The Supreme Court on Shareholder Consent in Debt-to-Equity Conversions
Category: Banking Law
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Case Name: JYOTI LIMITED VS. BSE LIMITED & ANR.
Case Number: Civil Appeal No. 4707 of 2022
Date: 10th December,2024
Quorum: Hon'ble Mr. Justice Pankaj Mithal, Hon'ble Mr. Justice Sandeep Mehta
FACTS OF THE CASE
Jyoti Limited, a corporate entity, filed an application with the BSE for the listing of equity shares. This arose from a resolution of the company's Board of Directors dated May 2nd, 2018, to convert into equity shares the outstanding debt of ₹32.80 cr due to RARE. Thereafter, Jyoti Limited had applied to BSE with the application for listing 59,63,636 equity shares allotted to RARE. The application was rejected by BSE on the grounds of absence of an in-principle approval from the exchange and absence of approval from shareholders for the allotment. BSE's dismissal was upheld by SAT Mumbai; consequently, an appeal was filed before the Supreme Court by Jyoti Ltd. The appellant maintained that the debt conversion was carried out under the SARFAESI Act and did not require shareholder consent, as the proposal to increase subscribed capital was made by RARE and not the company.
ISSUE OF THE CASE
Did the conversion of debt into equity shares carry with it any special requirements as per Section 62(1)(c) of the Companies Act, 2013?
LEGAL PROVISIONS
Section 9. SARFAESI Act, 2002: Empowers all secured creditors, RARE being among them, to adopt various measures, including converting existing debts in the form of equity shares of the borrower company.
Section 62(1)(c), Companies Act, 2013: Requires that, where a company proposes to increase its subscribed capital through the issue of new shares to any person, shareholder approval by special resolution must be obtained.
Regulation 28, SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015: A prior approval of the stock exchange for the listing of additional shares, fulfilling all procedural and regulatory requirements of the same, is required.
ARGUMENTS
Arguments of the Appellant (Jyoti Limited):
As an appellant, it argued that Section 9 of the SARFAESI Act allowed RARE to convert debt into equity shares on its own without the need for a shareholder resolution. They argued that really this decision initiated from RARE and not from the company itself therefore they are not liable to follow the provisions of Section 62(1)(c) of the Companies Act. According, it added that the absence of an in-principle approval from the BSE should not bar the listing since the conversion of the debt, as allowed under the SARFAESI Act, is an outstanding right of RARE to be exercised.
Arguments of the Respondent (BSE Limited and Others):
They, however, argued in this context that the Board of the Directors of Jyoti Limited had been writing to this Board and had agreed for debt conversion when it had passed a resolution that this proposal initiated the increase of subscribed capital. In their opinion, this triggered the requirement for a shareholder’s approval per the provision of Section 62(1)(c) of the Companies Act. Further, they alleged that no in-principle approval from the concerned stock exchange is a direct violation of Regulation 28 of the SEBI (LODR) Regulations, which is critical in bringing transparency and investor confidence.
ANALYSIS
The Court was therefore concentrated on balancing the powers given to secured creditors under the SARFAESI Act with procedural safeguards under the Companies Act and the SEBI regulations. The authority of the secured creditors under Section 9 of the SARFAESI Act to convert debt into equity shares is, however, subject to other statutory requirements.
The resolution passed by the Board of Directors of Jyoti Limited reflected the company's acceptance of the conversion of the debt. It was an infusion of share capital into the company by the company itself, a proposal to increase subscribed capital which Section 62(1)(c) of the Companies Act would require to be approved by the shareholders. RARE did not initiate the conversion-a point made irrelevant by the company's involvement.
The Court also upheld that obtaining in-principle approval under Regulation 28 of the SEBI (LODR) Regulations is necessary for maintaining transparency and safeguarding investors. Denial of such approval paved the way for BSE's rejection of the application for listing.
JUDGMENT
This motion was dismissed. The Court held that the company was the provider of the proposal for increasing subscription of capital when it passed a resolution for debt conversion and required shareholder approval in terms of Section 62(1)(c) of the Companies Act. The Court maintained the provisions of Regulation 28 of the SEBI (LODR) Regulations, indicating that BSE's rejection of listing was justified in the absence of in-principle approval. The Court stressed on upholding corporate governance norms and the rights of shareholders to ensure greater accountability and transparency in the corporate sector; the appeal was thus dismissed, and all pending applications and interlocutory applications were disposed of.
CONCLUSION
The decision exemplifies the judiciary's commitment to ensuring strict adherence to corporate governance norms. The decision explains the interplay of SARSFAESI with the Companies Act and emphasizes the need for obtaining shareholder approval for capital re-structuring and the need to adhere to a regulation under the SEBI framework. The ruling stands as an important precedent in being a protective factor on shareholders' interests and providing a boost to corporate transparency in corporate transactions.
