Summary
The Supreme Court upheld the refusal of BSE to list equity shares allotted to an asset reconstruction company on conversion of debt, holding that since the conversion was agreed to and initiated by the company itself, a special resolution of shareholders under Section 62(1)(c) of the Companies Act, 2013 was required, and that BSE's in-principle approval under Regulation 28 of the SEBI LODR Regulations was also necessary.
Issues
- Whether shares allotted to an asset reconstruction company on conversion of part of the borrower's debt could be listed without a special resolution of the borrower's shareholders under Section 62(1)(c) of the Companies Act, 2013.
- Whether in-principle approval of the stock exchange was required before listing the shares.
Provisions considered
- Section 9, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002The Court accepted that Section 9 empowers an asset reconstruction company to convert a portion of debt into shares of the borrower, but read that power as subject to Section 62 of the Companies Act, 2013; shareholder approval may not be needed only where the proposal is not that of the borrower company. (¶¶ 4, 5)
- Section 62(1)(c), Companies Act, 2013Because the borrower company negotiated the conversion, passed a Board resolution allotting the shares and itself applied for listing, it was deemed the proposer of the increase in subscribed capital, so a special resolution of shareholders was mandatory before listing; none had been passed. (¶¶ 4, 5, 7, 9, 10)
- Regulation 28, SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015The Court accepted, as not perverse, the Tribunal's finding that in-principle approval of BSE was necessary under this Regulation before the shares could be listed. (¶ 8)
- Section 22F, Securities Contracts (Regulation) Act, 1956The statutory appeal against the Securities Appellate Tribunal's order was brought under this provision and dismissed as devoid of merit. (¶ 11)
Held
- The power of an asset reconstruction company under Section 9 of the SARFAESI Act to convert debt into shares of the borrower is subject to Section 62 of the Companies Act, 2013; shareholder approval may be unnecessary only where the proposal does not come from the borrower company. (¶ 5)
- Where the borrower company itself agreed to the conversion of Rs. 32.80 crore of debt into equity, passed a Board resolution allotting the shares to the asset reconstruction company and applied to BSE for listing, the proposal to increase subscribed capital was the company's own, and a special resolution of shareholders under Section 62(1)(c) was mandatory before the shares could be listed. (¶¶ 6, 7, 9)
- The Tribunal's finding that BSE's in-principle approval was required under Regulation 28 of the SEBI LODR Regulations, 2015 was accepted as not perverse. (¶ 8)
- The Court stated that its order was confined to the peculiar facts, where the company itself passed the resolution and applied for listing and was therefore deemed to be the proposer. (¶ 10)
Result
Statutory appeal under Section 22F of the Securities Contracts (Regulation) Act, 1956 dismissed; refusal of BSE to list the shares, as upheld by the Securities Appellate Tribunal, sustained.