Disclaimer: The views expressed here are solely those of the author in private capacity and do not in any way represent the views of the Legal Ocean or its editors, or any other representatives associated with Legal Ocean.

When we go through the powers conferred to SEBI (‘the Board’) for the regulation of financial and securities market, we observe that the Board has been vested with a vast range of powers, which are too broad even for a cross-sector regulator. This is one of the reasons for the conflict of powers given to the Board and the other authorities under various laws which are not within the ambit of the Board or partially within their ambit. This has created a lot of chaos not only for investors and consumers but also for other cross-sector regulators and even sector-specific ones.

One example of such legislation is the Insolvency and Bankruptcy Code, 2016 (‘the Code’), which brought a revolutionary change in the insolvency and bankruptcy law of India by consolidating all the provisions related to the same in one statute. This law made the procedure for insolvency resolution very efficient as compared to the previous laws.

Jurisdiction of SEBI

SEBI has been conferred with powers and responsibilities by the virtue of the provisions listed in the SEBI Act, 1992 as well as few provisions enumerated under Companies Act[1]. SEBI was established under the SEBI Act, 1992 and thus, it has been given the responsibility of regulating and promoting the development of the securities market. SEBI also has the responsibility of protecting the interest of the investors.[2] To do so, the Board can take any measure that it deems fit and issue such directions. The board can also issue directions to regulate the affairs of the intermediaries or any persons, and to secure their proper management as well.[3]

The Board has been vested with the power to investigate into any detrimental transaction of securities or violation of any provisions of the rules or regulations which are laid down by the Board itself.[4] It can also regulate the functioning of stockbrokers.

Jurisdiction of NCLT

The NCLT (the “Tribunal”) has been given the responsibility under the Companies Act, 2013 to regulate and manage the proper functioning of companies. For this, the Tribunal has the power to adjudicate the class action suits against any fraud by a company[5], and share transfer disputes between the company and the victim[6]. Furthermore, the NCLT can look into the matters of oppression due to cases of mismanagement and abuse[7] as well as revision of financial statements.[8] All these powers can be derived from the general provisions of inquiries and investigation under the Companies Act, 2013. NCLT also has the power to dissolve or deregister a company if the actions of the company are found to be fraudulent or illicit.

The NCLT has transformed into an independent authority by the powers conferred by the High Court, Board of Industrial and Financial Reconstruction (BIFR) and Appellate Authority for Industrial and Financial Reconstruction (AAIFR)[9], and thus it can check into all the legal matters related to the functioning of companies and thus, the Tribunal handles all the cases of the listed companies in India.

The Issue

It seems that the NCLT and SEBI have some overlapping problems regarding their laws with respect to some specific key issues. This can be inferred from the case of  HBN Dairies (Respondents)[10] wherein the NCLT ordered the SEBI to de-attach all the immovable properties of the Corporate Debtor due to the fact that the Corporate Insolvency Resolution Process had been initiated against him. The matter involved the operation of illegal Collective Investment Schemes (CIS). Before starting a CIS, various compliances under SEBI laws have to be taken into consideration in order to get approval from SEBI to run such a scheme.

However, there was no approval taken by HBN Dairies from SEBI for running the scheme, and thus the Board had to attach the properties under Section 11 and 11B of the SEBI Act, 1992 and provisions under SEBI (Collective Investment Schemes) Regulations, 1999. The same was also upheld by the Securities Appellate Tribunal (SAT). As the name suggests, a CIS required collection of money in the form of investment by the company for carrying out various functions. Due to this, it also comes within the ambit of ‘Financial Debt’ under the provisions of Insolvency and Bankruptcy Code, 2016.

Thus, the investors of the scheme filed the application before the NCLT for initiating insolvency proceedings against the company. When an application is admitted under this, the provisions of IBC, 2016 state that no other proceeding can be continued against the Corporate Debtor.[11] This provision thus gave the power to NCLT to override the provisions of SEBI and prevent them from recovering any amount from HBN Dairies.

