NATIONAL LAW INSTITUTE UNIVERSITY,BHOPAL

SUBJECT: COMPANY LAW

SEMESTER -V

PROJECT ON: SEBI: RELISTING NORMS FOR CRIP

COMPANIES

SUBMITTED TO: - SUBMITTED BY: -

Ms. PADMA SINGH UJJWAL JOSHI

(2019 B.A. LL.B. 70)
(ASSISTANT PROFESSOR)
 Table of Contents
CERTIFICATE.................................................................................................................................2
ACKNOWLEDGEMENT.................................................................................................................3
INTRODUCTION............................................................................................................................4
STATEMENT OF PROBLEM..........................................................................................................5
HYPOTHESIS..................................................................................................................................5
RESEARCH QUESTIONS...............................................................................................................5
OBJECTIVE OF STUDY.................................................................................................................5
METHOD OF STUDY.....................................................................................................................6
POWERS OF SEBI..........................................................................................................................6
LISTING OF COMPANIES...........................................................................................................11
BENEFITS OF LISTING...........................................................................................................12
DISADVANTAGES OF LISTING..............................................................................................14
CORPORATE INSLOVENCY RESOLUTION PROCESS.............................................................15
Steps under CIRP.......................................................................................................................16
MINIMUM PUBLIC SHAREHOLDING.......................................................................................19
EFFECT OF PANDEMIC ON CIRP AND MSP RULE................................................................24
CONCLUSION AND SUGESSION...............................................................................................28
BIBLIOGRAPHY...........................................................................................................................29
REVIEW OF LITERATURE..........................................................................................................30
 CERTIFICATE

“This is to certify that the paper namely SEBI- RELISTING NORMS FOR CIRP
COMPANIES- has been prepared and submitted by Ujjwal Joshi who is currently pursuing their
BA LLB(Hons.) at National Law Institute University, Bhopal in fulfilment of Company Law
course. It is also certified that this is an original research report and this paper has not been
submitted to any other university, nor published in any journal.”

Date-

Signature of the student-

Signature of Research Supervisor- 

 ACKNOWLEDGEMENT

“This paper has been made possible by the unconditional support of many people. I would like to
acknowledge and extend my heartfelt gratitude to Vice Chancellor (Dr.) V. Vijaykumar and Mrs.
Padma Singh for guiding me throughout the development of this project into a coherent whole by
providing helpful insight and sharing their brilliant expertise. I would also like to thank the
official of Gyan mandir, library, NLIU BHOPAL for helping me to find the appropriate research
material or this study. I am deeply indebted to my parent, senior and friend for all the moral
support and encouragement.”
 INTRODUCTION

The Securities Exchange Board of India, which is controlled by the Indian government, regulates
the shares, debentures, other securities, and other commodities markets in India. SEBI is tasked
with three functions: quasi-legislative, quasi-judicial, and quasi-executive. In its legislative role,
it writes regulations, in its executive function, it conducts investigations and enforces such
decisions, and in its judicial capacity, it adjudicates and passes orders. The Securities and
Exchange Board of India's Preamble states that the board's fundamental functions are to protect
the concerns of investors in securities, to encourage the growth of, and to manage the securities
market, as well as for matters related to or incidental to those functions.

Insolvency is a financial scenario in which an entity or an individual is unable to meet financial

obligations due to an excess of liabilities over assets, whereas bankruptcy is a legal matter in
which a court of law issues orders regarding an individual's or entity's insolvency and, as a result,
issues orders for resolution. The Corporate Insolvency Resolution Process (CIRP) is a creditor
recovery process. A financial creditor, an operational creditor, or the company itself may
commence CIRP if it becomes bankrupt.

"Public shareholding" is defined in rule 2(e) of the Securities Contracts (regulation) rules, 1957
as "equity shares of the company held by the public" , including shares underlying depository
receipts if the holder of such depository receipts has the right to issue voting directions and such
depository receipts are listed on an international exchange in accordance with the Depository
Receipts Scheme, 2014 Regulation 38 of the Listing regul This clause, however, does not apply
to firms that are listed on an institutional trading platform without issuing a public offering.

