A conflict has emerged between rules stipulated by the market and banking regulator — SEBI and RBI — over voting on debentures issued by stressed companies which could delay the resolution of bad debts under the Insolvency and Bankruptcy Code.

This divergence came to the fore after the Bombay High Court recently allowed shareholders of Reliance Commercial Finance, which was taken over by Authum Infrastructure and Investment, to carry out voting based on the Debenture Trust Deeds as per RBI’s 2019 circular that is aimed at time-bound resolution of stressed assets.

However, SEBI has moved the Supreme Court against the Bombay High Court order claiming that the voting on debenture should be based on ISIN (International Securities Identification Number) as per the SEBI (Debenture Trustee) Regulations 1993 and its circular of October 13, 2020, as they protect retail investors’ interests.

Following this, the bench led by CJI NV Ramana directed the lenders not to implement the outcome of voting, till the matter is heard afresh by another SC bench led by Justice DY Chandrachud.

Conflict between regulators

The conflict between both the regulators in this case was due to application of two circulars. The voting in Reliance Commercial case was conducted under the RBI norms that allowed lenders to enter into Inter Creditor Agreement for implementing a resolution plan.

The RBI rule says voting by debenture holders will be governed by the Debenture Trustees Deeds which requires approval from 75 per cent of outstanding debt holders. However, the SEBI circular mandates voting at ISIN level, which needs 100 per cent approval.

Moreover, the retrospective implementation of SEBI’s October order would further delay closure of approved resolution plans.

In the case of Reliance Commercial, the Bombay High Court said the voting on the resolution plan by Authum Investments & Infrastructure will not harm retail investors, as investors up to ₹10 lakh will get 100 per cent recovery in the resolution plan.

Need to protect small investors

The court noted, “Should single-investor-wise voting be carried out, one single investor may vote against or abstain from voting. leading to a situation where a debenture holder with ₹5-crore investment could veto a resolution plan worth ₹9,017 crore. This would hurt the retail debenture holders the most. Therefore, the SEBI role to protect small investors would be defeated”.

The High Court order further said, “Under the Debenture Trust Deed, every debenture holder will have voting rights and the faith of the vote shall be decided by a majority of 3/4th. This mechanism is equitable and in keeping with the interest of all stakeholders.”

Challenging the High Court order, SEBI said that its circular does not take away or impair the voting rights of debenture-holders, but prevents such voting rights being steam-rolled by a large investor.

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