The applicants were considered as financial creditors due to the existence of financial debt under Section 7 of the Code and this initiated the period of moratorium under Section 14 of the Code. While doing so, the Tribunal referred to another case[12] adjudged by the NCLAT wherein it was held that the term ‘financial creditor’ also covers those who have committed to pay interest or assured returns. The application was challenged by the corporate debtor and the appeal was rejected by the Appellate Tribunal (NCLAT) which re-instated the importance and role of Section 238 of the Code and relied on its own judgment given in Anju Agarwal case[13], wherein a similar question of whether recovery of dues by regulatory authorities was prohibited under the provision of Moratorium[14] was raised.

SEBI, on the other hand, had made public announcements for auction of the properties belonging to the corporate debtor, as was ordered by the SAT, but because of the overriding effect which had made the Board helpless, it filed an appeal before the Apex Court against the order of initiation of CIRP upheld by the NCLAT. The Board contended that Section 238 of the Code was applicable only when there was any law which was inconsistent with the provisions of the Code, but the provisions laid down by SEBI were not of such nature. Thus both the laws could be proceeded with simultaneously.

SEBI claimed that in matters of CIS, the Board has exclusive jurisdiction to adjudicate as the provisions for regulation of CIS are laid down by the Board itself. Furthermore, because the corporate debtor holds the assets of CIS in trust and IBC has no control over it, the provisions of IBC will not be applicable in the instant matter. Lastly, the Board also asserted that the investors are covered within the ambit of holders instead of lenders. These holders hold the units that can be traded and thus they do not fulfil the requirements to qualify as a financial creditor under the Code.

The final verdict given by the Supreme Court was given in the favour of NCLT wherein the bench consisting of Justice Indira Bannerjee and Ajay Rastogi relied on the non-obstante clause under Section 238 of the Code and stated that this clause will override every other law.

In Shobha Ltd v. Pancard Clubs,[15] NCLT Mumbai dealt with a similar factual matrix involving attachment of properties of a Company who had floated a CIS without registration. When the Tribunal was adjudicating about the existence of financial debt it held that:

“There is no jural relationship in between this Petitioner and the Corporate Debtor because the contract purported to have been entered between this Petitioner and the Corporate Debtor is not recognised by any law, indeed there is a prohibition under SEBI Act to collect funds as mentioned under Section 11AA of the SEBI Act unless and until a license for CIS has been granted by the SEBI.”

Conclusion

The Insolvency and Bankruptcy Code is a very new law which was enacted with the intention of timely resolution of the companies in debt. The laws laid down by SEBI came much before with the objective of protecting the interests of the investors in securities as well as promoting and regulating the securities market. Due to this, the powers conferred to it are vast than that to the Code. Due to this, there are some loopholes and contradictions which have taken up the form.

In order to avoid such circumstances and implement the Code as well as the Securities laws more effectively, the Board recently signed a Memorandum of Understanding with the Insolvency and Bankruptcy Board of India (IBBI). The main objectives of this MoU are to promote entrepreneurship and debt market. This has indicated some hope for both the regulators.


[1]    Companies Act, §§ Ss 24, 458 (2013).

[2]    Securities and Exchange Board of India Act, § 11(1) (1992).

[3]    Securities and Exchange Board of India Act, § 12 (1992).

[4]    Securities and Exchange Board of India Act, § 11(c) (1992).

[5]    Companies Act, § 245 (2013).

[6]    Companies Act, §§ 58, 59 (2013).

[7]    Companies Act, § 397 (2013).

[8]    Companies Act, 2013. §§ 130, 131, 447, 448 (2013).

[9]    For example, Insolvency and Bankruptcy Code, (2016).

[10]  Bhanu Ram v. HBN Dairies & Allied Ltd., TaxPub(CL) 0050, (NCLAT: 2019).

[11]  Insolvency and Bankruptcy Code, § 238 (2016).

[12]  Nikhil Mehta & Sons and Ors. v. AMR Infrastructure Ltd., IB-02(PB)/2017 & C.A. No. 1584/2019. (NCLAT: 2019).

[13]  Anju Agarwal, RP (Shree Bhawani Paper Mills Ltd.) v. Bombay Stock Exchange and Ors., Company Appeal (AT) (Insolvency) No. 734/2018 (NCLAT: 2018).

[14]  Insolvency and Bankruptcy Code, 2016. §14 (2016).

[15]  Shobha Ltd. v. Pancard Clubs, SCC Online 7486 (NCLT:2017).

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