In recent years, with the introduction of the Insolvency and Bankruptcy Code in 2016, the
method for launching an insolvency case has been harmonised and streamlined, providing relief
to creditors. However, a company going bankrupt is bad for both the investors and the
individuals that work there. Other corporations are enticed to invest in the insolvent companies
in order to protect the interests of all of these participants. Despite the fact that the government
promotes this process, there are numerous complexities and technicalities that must be addressed
in order to protect market investors. SEBI performs all of the necessary functions in this regard,
but its existing rules often fall short of anticipating market reactions, which are then used by the
acquiring business by exploiting gaps in the established rules. One of these norms is that of
Minimum Public Shareholding that is required when a company is listed in any of the stock
exchange.

This paper will discuss this standard, with a focus on the relisting of companies that have
undergone insolvency resolution. It's important to focus on these companies because if the public
shareholding requirement isn't reached, it'll be difficult to estimate the company's true value,
which might be disastrous for investors.

STATEMENT OF PROBLEM

Minimum Public Shareholding norms implemented by the SEBI for listing of a company post
insolvency resolution process have resulted in huge losses for the bona fide investors.

HYPOTHESIS

Current norm of SEBI obligating the companies to maintain minimum of 25% Public
Shareholding at the time of listing results in huge losses to the investors.

RESEARCH QUESTIONS

1. Whether the Minimum Public Shareholding norms apply to the companies relisted after
going through insolvency resolution process?
2. Can the shares bought by the bona fide investors in a CIRP companies be locked in for
the defined period?

OBJECTIVE OF STUDY

1. To analyse the implications of Minimum Public Shareholding norm notified by SEBI.

2. To study the status of the companies after the insolvency resolution process.
3. To analyse the rights of the investors of a CIPR company.
 METHOD OF STUDY

This project is largely based on the doctrinal method of data collection. It takes into
consideration various sources such as books, reports, articles and papers on the same or related
topic. The study has tried to deal with the basic concept first and then explaining every
component of it.

POWERS OF SEBI

SEBI, as a regulatory organisation, has a number of capabilities to carry out important

responsibilities. A list of such authorities vested in the adjudicatory and regulatory body may be
found in the SEBI Act of 1992. SEBI's responsibilities include acting as a securities issuer,
investor and trader protector, and financial intermediary.

1. Powers of Civil Court1

For completing the duties assigned to it under the act, the SEBI has been vested with the powers
same as that of a Civil Court under the Code of Civil Procedure Code , 1908 for trying a suit in
respect of following matters :

i. The board can ask for the production of books of account and other documents, at a place and
time as the board may seem fit;
ii. The board can summon and enforce the attendance of any such person and also examine him
on oath;
2. Powers to suspend and restrain2
The Board can in the interests of investors or securities market, take numerous measures3. The
board can temporarily stop trading of any security in a recognised stock exchange; it can prohibit
or prevent any person from buying or selling in any securities market; the board can order
retention of any such amount in respect of any transaction which is under investigation; it can
also attach the bank account of any person involved in a transaction that is in violation of any
provisions of SEBI Act, after an order has been passed by the Judicial Magistrate of the first

1
Securities Exchange Board of India Act, 1992§ 11(3)
2
Securities Exchange Board of India Act, 1992 § 11(4)
3
Substituted for clause (i) of sub section (2) by the SEBI (Amendment) Act, 2002, w.e.f. 29-10-2002
class; the board is also enabled to order any intermediary or any person associated with the
securities market in any manner not to dispose of or alienate a property that forms a part of any
transaction which is under investigation.

3. Powers to manage issue of prospectus4

The Board may act to protect investors' interests in I matters relating to capital raising, securities
transfers, and other related issues; and (ii) the manner in which such issues are reported by firms.
The Board has the authority to impose general or particular orders prohibiting any corporation
from issuing a prospectus, an offer document, or any other form of public solicitation for the sale
of securities.

4. Power to issue directions5

The board can issue directions to any person associated with the securities market or any
company as referred under section 11A. Such directions issued must be only be given to secure
and protect the interests of the investors, for orderly working of the securities market or to
restrain any intermediary or person referred under section 12 from conducting his activities in
any manner that would be detrimental to either the investors or the securities market.

