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SEBI v. Reserve Bank of India (RBI) norms – default on NCDs by listed companies – Supreme Court of India settles the dust

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The SC today in the matter of SEBI v. Rajkumar Nagpal and Ors. concerning the default on the Non-convertible Debentures (NCDs) issued by Reliance Commercial Finance Limited (RCFL) has settled a long standing conflict between Reserve Bank of India (RBI) and SEBI directions.
The Reserve Bank of India (RBI) Directions 2019 07.06.2019 and SEBI Circular dated 13.10.2020 were at conflict. Under RBI norms, for voting, the lenders ought to enter into an Inter-Creditor Agreement (ICA) for arriving at and implementing a Resolution Plan (RP) while SEBI wanted its regulations and circulars to be strictly complied with to ensure that the resolution arrived at the debenture trust deed level among the consenting debenture holders cannot bind the dissenting debenture holders (and hence settle for a lesser amount). The decision of the SC not broadly deals with issues as under:
(i) Harmony between the Reserve Bank of India (RBI) and SEBI directions
Both norms applied a varying threshold for approval of the RP. The SC opined that “By issuing the SEBI Circular, SEBI subscribed to the overall framework of the RBI Circular and permitted debenture holders to participate in the process specified in the RBI Circular to enter into a Resolution Plan. Under the RBI Circular, the Resolution Plan cannot come into existence without an ICA. The SEBI Circular does not disturb this position…”.
(ii) Bar on jurisdiction of Civil Courts
SEBI had argued that a Civil Court did not have jurisdiction over this matter by virtue of Section 15Y of the SEBI Act, 1992. The Supreme Court disagreed with this stand and held that Section 15I of the SEBI Act did not confer jurisdiction on the adjudicating officer to grant relief sought by the plaintiffs in the first place. Hence the bar under S15Y would not apply. 
(iii) Retroactivity of the SEBI Circular
The SC held that the SEBI Circular could not operate retrospectively and read it to be retroactive.
(iv) Exercise of power under Article 142 of the Constitution of India
While providing various caveats to SEBI, the court allowed SEBI’s appeal. The SC also utilized its powers under Article 142 to mitigate the potential denial of rights in view of the peculiar facts and circumstances and “extend the benefit to the retail debenture holders by allowing the resolution plan to pass muster”. Accordingly, while providing the relief to RCFL debenture holders the court allowed its voting process to go through.

The PDF of the judgement can be accessed at: https://lnkd.in/d-2kEky9

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