Why is a Reliance Capital Ltd investor challenging its resolution plan?

An investor has challenged SEBI's delisting norms and NCLT's approval of a resolution plan for Reliance Capital Ltd (RCL). The plan includes delisting of RCL's shares, which fails to protect the interest of investors, the petitioner alleged.

Anil Ambani at the 32nd AGM of Reliance Capital in Mumbai. (Express file photo by Dilip Kagda)

An investor in Reliance Capital Ltd (RCL), which has been facing insolvency proceedings, has challenged certain regulations of SEBI’s delisting norms and a recent National Company Law Tribunal’s (NCLT) approval of a resolution plan for the company.

The plan provides for delisting of shares of RCL. In a writ petition filed before the Bombay High Court, the investor said SEBI’s regulation, which exempts applicability of Delisting Regulations in cases where delisting is as per the Insolvency and Bankruptcy Code (IBC)-approved resolution plan, fails to protect the interest of investors.

Who is the petitioner?

The petitioner, Harsh Mehta, is an investor who has challenged certain provisions of SEBI’s delisting of equity shares regulations and the NCLT’s approval of the resolution plan for RCL, submitted by IndusInd International Holdings Ltd (IIHL).

Mehta is a stock market investor and holds 6,700 shares of RCL, representing 0.003 per cent shareholding in the company. RCL is a listed entity having 98.49 per cent public shareholding as on December 31, 2023. Mehta has been a shareholder of RCL since November 2022.

Which regulation of SEBI’s Delisting Regulations has been challenged?

The petitioner has challenged the vires of Regulation 3(2)(b)(i) of the SEBI (delisting of Equity Shares) Regulations, 2021 (Delisting Regulations). Regulation 3(2)(b)(i) that exempt the applicability of Delisting Regulations to the delisting of equity shares of a listed company made as per a resolution plan approved under Section 31 of the Insolvency Code, if such plan provides for the delisting of such shares.

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The same is ultra vires or beyond the scope of the SEBI Act, 1992, according to the petition.

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Section 31 of the Insolvency Code refers to approval of a resolution plan by NCLT for an entity undergoing insolvency proceedings. The plan will be binding on the corporate debtor and its employees, creditors, guarantors and other stakeholders involved in the resolution plan.

Delisting of securities means the removal of securities of a listed company from stock exchanges. There are two types of delisting – voluntary and compulsory.

In voluntary delisting, a company decides on its own to remove its securities from stock exchanges whereas in compulsory delisting, the securities of a company are removed from stock exchanges as a penal measure for not making submissions or complying with various requirements set out in the listing agreement within the time frames prescribed.

What does the RCL resolution plan entail?

In November 2021, the Reserve Bank of India (RBI) superseded the board of RCL and appointed an administrator. In December 2021, a corporate insolvency resolution process (CIRP) was initiated against RCL. The NCLT, on February 27, 2024, approved the resolution plan of IndusInd International Holdings Ltd (IIHL).

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The petitioner has challenged the NCLT order which approved the resolution plan providing for delisting of shares of Reliance Capital and consequent circulars issued by the BSE and the NSE, dated February 29, 2024, announcing the suspension of trading in the scrip of RCL. The trading in the scrip of RCL is currently suspended on stock exchanges following the NCLT order.

What are the concerns raised?

The petitioner said RCL, on February 28, 2024, made the disclosure to the NSE and the BSE stating that the liquidation value of the equity shareholder of RCL is ‘NIL’ and hence, equity shareholders will not be entitled to receive any payment and no offer will be made to any shareholder of RCL.

The entire existing share capital of RCL is proposed to be cancelled and extinguished for NIL consideration by virtue of the NCLT Approval Order such that IIHL and/or the Implementing Entity, and its nominees, are the only shareholders of the corporate debtor – RCL.

“As a result of the Impugned Regulation (Regulation 3(2)(b)(i) of the Delisting Regulations of SEBI), a resolution process that leads to overnight zero value of equity shares in case of companies that undergo delisting according to approval of resolution plan takes effect without prior intimation to the public shareholders and without taking approval from the public shareholders,” the petition said.

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The exemption provided under the said regulation of Delisting Regulations leads to failure in protecting the interest of public shareholders who are also investors in the market.

The petitioner said the resolution plan as approved by the NCLT order, by simply stating that the equity shares of RCL will stand delisted and giving an overnight value of Zero to the equity shares, affects the shareholding of 98.49 per cent public shareholders of RCL.

“The Resolution Plan is passed on the basis of a patently wrong liquidation valuation to defeat the interest of the equity shareholders,” the petition said