In one of the matters before the Hon’ble Supreme Court, there was an alleged misstatement of
facts in prospectus of company that was alleged to be misguiding the investors. In use of its
powers, SEBI restrained Director of Company from indulging in the securities market on prima
facie case that facts were misstated in the prospectus of the company during public issue of
shares which resulted in misguiding the investors. The Supreme Court has held that Provisions of
Section 11B could be applied retrospectively as it was procedural in nature. Even if the
lawapplies prospectively, SEBI cannot be prevented from working in terms of the law which
exists on the day the Board passed its order.6

Similar stand in favor of exercise of power by SEBI was taken by the High Court of Bombay in
the matter of Banhem Securities Pvt. Ltd vs. National Stock Exchange &ors7.The Hon’ble High
court held that the notification issued by the SEBI Board was in exercise of its powers under

4
Securities Exchange Board of India Act, 1992 § 11A (1)
5
Securities Exchange Board of India Act, 1992 § 11(B)
6
Securities and Exchange Board of India Vs. Ajay Agarwal2010 3 SCC 764.
7
Banhem Securities Pvt. Ltd vs. National Stock Exchange &ors2005 (5) COMPLJ 224 (BOM)
section 11 and 11B of the SEBI Act in order to protect bona fide interests of everyone associated
with the securities market.8

5. Power to investigate9
Where the Board is satisfies with the backing of reasonable grounds that the transactions in
securities are being dealt with in a manner detrimental to the investors or the market itself or that
any person associated with the securities market has acted in violation of any of the provisions
of the SEBI Act, then the Board may, at any relevant time can direct any persons through an
order to investigate the affairs of such intermediary or persons associated with the securities
market those are alleged and to report thereon to the Board.

Hon’ble High court of Delhi in the matter of K. Venkateswarlu Vs The Regional Manager, SEBI
&Anr10dealt with the question of whether to issue writ of mandamus or not to SEBI to take in
consideration the complaint of a customer. Those, who are indulged in the stock market and
purchase shares as a mode of investment, have the acquired the knowledge that stock market is
sometime in the grip of bulls and sometime in the grip of bears. SEBI was formed under the Act
as a specialized body, to take care of different regulations meant for stock market. Thus it is the
duty of SEBI to know when and where the investigation is to be done by it.

6. Regulation of Intermediaries: Registration of Stock Broker, Sub Broker, Share Transfer

Agents.
Buying, selling and otherwise dealing in securities market is carried out bynumerous
intermediaries which are associated with securities market in one or the other way.As per section
12 (1) of the act every intermediary who may be associated with securities market mus follow
the terms of the certificate of registration given by the Board while buying, selling or dealing in
securities. Only those individuals are exempted from such certificate who are buying or selling
securities or otherwise dealing with the securities market immediately before the establishment
of the Board wherein they required no certification to deal in securities. Also such persons may
continue to do so for a period of three months from such formation of the Board.11

8
Raj Kumar Kishorepuri Vs General Manager, Securities & Exchange Board of India
&Ors.2005127CompCas18(Cal)
9
Securities Exchange Board of India Act, 1992 § 11(C)
10
K. Venkateswarlu Vs The Regional Manager, SEBI &Anr 2008 (2) TMI 629
11
Securities Exchange Board of India Act, 1992 § 12(2)
7. Powers to Prohibit deceptive trade practices.12
The Board is empowered under Section 12 A of the act to prohibit or restrict any person from (a)
using or employing any manipulative or deceptive device in connection with the issue, purchase
or sale of any securities listed or proposed to be listed on a recognised stock exchange;(b) using
any method or schemeto defraud the people trading in the market, by dealing in securities which
are listed or proposed to be listed on a recognised stock exchange;(c) engaging in insider trading;
(d) dealing in securities by those persons who possess certain material or information that is not
available to the public that would make such transaction a clear violation of the provisions of this
Act or the rules or the regulations made thereunder; (e) acquiring control of any company or
securities more than the percentage of equity share capital of a company whose securities are
listed or proposed to be listed on a recognised stock exchange in contravention of the regulations
made under this Act.

8. Powers to impose Penalties and Adjudication

Chapter VI of the SEBI Act, 1992 contains Section 15A to Section 15 JA that deals with
penalties that the Board can impose for various failures, defaulters, non-disclosures and other
offences.

Bombay High Court discussed the powers of SEBI to impose penalties in the case of The
Securities & Exchange Board of India vs.Cabot International Capital Corporation13. Court in
this case dealt with the question, whether mens rea is sine qua non, for imposing penalty for
breach of the provisions of the SEBI Act and the Regulations framed thereunder, apart from the
discretionary power exercisable by the Board in itsposition as an adjudicating authority. The
Court after thoroughly hearingarguments presented by both parties decidedagainst the necessity
of mens rea for imposing the penalty. According to the court, mens rea is not essential for
imposing civil penalties under the SEBI Act and Regulations.

