SEBI has no locus in Scheme Petition under sections 391, 394 of Companies Act: High Court

Stock market regulator Securities and Exchange Board of India (SEBI) does not have locus to intervene in a Scheme Petition under Sections (391 and 394) of Companies Act, the Bombay High Court has held in a recent judgment by Justice Kathawalla.

Sections 391 and 394 of the Companies Act deal with issues relating to merger, amalgamation, restructuring of companies.

SEBI had applied to the Bombay High Court to set aside the High Court’s earlier order sanctioning a scheme of arrangement and amalgamation in a matter relating to Ikisan Ltd and Kakinada Fertilizers . SEBI had contended in its application that a fraud had been perpetrated on the Court by suppression and/or misrepresentation of facts and documents relating to the court sanctioned composite scheme between Kakinada Fertilizers, erstwhile Nagarjuna Fertilizers and Chemicals Ltd (NFCL), Ikisan Ltd and Nagarjuna Oil Refinery Ltd (NORL). Under this composite scheme, the oil business of the erstwhile NFCL was demerged into NORL and the erstwhile NFCL together with its residual business and Ikisan were merged into the KFL.

SEBI had cited in its appeal the Supreme Court’s observations in the Sahara case wherein the apex court had said that SEBI had wide powers to take any actions/steps necessary for investor protection and for the development and regulation of the securities market and that SEBI’s powers are not fettered by any other law, including the Companies Act.

Turning down SEBI’s contention, Justice Kathawalla said that in his view, the observations of the Supreme Court in the case of Sahara India are general in nature. He said in his order, “the observations in the Sahara judgment cannot be construed to have overruled the categorical finding of the Division Bench of this Court in the Sterlite case that SEBI cannot, as a matter of right, be heard in all scheme petitions coming up before the Court under Section 391 of the Act. Therefore, the decision of the Division Bench in the Sterlite case, in my view, holds the field on this aspect and it cannot be said that the said finding has been set aside by the Supreme Court.”

Besides SEBI had in a case relating to MCX Stock Exchange Ltd, made a submission that a scheme under Section 391 binds the creditors and shareholders and cannot bind SEBI which does not in any event have locus in a Section 391 Petition.

If SEBI has no locus to appear in a Scheme Petition, SEBI can hardly be a “person aggrieved” who would be entitled to file a Petition seeking a review/recall of the order sanctioning the scheme, the court held.

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