SEBI moves to ease Corporate Insolvency Process

CS Avinash Godse 
on 09 June 2018


The Corporate Insolvency Resolution Process (CIRP) will get a boost with the Securities and Exchange Board of India (SEBI) amended its Regulations to remove the hurdles.

THE SEBI came with the amendments for ensuring the compliance with SEBI regulations by listed entities undergoing the 'Corporate Insolvency Resolution Process' ('CIRP') under the Insolvency and Bankruptcy Code, 2016 ('IBC'). This comes in light of the circular issued by the Insolvency and Bankruptcy Board of India ('IBBI') on January 3, 2018, clarifying that any corporate entity undergoing insolvency resolution under the IBC needs to comply with provisions of all applicable laws, unless specifically exempted or inapplicable in the given case.

The circular further directs that while acting as an Interim Resolution Professional, a Resolution Professional, or a Liquidator for a corporate person under the Code, an insolvency professional shall exercise reasonable care and diligence and take all necessary steps to ensure that the corporate person undergoing any process under the Code complies with the applicable laws.

It further clarified that if a corporate person during any of the aforesaid processes under the Code suffers any loss, including penalty, if any, on account of non-compliance of any provision of the applicable laws, such loss shall not form part of insolvency resolution process cost or liquidation process cost under the Code. It is also clarified that the insolvency professional will be responsible for the non-compliance of the provisions of the applicable laws if it is on account of his conduct.

With an increasing number of corporate firms in various stages of the resolution process, SEBI sought to streamline the process and minimize hurdles to ensure a time-bound resolution.

The amendments of various regulations by SEBI essentially span following major issues:

a. Disclosure requirements under SEBI (LODR) Regulations, 2015
b. Material Related Party Transactions under SEBI (LODR) Regulations, 2015
c. Disposal of shares in a material subsidiary under SEBI (LODR) Regulations, 2015
d. Dealing with assets of material subsidiaries under SEBI (LODR) Regulations, 2015
e. Re-classification of promoters under SEBI (LODR) Regulations, 2015
f. Compliance with minimum public shareholding requirement under SEBI (SAST) Regulations, 2011
g. Acquisition beyond maximum permissible non-public shareholding under SEBI (SAST) Regulations, 2011
h. Delisting pursuant to resolution plan/ liquidation under SEBI (Delisting of Equity Shares) Regulations, 2009
i. Preferential issue of specified securities under SEBI (ICDR) Regulations, 2009

The details of the above amendments are as follows:

A. SEBI (LODR), Regulations, 2015:

1. Regulation 17- Board of Directors:

The provisions as specified in Regulation 17 shall not be applicable during the insolvency resolution process period.

Provided that the role and responsibilities of the Board of Directors as specified under Regulation 17 shall be fulfilled by the Interim Resolution Professional or Resolution Professional in accordance with Sections 17 and 23 of the Insolvency Code.

2. Regulation 18- Audit Committee; Regulation 19- Nomination & Remuneration Committee; Regulation 20- Stakeholders Relationship Committee; Regulation 21- Risk Management Committee:

The provisions as specified in Regulations 18, 19, 20 and 21 shall not be applicable during the insolvency resolution process period.

Provided that the roles and responsibilities of the Committees specified in the respective Regulations shall be fulfilled by the Interim Resolution Professional or Resolution Professional.

3. Regulation 23(4)- Shareholders approval for material Related Party Transactions:

The requirements specified under this sub-regulation shall not apply in respect of a resolution plan approved under Section 31 of the Insolvency Code, subject to the event being disclosed to the Recognized Stock Exchanges within one day of the resolution plan being approved.

4. Regulation 24(5)- Restrictions on disposal of shares of the Material Subsidiary:

Regulation 24(6)- Restrictions on selling, disposing and leasing of assets amounting to more than 20% of the assets of the Material Subsidiary:

No restrictions when a resolution plan is duly approved under Section 31 of the Insolvency Code and such an event is disclosed to the Recognized Stock Exchanges within one day of the resolution plan being approved.

5. Regulation 31A- Class of shareholders and Conditions for Reclassification:

Restrictions under this regulation shall not apply, if re-classification of existing Promoter or Promoter Group of the listed entity is as per the resolution plan approved under Section 31 of the Insolvency Code, subject to the following conditions:

(i) the existing promoter and promoter group seeking re-classification shall not remain in control of the listed entity; and

(ii) such re-classification along with the underlying rationale shall be disclosed to the Stock Exchanges within one day of the resolution plan being approved.

6. Regulation 37- Scheme of Arrangement:

The requirements as specified under this Regulation and under Regulation 94 of these regulations shall not apply to a restructuring proposal approved as part of a resolution plan by the Tribunal under Section 31 of the Insolvency Code, subject to the details being disclosed to the Recognized Stock Exchanges within one day of the resolution plan being approved.