9. Power to Adjudicate14
Board has the power to adjudicate on any matter covered by the SEBI Act. For adjudicating any
such matter, the board can appoint an adjudicating officer after the person concerned has been

12
Securities Exchange Board of India Act, 1992 Ch V A
13
The Securities & Exchange Board of India vs. Cabot International Capital Corporation (2004) 2 Comp LJ 363
(Bom).
14
Securities Exchange Board of India Act, 1992 § 15 (1)
given a reasonable opportunity of being heard for the purpose of imposing any penalty.
Adjudicating officer must give reliance to a number of determinants while deciding the quantum
of penalty. Some of the important factors are (a) the amount of disproportionate gain or unfair
advantage, wherever quantifiable, made as a result of the default; (b) the amount of loss caused
to an investor or group of investors as a result of the default; (c) the repetitive nature of the
default. All sums realised by way of penalties under this Act shall be credited to the
Consolidated Fund of India.15

10. Power to Make Regulations16:-

To achieve the objectives of the act the Board is empowered to take numerous actions under
Section 30 of the act. Under such actions the Board can issue regulations from time to time that
must provide following matters, namely: a) the times and places at which the meetings of the
Board were held and the procedure that must be followed at such meetings including quorum
necessary for the transaction of business; b) the terms and other conditions of service of officers
and employees of the Board; c) the matters relating to issue of capital, transfer of securities and
other matters incidental thereto and the manner in which such matters shall be disclosed by the
companies under section 11A.131.17

15
Securities Exchange Board of India Act, 1992 § 15 (JA)
16
Securities Exchange Board of India Act, 1992 § 30
17
Securities Exchange Board of India Act, 1992 § 31
 LISTING OF COMPANIES

When a company officially admits its securities on a trading platform that includes any of the
recognised exchanges then this process is known as listing. It is a significant event for every
company in the journey that marks its growth and development in the field. It enables a company
to strengthen its structure and reputation in the market by raising capital from the market itself.18
It provides liquidity to investors and ensures effective surveillance of compliance of the issuer
and trading of the securities by SEBI that strives to protect the interest of investors.

As against the common beliefs,a company does not always listsits shares on an exchange for
selling them to raise capital but may be done to bring in increased levels of scrutiny that comes
with listing that in turnintensify the corporate governance and hence higher compliance levels
are demanded.19When the company intends to raise capital by selling its shares in the exchange it
is known as an Initial Public Offer (IPO), in such cases the amount that would be raised from
suchsale is well known in advance and when no capital is being sought in the market it is
referred to as a Listing by Introduction.

Listing of shares on an exchange is a complex process and includes several steps before the goal
could be achieved. Time requirement and complexity of the listing process largely depends on
the “type” of listing the company wishes to realise:

1. Simple listing on the Exchange- In this kind of listing the company does not intend to raise
capital by issue of new shares or public offering of existing shares (exit). Rather, when the
company appears on the market, it comes with an intention to create a future possibility for
flexible funding that it would resort to in the future. At the same time, the company strives to
understand the requirements associated with maintaining its shares on the Exchange, while
enabling the company to continuously test its performance in the exchange markets before
the public. If the performance of the company is satisfactory during this period on the
Exchange, it boosts the company’s conditions for raising future funds from issue of shares
directly to the public.20
18
C.P. Singhania v. Garware Club House [2003] 46 SCL 659 (Bom.)
Mrs. ProddaturiMalathi v. SRP Logistics (P.) Ltd. [2018] 96 565 (NCL-AT),
19

Rose Valley Real Estates & Construction Ltd. v. Securities and Exchange Board of India [2014] 42 188 (SAT-
20

Mumbai),
2. Traditional public offering: In this kind of listing in addition to admission of the company on
the Exchange, the company also offers a share package directly to the public through the
exchange in order to raise capital, i.e. either the issue of new shares or sale by owners or a
combination of the two.

At this point it must be noted that a company is not mandatorily required to list itself on an
exchange under the Companies Act of 2013 or that of 1956. But it becomes important when a
Public Limited Company wants to issue shares or debentures to the public in order to raise
money from them.21At this point the company is bound by the rules and regualtions of the stock
exchange it is listed on which are governed by the rules notified by the SEBI from time to time.

