DELISTING OF SHARES UNDER THE INDIAN INSOLVENCY REGIME: A PROCEDURAL DEBACLE
Updated: Jul 19, 2022
This post is authored by Vedant Sharma, fourth-year student of B.B.A. LL.B. (Hons.), at National Law University, Odisha.
The primary objective of the Insolvency and Bankruptcy Code, 2016 (“IBC”)[i] is to maximize the value for all the stakeholders in the Corporate Insolvency Resolution Process ("CIRP") and simultaneously bring the corporate debtor back on track as a going concern. In furtherance of this objective, the resolution applicant can file a resolution plan proposing to takeover and delist the shares of the corporate debtor from the registered stock exchange. While the process of delisting the company under normal circumstances requires strict compliance and has multi-layered protection for the shareholders, the same is bypassed when it comes to the delisting of shares as a result of CIRP. The paper highlights the fallacies of the delisting process under the resolution plan and analyses how it impacts the shareholders of the corporate debtor.
2. DISCRIMINATING CLASS OF SHAREHOLDERS
Regulation 15[ii] read with Regulation 8[iii] of the SEBI (Delisting of Equity Shares) Regulations, 2009 (“Delisting Regulation”) provides that the buyback value of the shares shall be determined through the reverse book building process. Subsequently, the company shall issue a public offer for purchasing the share from the open market at not less than the price determined by the reverse book building process. Under this process, the company announces the delisting plan and the public shareholders through an online bidding system can tender their shares at or above the floor value as determined based on regulation 15 of the Delisting Regulations, thereby, providing adequate and fair consideration to the shareholders for their respective shares. However, as per the 2018 amendment to the delisting regulation,[iv]the same multi-layered protection is not guaranteed to the public shareholders of a listed company under CIRP as, Regulation 3(3)[v] of Delisting Regulation provides that the framework under the Delisting Regulation shall not apply to any delisting made as per a resolution plan approved under Section 31 of IBC.[vi] This differential protection discriminates between the shareholders of a company under a general delisting and shareholders of a company being delisted under CIRP. Additionally, the public shareholders of a company have no responsibility to discharge the debts of the corporate debtor. In consonance with the same, denying a fair delisting value under the delisting regulations to the public shareholders of the corporate debtor is arbitrary and unjust.
The objective of the Securities and Exchange Board of India Act, 1992 (“SEBI Act”)[vii]is to ensure protection and maintain the best interest of the investors and shareholders. SEBI, in the exercise of its delegated powers under the provisions of the SEBI Act, has framed the Delisting Regulation which provides that the said regulation wouldn’t apply to a company under CIRP. This vitiates the protection provided to the shareholders of the company and is detrimental to their interests if the company goes into CIRP. Such an exercise of power by way of delegated legislation, not only ultra vires the objective of SEBI Act as aforesaid, but also ex facie arbitrary, unreasonable, irrational, and violative of Article 14 of the Constitution of India.[viii]
3. FAIR VALUE V. LIQUIDATION VALUE
Regulation 3 (3)[ix] of the Delisting Regulation provides that when the delisting of a listed company is to be done as a part of the resolution plan under the provisions of the IBC, the exit to the shareholders of the company shall be at a price not less than the liquidation value. Regulation 35[x] of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“IBC Regulations”) provides that both the fair value and the liquidation value has to be calculated by the resolution professional. However, Regulation 3(3) of the Delisting Regulations provides only the maximum liquidation value of the shares “at which a promoter or any entity belonging to the promoter group or any other shareholder, directly or indirectly, is provided an exit opportunity”, as opposed to the fair value of the shares which may have been calculated under Regulation 35 of IBC Regulations. It follows that if the delisting of a listed company is to be done as a part of a resolution plan under the IBC, the shareholders will not be given the fair value which may have been arrived at under Regulation 35 of IBC Regulations but only the liquidation value of shares even if the company is not going into liquidation. Legislators incorporated the provisions relating to the liquidation process under Chapter III and CIRP under Chapter II. As per the scheme of IBC, CIRP is different and distinct from the liquidation process and the same has been held by the Hon'ble Supreme Court in Swiss Ribbons v. Union of India.[xi] Wherever the provisions relating to the liquidation process have been neither referred to nor incorporated in the CIRP, the provisions under the liquidation process cannot be applied to CIRP. SEBI through the Delisting Regulation eliminates the distinction between CIRP and the liquidation process. The said distinction cannot be done away with by SEBI as its power to make regulations is only for the interest and for the protection of investors, and eliminating this distinction is prejudicial and detrimental to the investors. Therefore, giving liquidation value for delisted shares in CIRP without the company going into liquidation is arbitrary and against the established principle of law.
