Companies Act | Approval Of Shareholders Mandatory For Listing Shares On Stock Exchange : Supreme Court

The Supreme Court recently ruled that, without in-principle approval from the company's shareholders, debt-to-equity converted shares issued in favor of any person cannot be listed on the stock market.

In other words, the Court stated that obtaining in-principle approval from the company's shareholders, as required under Section 62(1)(c) of the Companies Act, 2013, is mandatory before allotting shares to any person. Without this approval, the allotted shares cannot be listed on the stock market.

Moreover, the Court stated that even if the company's shareholder approves the allotment of the company's share to a person, the shares would not automatically become eligible for listing unless the listing is approved by the recognized stock exchange as per Regulation 28 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

A bench comprising Justices Pankaj Mithal and Sandeep Mehta heard an appeal filed by Jyoti Ltd. challenging the Securities Appellate Tribunal's (SAT) decision, which rejected its application for listing debt-to-equity converted shares on the Bombay Stock Exchange (BSE). The rejection was based on the company's failure to obtain in-principle approval from its shareholders before allotting shares to the respondent and the absence of BSE's approval for listing the shares on the stock market.

Briefly put, Appellant-Jyoti Limited sought the listing of 59,63,636 equity shares on the BSE. These shares were issued to Asset Reconstruction Company after converting part of Appellant's outstanding debt of Rs. 32.80 crore into equity under Section 9(1) of the SARFAESI Act, 2002.

The Appellant contended that since the process to convert the debt to equity share was not initiated by it but by the Asset Reconstruction Company (ARC) under Section 9(1) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Act, 2002 (SARFAESI Act), therefore in-principle approval of its shareholders was not required. According to the appellant, Section 9(1) of the SARFAESI Act permits the Respondent to take measures such as the conversion of any portion of debt into shares of the borrower company i.e., the appellant herein, and once such power is exercised, the shares have to be listed on the Stock Exchange regardless of the BSE's approval under Regulation 28 of the SEBI Regulations.

Per contra, the Respondent-BSE Ltd. supported the SAT's decision contending that the absence of in-principle approval of the Appellant's shareholder under Section 62(1)(c) of the Companies Act, 2013 before allotting the share to the Asset Reconstruction Company would not justify automatic listing in the BSE unless the listing permission is also sought from the BSE under SEBI's Regulation.

Affirming the SAT's order, the Court observed that the permission granted to the Asset Reconstruction Company under Section 9(1) of the SARFAESI Act to convert debt to equity shares would not justify the listing of shares in the stock market unless the transaction is approved by the company's shareholder as well as the stock exchange.

The Court, noting that the appellant had initiated the share allotment process by convening a Board of Directors meeting, stated that the appellant was mistaken in claiming that the Asset Reconstruction Company (ARC) had initiated the conversion of debt into equity shares. As a result, the allotted shares could not be eligible for listing on the stock market without the approval of both the shareholders and the BSE.

“we find that the conversion of the debt into additional shares had taken place with the agreement of the appellant company and RARE, and it is on the basis of such an agreement between the parties that a resolution was passed on 02.05.2018 by the Board of Directors of the appellant company accepting the proposal to convert the debt into shares and to allot them in favor of RARE, thus, resulting in increase of the equity capital of the appellant company. Even the application for listing of the aforesaid additional shares was made by the appellant company to the BSE meaning thereby that the proposal for increasing the subscribed capital of the company by converting part of the debt into equity shares, as aforesaid, was initiated by the appellant company itself and not actually by RARE. Therefore, the proposal was that of the company only. Accordingly, as contemplated by Section 62(1)(c) of the Companies Act, 2013, the approval of the shareholders would be mandatory before the shares are accepted for listing on the BSE.”, the court said.

Also, the Court affirmed the SAT's findings on the absence of BSE's permission under Regulation 28 of the SEBI Regulations before listing the shares for trading,

“Insofar as the other ground for rejection of the application is concerned, that is to say, for want of approval of the BSE, the Securities Appellate Tribunal has returned a clear finding that the approval of the BSE is necessary in view of Regulation 28 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 and we do not have different opinion on it rather we accept the said finding which is not perverse in any manner."

Accordingly, the appeal was dismissed with the following note:

“In view of the aforesaid facts and circumstances, we are of the opinion that no error or illegality has been committed either by the BSE or the Securities Appellate Tribunal in refusing to accept the request of the appellant company for the listing of the shares at the Stock Exchange inasmuch as Section 62 of the Companies Act stands duly attracted and in the light of sub-clause (c) of sub-section (1) of Section 62 of the Companies Act, special resolution of the shareholders is necessary which is lacking in the instant case.”

Appearance:

For Appellant(s) Mr. Lakshmeesh S. Kamath, AOR Mrs. Samriti Ahuja, Adv. Ms. Aditi Prakash, Adv.

For Respondent(s) Mr. Pratap Venugopal, Sr. Adv. Ms. Surekha Raman, Adv. Mr. Amarjit Singh Bedi, Adv. Mr. Shreyash Kumar, Adv. Mr. Yashwant Sanjenbam, Adv. Mr. Imilikaba Jamir, Adv. M/S. K J John And Co, AOR Mr. Rahul Gupta, AOR

Case Title: JYOTI LIMITED Vs. BSE LIMITED & ANR.

Citation : 2024 LiveLaw (SC) 1003

Click here to read/download the order