After understanding the meaning of listing it is pertinent to note the pros and cons that he listing
provides. Listing a company endows an exclusive privilege to securities on the stock exchange.
Only listed shares are displayed and traded on the stock exchange. Being traded onstock
exchange provides transparency in transactions of listed securities and equality and competitive
conditions that in turns increases the creditworthiness of the company.Thus, it is commonly
believed that listing is not only beneficial for the company, but also for the investor, and to the
public at large.22

BENEFITS OF LISTING
1. Access to Capital for Growth
During the course of business most of the companies reach a stage where they are in need of
additional capital to fund the company's growth / expansion plans. At such a stage listing of the
company is thereby a method of overcoming these constraints. Listing on a Stock Exchange
helps the company increases its shareholder base and enhances credibility in the eyes of investors
as well as its customers. The capital markets offer a readied sort of sponsoring for associations,
enabling them to leave on advancement and expansion plans or to back their working capital
with no trouble.23

2. Enhanced Visibility

21
Rahul Subodh Windoors Ltd. v. A.K. Menon [1999] 96 Comp. Cas. 597 (SC)
22
A P L Industries Ltd. v. Securities Exchange Board of India [2016] 76 133 (Delhi)
23
Rich Paints Ltd. v. Vadodara Stock Exchange Ltd. [1998] 15 SCL 128/92 Comp. Cas. 282
Opening up to the world improves association's detectable quality and legitimacy among
institutions and the contributing public because of following distinctive authoritative guidelines
and ensuring straightforwardness while coordinating assignments. Listing will allow an
association's proposals to trade on an official stock exchange, with the cost decided by market
demand and supply controls. This will bring into light market chosen valuation for the company.

3. Liquidity
Listing stimulates liquidity, permitting financial specialists the opportunity to comprehend the
assessment of their investment. It licenses speculators to trade in the equity of the company,
sharing risks similarly as benefitting by any development in the various institutional worth. At
the point when securities of company are listed on an exchange, financial specialists have a street
to leave their shares uninhibitedly by placing these equitiesto the public involved in the capital
exchanges.24

4. Increase in employee morale

Going public increases visibility and improves the way in which public perceives the motive as
well as future goals of the organization, thereby increasing employee’s confidence in the
company and thus there morale. It may also lead to hiring of new staff and may facilitate stock-
based payments such as ESOPs etc.

5. Transparency and efficiency

Through listing company gains straightforwardness and viability in the overall exercises of the
company. The board and administrative unit of a listedcompany has duty towards it speculators.25
Further, listedcompany need to ensure ideal compliance by giving information/revelation to the
Exchange/financial specialists as set down in the Listing Agreement. Listedcompany are
commonly eminent in broad society and seen as more direct and reliable, having completed the
regulator's sharp evaluations. This will serve to help trust in the association and open up the
approaches to a pontoon pile of chances it can work upon.

DISADVANTAGES OF LISTING
1. Accountability and scrutiny.

24
Harikumar Rajah v. Ashok R. Thakkar [2004] 51 SCL 735 (Mad.)
25
Sajal Dutta v. Ruby General Hospital Ltd. [2015] 56
Public companies are public property. As such they are expected to comply with the rules of the
markets they populate. Further the rules and regulations initiated by the SEBI and respective
stock exchanges compel the companies to works under its ambit so as to protect the interest of
the investors. This creates an environment of threat for the company as they find it difficult to
adhere to all these conditions.

2. Undervaluation risk.
As against the general perceptions that securities offer liquidity, it must be kept in mind that
issuance of shares also dilutes the control of the company and not results in liquidity in every
case. Further, due to low demand of the securities can result in low share price which lead to
defeat of the very purpose of issuance of shares i.e. raising capital. On the public business
divisions, companies’ share costs are affected not only by their own display, but by the
introduction of the market and the economy.26

3. Cost.
The amount of time taken in the management as well as the costs involved floating a security are
very high. Also, the cost incurred by the company in maintaining its stock in the exchange is
itself very high. Not only the cost but also the time taken in mere filing for the process for
floating the share itself can take a long time and paper work that stops a relatively small
company from enjoying the fruits of capital funded through shares.