4. DEEMED APPROVAL IS ILLEGAL
Regulation 8(1)(b)[xii] of the Delisting Regulation mandates that prior approval of the shareholders is required to delist the shares of the company. However, in the case of delisting under the CIRP process, there is no specific provision mandating the shareholder’s approval. The deemed approval under the explanation to sub-section (2) of Section 30 of IBC cannot be extended to persons who are not covered by IBC in general (shareholders), or by sub-section (2) of Section 30 of IBC.[xiii] Section 30 of IBC and IBC Regulations do not cover public shareholders, who are non-promoter shareholders. Hence, the provision to delist equity shares of the listed entity without the approval of the public shareholders, as under Regulation 8 of the Delisting Regulations, on account of the deemed approval under the explanation to Section 30(2) of IBC, is arbitrary, unreasonable, violative of principles of natural justice, irrational and therefore, ultra vires Article 14[xiv] and Article 21[xv] read with Article 300A[xvi] of the Constitution of India as it abridges the constitutional right of a shareholder to hold the shares of the delisting company without their consent.[xvii]
5. CONCLUSION AND SUGGESTION
The present insolvency regime has provided a loophole for the resolution applicant to bypass the shareholder’s mandate and delist the company. Further, the waiver of safeguards placed by the delisting regulations jeopardizes the rights of shareholders. The issue warrants a timely resolution that is in coherence with the objectives of the IBC. The issue is sub judice before the Bombay High Court in Varun Dev Jha v. SEBI, a writ petition filed by the shareholders of Deewan Housing Finance Ltd. (“DHFL”) against the delisting of DHFL post-CIRP. However, as per the author, the court can read down the presumption of Section 30(2), as applicable only to the extent of business or property of the company and shall not be construed when the question is concerning the rights of shareholders. Secondly, Regulation 3(3) of the Delisting Regulations shall provide for a fair value in the case of CIRP and liquidation value only in the case of liquidation post CIRP. Furthermore, to provide an additional safeguard to the shareholders, the legislator can ponder upon providing a statutory right to the shareholders to contribute and take an active role in the CIRP as equal stakeholders. As the economic paradigm is shifting toward a globalized economy, the Indian insolvency regime needs to provide adequate protection to domestic as well as international investors and shareholders. Hence, these fundamental changes will help to develop and foster a proactive insolvency framework that protects the rights of all stakeholders.
[i] The Insolvency and Bankruptcy Code, 2016. [ii] Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009, §15. [iii] Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009, §8. [iv] Securities and Exchange Board of India (Delisting of Equity Shares) (Amendment) Regulations, 2018. [v] Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009, §3(3). [vi] The Insolvency and Bankruptcy Code, 2016, § 31. [vii] The Securities and Exchange Board of India Act, 1992. [viii] The Constitution of India, 1950, § 14. [ix] Supra note 4. [x] The (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, § 9. [xi] Swiss Ribbons v. Union of India, (2019) 4 SCC 17. [xii] Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009, §8(1)(b). [xiii] The Insolvency and Bankruptcy Code, 2016, § 30(2). [xiv] Supra note 7. [xv] The Constitution of India, 1950, § 21. [xvi] The Constitution of India, 1950, § 300A. [xvii] Nikhil T. Parikh v. Union of India, 2014 SCC OnLine Guj 3590.