Sebi cannot bring legal action against corporations under the IBC: Panel

23 Jun 2022 , 09:12 AM

The Securities and Exchange Board of India (Sebi) should not have any particular exemption from the Insolvency and Bankruptcy Code’s (IBC) moratorium provision, according to the Insolvency Law Committee’s recommendation.

The regulations provide that if a firm is declared insolvent under the code, a general moratorium takes effect that prevents authorities from starting any further legal actions against the corporation. According to those with direct knowledge of the situation, Sebi has requested an exception to this regulation from the central government and the subject has been sent to the Insolvency Law Committee.

The committee stated in its report to the government that any exclusions to the moratorium might impede the IBC procedure. The central government is authorized by law to exclude any financial or regulatory arrangement from the scope of the moratorium.

The report, which was submitted to the finance ministry last week, stated that the exemption under Section 14(3)(a) (exemption from moratorium) “should be exercised only in exceptional circumstances, which may not hinder the smooth conduct of the CIRP” and that it “should not be relaxed until found necessary from the implementation experience of the code.” Sebi did not respond to an email addressed to them.

According to the individuals described above, the market regulator requested the exception because, in a number of situations, these corporations were endangering the interests of public shareholders. There have been several instances where businesses that broke listing regulations continued to trade on stock exchanges while a resolution procedure was underway. For instance, the promoter ownership in certain cases reached 98—99 percent, reducing the number of free-float shares that could be traded on the market. Some market traders took advantage of these circumstances to influence the stock prices.

“Many companies kept their stock market listings while going through the resolution process, even though they might not have been entirely compliant with the securities regulations at the time. In order to safeguard the interests of public investors, Sebi sought the exemption from the moratorium “Manoj Kumar, a corporate professionals associate, stated.

“However, the purpose of IBC is to protect business value during CIRP and give a fresh start to the new buyer, thus any pending regulatory action may deter interested purchasers. These actions typically take years to complete, and the new management is often unsure about the level of culpability “Kumar added.

The moratorium exclusively affects legal actions brought against the corporation covered by the resolution, to be clear. However, if there are any violations, authorities have the authority to take legal action against the company’s promoters or senior officials.

Successful bankruptcy legislation must safeguard “the value of the insolvency estate against erosion by the acts of many parties to insolvency proceedings,” according to the Insolvency Law Committee’s study.

The moratorium, it was further emphasized, guarantees that the debtor’s assets are maintained intact to maximize value and aids in the achievement of this goal.