7. Regulation 30, Schedule III- Disclosure of Events or Information:

Disclosure of the following events in relation to the Corporate Insolvency Resolution Process (CIRP) of a listed corporate debtor under the Insolvency Code (as soon as reasonably possible and not later than twenty four hours from the occurrence of event or information):

a) Filing of application by the corporate applicant for initiation of CIRP, also specifying the amount of default;
b) Filing of application by financial creditors for initiation of CIRP against the corporate debtor, also specifying the amount of default;
c) Admission of application by the Tribunal, along with amount of default or rejection or withdrawal, as applicable ;
d) Public announcement made pursuant to order passed by the Tribunal under Section 13 of Insolvency Code;
e) List of creditors as required to be displayed by the corporate debtor under Regulation 13(2)(c) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016;
f) Appointment/ Replacement of the Resolution Professional;
g) Prior or post-facto intimation of the meetings of Committee of Creditors;
h) Brief particulars of invitation of resolution plans under section 25(2)(h) of Insolvency Code in the Form specified under regulation 36A(5) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016;
i) Number of resolution plans received by Resolution Professional;
j) Filing of resolution plan with the Tribunal;
k) Approval of resolution plan by the Tribunal or rejection, if applicable;
l) Salient features, not involving commercial secrets, of the resolution plan approved by the Tribunal, in such form as may be specified;
m) Any other material information not involving commercial secrets.

B. SEBI (PIT) Regulations, 2015:

a) All participants who have acquired confidential information in the course of Insolvency Proceedings, shall maintain the confidentiality of such information. Such participants shall include the companies, Resolution Professionals (RPs), Committee of Creditors and any other entities who may have access to Unpublished Price Sensitive Information (UPSI) as defined in SEBI (PIT) Regulations, 2015.

b) Such participants should continue to ensure there is a strong and robust framework to maintain confidentiality of the Unpublished Price Sensitive Information and ensure that persons (including the Resolution Professionals (RPs), Committee of Creditors and any other entities who may have access to UPSI as defined in SEBI (PIT) Regulations, 2015 are put through necessary restrictions as required under the provisions of the SEBI (Prohibition of Insider Trading) Regulations 2015.

C. SEBI (ICDR) Regulations, 2009:

The provisions of this chapter, except lock-in-period, shall not apply, where the preferential issue of specified securities is made in terms of resolution plan approved under Regulation 31 of IBC, 2016.

D. SEBI (SAST) Regulations, 2011:

Acquisition pursuant to resolution plan approved under Regulation 31 of IBC, 2016, shall be exempt from the requirement of maximum permissible non-public shareholding.

The latest change will enable acquirers of shares under approved resolution plan to go beyond the maximum permissible non-public shareholding, that is, 75 percent. The SEBI move is expected to smoothen the implementation of successful resolution plans. Hitherto, the 'Takeover Code' barred acquirers of shares in a company from entering into any transaction that would take their aggregate shareholding above the maximum permissible non-public shareholding limit.

E. SEBI (Delisting of Equity Shares) Regulations, 2009:

Nothing in these Regulations shall apply to any delisting of equity shares of a listed entity made pursuant to a resolution plan approved under Regulation 31 of IBC, 2016, if such plan:

a) Lays down any specific procedure to complete the delisting of such shares;
b) Provides an exit option to existing public shareholders at a price specified in the resolution plan

Provided that, the exit price shall not be less than the liquidation value as determine under regulation 35 of IBC, 2016. Provided further that, the exit price shall not be lower than the exit price given to promoters.

Provided also that, the details of the delisting of such shares along with the justification for exit price shall be disclosed to stock exchange within one day of approval of resolution plan.

Immediate Action Required:

The Companies which are already in CIRP have to disclosed the following events/ information's to the Recognized Stock Exchanges right away-

a) Public announcement made on May 19, 2018 pursuant to order passed by the Tribunal under Section 13 of Insolvency Code.

b) List of creditors as required to be displayed by the corporate debtor under Regulation 13(2)(c) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

c) Prior or post-facto intimation of the meetings of Committee of Creditors scheduled to be held on June 14, 2018.

Previously, the suspension of the board coupled with no disclosure requirements results in the creation of a severe information irregularity, especially with respect to minority shareholders. Minority shareholders have little or no knowledge about any of the various steps in the resolution process or how far along the resolution process is. They should have access to material information such as conditions imposed on the company, capital restructuring being undertaken and the status of the insolvency resolution process, amongst other things, with the caveat that the same is subject to further orders by the NCLT. Further, disclosure of the decisions of the committee of creditors, and other information that is not a commercial secret can only help improve the conditions and protect the rights of minority shareholders. SEBI's move of amending the LODR Regulations, amongst others, shall certainly balance the existing irregularity to an extent, and promote greater transparency in the capital market.


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