In an interesting turn of events, a writ petition has been filed before the Bombay High Court by an investor of Reliance Capital Ltd. (RCap) challenging Regulation 3(2)(b)(i) of SEBI (Delisting of Equity Shares) Regulations, 2021 (Delisting Regulations) and the National Company Law Tribunal's (NCLT) approval of a resolution plan for RCap.
Background
In November 2021, the Reserve Bank of India (RBI) superseded the board of RCap and appointed an administrator and subsequently a corporate insolvency resolution process (CIRP) was initiated against RCap. On February 27, 2024, the NCLT, approved the resolution plan proposed by IndusInd International Holdings Limited (IIHL) which included delisting of the shares of RCap. Subsequently, both BSE Limited (BSE) and National Stock Exchange of India Limited (NSE) issued circulars announcing the suspension of trading in the scrip of RCap.
Under the NCLT-approved resolution plan, IIHL and its nominees became the sole shareholders of RCap. As a result, the entire existing share capital of RCap where 98.49 % is held by public shareholders is proposed to be cancelled and extinguished for 'NIL' consideration. As per the disclosure made by the RCap to the Stock Exchanges, the existing shareholders will not be entitled to get any payment and no offer will be made to any shareholders of RCap.
In summary, under this resolution plan, the existing shareholders of RCap get nothing for their shareholding, their investment value becomes ZERO and their shares are cancelled.
Challenge to the Delisting Regulation
Regulation 3(2)(b)(i) of the Delisting Regulations provides an exemption from their applicability to the delisting of equity shares of a listed company executed in accordance with a resolution plan approved under Section 31 of the Insolvency and Bankruptcy Code, 2016 (IBC). This exemption is applicable when the approved plan includes provisions for the delisting of said shares. The Regulation also provides that an exit opportunity to public shareholders shall be provided at a price not lesser than what is being provided to the promotor/ entity or other shareholder.
In the usual process of a Delisting Regulation, existing shareholders get the option to exit at a price determined as per the due process (depending upon whether it is a voluntary or mandatory delisting). Due to this exemption, this avenue is no longer available to the shareholders. The resolution process leads to overnight zero value and cancellation of shares all occurring without advance notice to or consent from public shareholders. The Petitioner, aggrieved by his shareholding being cancelled, has challenged the Regulation as being Ultra Vires to the SEBI Act, 1992. The preamble of the SEBI Act, 1992 begins by stating that it is an Act to provide for establishment of a board to protect the interest of investors in securities. The petitioner alleges that the Regulation fails to consider protection of the existing shareholder who had invested money in the equity shares of a company.
The Troubled History of Regulation 3(2)(b)(i)
SEBI in the Delisting Regulations 2021, introduced for the first time, Regulation 3(2)(b)(i) after a public consultation process where SEBI considered the changed management and governance structure in case of a listed company undergoing a CIRP process and the need for ensuring revival of the corporate debtor.
However, while acknowledging the inherent risk associated with equity investments in cases of insolvency, the total lack of voice and disenfranchisement of the shareholders and cancellation of their shares, raises concerns about shareholder rights.
SEBI is also aware of this issue and in November 2022, issued another Consultation Paper on "Protection of interest of public equity shareholders in case of listed companies undergoing CIRP" addressing this issue and also opened it for public comments. SEBI in this consultation paper proposed a method which would give existing non-promoter public shareholders of the insolvent company the chance to acquire equity in the new entity resulting from the resolution plan. The public shareholders would be able to purchase shares up to the Minimum Public Shareholding (MPS) percentage (currently 25%) or a minimum of 5% of the fully diluted capital structure of the new entity on the same terms as agreed upon by the resolution applicant.
Awaiting the Outcome: Observing How the Situation Unfolds The petition before the Bombay High Court signifies a pivotal moment in the intersection of corporate insolvency and securities regulations. The essence of the challenge lies in its alignment with the overarching objective of SEBI - protecting shareholder interests. Notably, this issue has been subject to scrutiny in two consultation papers by SEBI, the latest being in November 2022. The petition underscores the pressing need to reassess shareholder rights in the context of insolvency proceedings, particularly in light of instances where shareholders are rendered voiceless and face the abrupt cancellation of their shares. As the matter unfolds, it will be interesting to see whether there will be progress on SEBI's proposed method or whether status quo will continue.