally, the shareholders in general fall last in the waterfall mechanism that is provided under the IBC.
The Proposed Protection
Through a consultation paper issued in November 2022, SEBI has made the following proposal:
- Resolution applicant (RA) to offer minority shareholders the opportunity to acquire equity in the new entity. A maximum of 25% can be offered by the RA and there must be a minimum acceptance of 5%. This would have to be done through a mandatory open offer.
- Minimum 5% public shareholding is to be ensured to continue the listing of the entity post-CIRP.
- Delisting to be permitted only if 5% acceptance is not achieved even through the mandatory open offer.
- Review of the existing delisting regulations should also be undertaken wherein exemptions should only be given when either the entity undergoes liquidation or when public shareholding remains below 5%.
Whether Shareholders Need any Protection
An important question that arises for consideration is whether minority shareholders need any protection. If the recently concluded CIRP of public-listed companies is considered, it can be clearly seen that the minority shareholders suffer the most. For instance, in the CIRP of DHFL, there was a complete reduction in the paid up share capital of the company, that too at a cost of zero. Again in Jaypee Kensington Boulevard v. NBCC (India) Limited, the resolution plan envisaged a complete reduction of the paid up share capital at a negligible cost and the same was even approved by the Supreme Court. Such resolution plan does not take into consideration the investments made by the public, who often lose everything in such cases. It is precisely such “unfair treatment” which in the opinion of SEBI is unacceptable and needs to be remedied.
Feasibility of Protection
Having looked at the intent with which SEBI has come up with this proposal, we now move onto analyse the proposal as to whether its implementation is legally feasible or not. For the same purpose, an important question that arises is whether SEBI is legally empowered at the first place to propose any such protection or not. Section 11 of the SEBI Act, 1992 assumes importance here. It deals with the powers and function of SEBI, wherein section 11(1) imposes a duty upon SEBI to implement such policies which are aimed towards protection of investors in the securities market and also undertake steps that aid in the overall development of the securities market. Thus, when the proposal is read in light of section 11(1), it can be deduced that SEBI is acting upon the duty that is imposed upon it by the statute as it seeks to protect the investors of public listed companies who stand to lose all of their investments once the company undergoes CIRP.
However, the proposal is also to be read in light of the provisions of the IBC and not just the SEBI Act, as the proposal, if brought into force, is going to affect modifications not just to provisions of the SEBI Act but also cause material changes in the IBC. To understand whether such material changes are permitted within the scheme of IBC or not, section 238 of the IBC becomes important. The said section is a non-obstante provision which means that in the event of a conflict of the provisions of IBC with any other law, the former is to prevail over the latter. In this regard, the question arises whether the protection for minority shareholders as envisaged by SEBI is in line with the provisions of IBC.
The Bankruptcy Law Reform Committee report of 2015, which formed the basis for the existing IBC had noted that “sound bankruptcy process, the equity value of the enterprise would be wiped out and the existing shareholders would lose control”. It also had observed: “When default takes place, control is supposed to transfer to the creditors; equity owners have no say”. The logical deduction that can be made from these observations is that the drafter of the IBC envisaged a situation wherein there is a complete reduction of the share capital and the equity shareholders lose everything. This deduction is further strengthened by the judgment of the apex court in Jaypee Kensington Boulevard v. NBCC (India) Limited. In this case, minority shareholders of Jaypee Infratech Limited challenged the resolution plan on the ground that the resolution plan envisages a complete dilution of the equity which in essence is against the provision of IBC. The Court not only dismissed the contention but also held that the “the grievances as suggested by these shareholders cannot be recognised as legal grievances and does not provide them any cause of action to maintain”.
The decision not only refutes the basis on which SEBI has proposed this framework but also established that in the substantive scheme of IBC there is no place for shareholder protection as well. Further, what emerges from the above analysis is that by attempting to exercise its powers under section 11(1), SEBI is directly in contravention to section 238 of IBC (and in essence to the entire code as well) and, thus, it becomes important to see whether any sort of reconciliation between the two is possible or not.
Since both the statutes are special laws, the only question that arises is which would have an overriding effect over the other. In this regard, the Supreme Court noted in Maharashtra Tubes Limited v. State Industrial and Investment Corporation of Maharashtra that when there is a conflict between two special laws with no possibility of harmonious construction possible, the latter enactment prevails over the former. By the application of the same in the present case, the provisions of IBC would prevail over that of the provisions of SEBI and thus powers of SEBI under section 11(1) cannot be exercised in a manner that it goes against the provisions of IBC. In other words, SEBI is legally not empowered to propose the framework as the same is in a direct conflict to the provisions of the IBC.
While the intent with which SEBI introduced the framework was laudable, it has failed to take into account the fact that any such framework would have to comply with the provisions of the IBC. As can be seen from the above analysis, in the overall scheme of the code, there is no protection that is envisaged for equity shareholders, By proposing the same, SEBI action is arguably in direct contravention with the provisions of IBC which ought to prevail over the powers of SEBI. Moreover, any form of protection that leads to a change in the overall scheme of the code should come not from SEBI but from the Insolvency and Bankruptcy Board of India as the latter being the insolvency regulator of the nation is more well suited to undertake any form of substantive change to the IBC.
– Dhruv Kohli & Sanya Singh