Delisting Regulations Of SEBI Not Applicable To Delisting Of Equity Shares Under Resolution Plan: Bombay High Court

Brief Facts

In this case, the petitioner challenges the vires of Regulation 3(2)(b)(i) of the SEBI Delisiting Regulations, 2021 on the ground that it is violative of the SEBI Act. Along with this, the petitioner also challenges the order passed by the NCLT by which the Resolution Plan for Reliance Capital Limited (RCL) was approved which led to the obliteration of 98.49% of public shareholding.

The petitioner submitted that the impugned regulation violates the objective of the SEBI Act i.e protection of the investor by exempting delisting under the IBC from the procedural safeguards enshrined under the Delisting Regulations leaving the public shareholders without any remedy. It also contended that the public shareholders have no say when the resolution plan is approved under the IBC therefore it prejudices the rights of the public shareholders.

Based on this, it is the case of the petitioner that the impugned regulation must be struck down on the ground that it violates Article 14 of the Indian Constitution. It was further argued that the NCLT order approving the Resolution must also be set aside.

On the other hand, it is the case of the respondent that the petitioner purchased shares of the RCL after the CIRP was initiated against the corporate debtor despite having full knowledge of potential legal outcomes including delisting. It further argued that the admitted value of the equity shareholders was NIL. This valuation has not been challenged by the petitioner nor the order approving the plan was challenged before the NCLAT therefore the petitioner cannot claim any prejudice of the delisting.

It was also submitted that IBC has an overriding effect over the SEBI Act and its regulations therefore the impugned regulation merely aligns with objective of the code as approval of the plan is binding on all stakeholders including the shareholders under section 31 of the code. Reliance was placed on the Supreme Court judgment in Ghanashyam Mishra and Sons Private Limited vs. Edelweiss Asset Reconstruction Company Limited, 2021 in support of this submission. Finally, it was submitted that the impugned regulation is consistent with the SEBI Act and complements the IBC by providing a legal clarity pertaining to delisting during the CIRP of the corporate debtor.

Observations:

The court at the outset observed that the reason for the petitioner to challenge the impugned regulation is unfounded when the liquidation value of the equity shares was NIL. It is equally intriguing that the shares of the corporate debtor were purchased by the Petitioner after its admission into the CIRP with full knowledge of the legal consequences. Despite this, the court analysed the submissions of the petitioner on merits.

The court observed that the Delisting Regulations, of which the Impugned Regulations is but a part, have been made by the SEBI exercising the powers conferred upon it by the provisions of the SCRA and SEBI.

“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 SCRA and SEBI Acts 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” the court observed.

The court further observed that the petitioner has failed to establish that the Impugned Regulation is ultra-vires the SEBI's powers conferred upon the SEBI by SCRA and the SEBI Act.

In Securities and Exchange Board of India vs. Alka Synthetics Ltd., the Gujarat High Court has held that The SEBI has been conferred with powers to address varied and unforeseen situations. This power is pivotal for the SEBI to further the protection of the investors and regulate the market in an effective manner.

The court further observed that the IBC provides sufficient safeguards to protect the interest of the stakeholders by maximising the value of the corporate debtor's assets and resolving the insolvency in a swift manner. The extent of such protection is provided by the legislative or quasi legislative bodies which is a policy matter in which the interference of the court is minimal.

The court also said that by making the Impugned Regulations, the SEBI has recognised the relative positions of the SEBI Act and the IBC. Section 32 of the SEBI Act provides that the provisions of the SEBI Act shall be in addition to and not in derogation of the provisions of any other law for the time being in force. In contrast, Section 238 of the IBC provides that the requirements of the IBC shall override other laws.

“Besides, the IBC is a later legislation and is presumed to have taken cognisance of the former legislation, the SEBI Act. Therefore, 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” the bench observed.

The court further observed that the provisions of the IBC will prevail over other laws and instruments having effect under any such laws. The Court also held that the commercial wisdom of the CoC must be given some precedence in matters of approving a resolution plan. This is yet another reason to hold that the Impugned Regulation is not ultra-vires.

The court said that the Explanation to clause 30(2)(e) provides that if any approval of shareholders is required under the Companies Act, 2013 or any other law for the time being in force for the implementation of actions under the resolution plan, such approval shall be deemed to have been given, and it shall not be a contravention of that Act or law.

“The whole effect must be given to the legal fiction created by the legislature, and such effect must not be cut down or diluted by applying the delisting regulations to a delisting pursuant to a resolution plan approved under Section 31 of the IBC” the court observed.

It opined that 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.

Accordingly, the present petition was dismissed.

Case Title: Harsh Mehta Versus Securities and Exchange Board of India and Ors. (WRIT PETITION NO. 4844 OF 2024)

Citation: 2024 LiveLaw (Bom) 624

Click Here To Read/Download The Order