The Insolvency and Bankruptcy Code, 2016 (IBC) and the Securities and Exchange Board of India (SEBI) Act are both important pieces of legislation in India that regulate different aspects of the financial markets. There have been some conflicts between the IBC and SEBI Regulations Act, such as when the SEBI wants to recover money from a corporate debtor during a moratorium. However, some critics argue that there is no conflict between them because they operate in different spheres. This article delves into this argument in more detail.
Understanding the SEBI vs. IBC Conflict
The Role of SEBI in Regulating Listed Companies:
SEBI oversees market integrity, investor protection, and corporate governance and is entrusted with the responsibility and developing the securities market. It formulates regulations and guidelines that govern various market participants, such as stock exchanges, brokers, and listed companies, to promote fair and transparent practices. IBC and SEBI Regulations also has the power to investigate fraudulent or unfair trade practices.
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The Role of IBC in Corporate Insolvency:
The IBC and SEBI Regulations aims to provide a structured resolution mechanism when companies default on their financial obligations. It enables creditors to take control of a debtor company’s assets, ensuring a time-bound resolution to minimise further value erosion. During the resolution process, a moratorium is imposed on legal proceedings against the debtor, providing a ‘breathing space’ to develop a viable resolution plan.
Jurisdictional Overlap – Where SEBI & IBC Collide:
The IBC and SEBI Regulations Act aims to protect investors, while the IBC sets deadlines for corporate insolvency resolution. While a listed entity is undergoing a corporate insolvency resolution process (CIRP), the primary corporate action is a moratorium placed on all judicial proceedings against the company, effectively halting any significant business decisions or transactions until a resolution plan is approved by the Committee of Creditors (CoC). In such situations, the foremost issue that arises is regarding major decisions during CIRP, whether SEBI or the resolution professional (RP) has control. Which authority will oversee the proceedings, SEBI or the National Company Law Tribunal (NCLT) is a major reason for jurisdictional conflicts between the SEBI Act and the IBC.
Key Legal Conflicts Between IBC and SEBI Regulations
SEBI’s Enforcement Actions During IBC Moratorium:
The SEBI Act gives SEBI the power to recover penalties by attaching and selling a debtor’s assets, and IBC prohibits these actions during a moratorium, which is issued under section 14 of the IBC.
Delisting of Shares After Insolvency Resolution:
An insolvent company’s shares can be delisted from the stock exchange as part of the approved resolution plan. This means that the shares are removed from public trading and shareholders have an exit opportunity through the plan, often a price determined by the resolution process. This bypasses the standard SEBI delisting regulations as section 238 of the IBC overrides conflicting legislations.
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Investigations & Fraudulent Transactions:
SEBI has the responsibility to investigate insider trading, misstatements, and fraudulent financial practices. The IBC and SEBI Regulations role, therefore, regulatory actions by SEBI can be paused due to the moratorium imposed during CIRP. However, jurisdictional conflict remains between the IBC and the SEBI Act.
Judicial Precedents – Supreme Court & NCLAT Rulings on SEBI vs. IBC
Supreme Court and NCLAT rulings of the IBC and SEBI Regulations have established that the two statutes operate in different spheres and do not conflict. SEBI v. Dewan Housing Finance Corporation Limited was a case in which SEBI faced a challenge from the company over a penalty imposed by SEBI. The company challenged the penalty in the Securities Appellate Tribunal (SAT), which ruled that the SEBI could not initiate proceedings against the company after a moratorium was imposed under Section 14 of the IBC. The Supreme Court upheld the SAT’s decision, quashing the penalty and the proceedings. This decision affirmed the IBC’s supremacy in insolvency situations. The Supreme Court in Monnet Ispat and Energy Ltd. v. SEBI affirmed that the IBC overrides SEBI in insolvency matters as per section 238 of the IBC.
Policy Recommendations for Harmonizing IBC and SEBI Regulations
To successfully reduce the conflicts due to the overlapping of SEBI and IBC, it is recommended to:
- Define clear boundaries between SEBI’s investor protection mandate and IBC’s insolvency framework.
- Establish a joint SEBI-IBBI regulatory mechanism to coordinate enforcement actions.
- Implement a special insolvency code for publicly traded companies to balance investor rights with resolution objectives.
Conclusion
While the IBC and SEBI Regulations can sometimes appear to overlap, their primary focus is on different matters – the IBC on corporate insolvency and creditor rights, and the SEBI on investor protection in the securities market. This generally does prevent jurisdictional overlap between the two, however, there are situations where a company undergoing insolvency proceedings is also subject to SEBI regulations can create points of contention. There is a need for a coordinated policy approach to balance investor protection with debt resolution. Harmonising the IBC and SEBI Regulations can help ensure efficient insolvency outcomes and maintain coherence in their application.