26
Babu Khandelwal v. Andhra Ferro Alloys Ltd. [2015] 129 SCL 719/53 99
 CORPORATE INSLOVENCY RESOLUTION PROCESS

In the eyes of a normal individual, insolvency and Bankruptcy are often used in same sense.
Nonetheless, there is a dainty line of distinction between these two words. Indebtedness is a
monetary circumstance, where a substance or an individual can't meet the money related
commitments because of overabundance of liabilities over resources, while, Bankruptcy is a
lawful technique where the courtroom passes orders regarding bankruptcy of an individual or
element and thusly passes orders for its goal. In this manner, an individual or an element can be
insolvent without being bankrupt and insolvency can prompt liquidation if the wiped out
individual or element can't beat the budgetary fiasco.27

When a company fails to pay back its debt to the creditor then in such circumstances the
company can be said to be insolvent. Following are two ways to check for corporate insolvency:

 The Cash-Flow Test: Is the company currently or in future will it be unable to pay its debts as
and when they fall due for payment?
 The Balance Sheet Test: Are the value of the company’s assets less than the number of its
liabilities after taking into account as-yet uncertain and future liabilities?
If these questions can be answered in affirmative then the company is declared insolvent. The
Insolvency Resolution Process (IRP) is a one of the procedures covered under the Insolvency and
Bankruptcy Code, 2016, according to which the National Company Law Tribunal (NCLT)
initiates a corporate insolvency resolution process (CIRP) when a company is not able to meet its
obligations of making payment to creditors.28

Corporate Insolvency Resolution Process (CIRP) acts as an instrument through which the
creditors can recover their debts. In a case when a company becomes insolvent i.e. is not able to
meet the demands of the creditor then a financial creditor, an operational creditor, or the
corporate can start a CIRP against such company. Financial Creditor covers all such persons who
are entitled to a particular amount by virtue of them being a creditor to whom a financial debt is
owed. For example: Banks or other financial institutions. Similar is the case with operational
creditors, only difference is that debt owed to an Operational creditor is that of operational in

27
D. Link (India) Ltd. v. SEBI [2008] SCL 385 (SAT - Mum.)
28
Gurmeet Singh v. Polymer Papers Ltd. [2003] 45 SCL 251 (CLB).
nature i.e. for conducting the business of the company itself. For example: vendors and suppliers,
employees, government etc.

Process for an application for insolvency or bankruptcy of start-ups, individuals, partnership

firms, limited liability partnership, and companies has been provided for in The Insolvency and
Bankruptcy Code, 2016. Even though the default amounts under each slab is mentioned in the
act itself but the exact amount is to be notified by the government keeping mind the state of the
economy. At this point it must be noted that such amount must be treated only as a range and not
as a upper or lower limit fixed for debt default.29

CIRP is begun ensuing to making an application. CIRP is the cycle through which it is settled
whether the person who has defaulted is good for repayment or not. If an individual isn't
prepared for repaying the commitment the company is restructured or liquidated.

Steps under CIRP:

1. Application to NCLT: Application for initiating CIRP is to be made to the National Company
Law Tribunal to admit a company into such proceeding. Such company is known as Corporate
Debtor under IBC. Application before NCLT can be made either by a financial or an operational
creditor of the company or even the company itself in question. One of the essential requirements
for admission of a proceeding is to show that the default in payment by the company amount to
over 1 Lakh rupees.

2. Interim Resolution Professional & Moratorium: Once a company i.e. corporate debtor is
included in a CIRP then the tribunal suspends its board of directors and therein after the
management is put under the control of an interim resolution professional and the company’s
managements loses its control over the same until the CIRP ends. In addition to his powers,
interim professional has the power to raise fresh funds for the working of the company.

Simultaneously, a moratorium becomes effective which prohibits:

 Continuation or initiation of any legal proceedings against the corporate debtor

 Transfer of its assets

29
Hill Crest Realty Sdn. Bhd. v. Ram Parshotam Mittal [2010] 103 SCL 80 (Delhi)
 Enforcement of any security interest
 Recovery of any property from it by an owner
 Suspension or termination of the supply of essential goods and services, the moratorium lasts
till the corporate debtor is in CIRP
It must be kept in mind that all the prohibitions imposed during the moratorium does not in any
way affect the key business contracts that were entered into by the corporate debtor before CIRP.

3. Verification and Analysis of Claims: At this stage, claims made by creditors are verified by
the resolution professional after he summons the creditors. After that, within 30 days of
acceptance into CIRP, will form a Committee of Creditors (COC) which comprises of all the
financial creditors of the corporate debtor.30

4. Appointment of Resolution Professional: Within seven days of the forming the committee, the
COC will have to either resolve to appoint the interim resolution professional as a resolution
professional or to replace the interim resolution professional by another resolution professional.

5. Approval of the “Resolution Plan”: Even though the resolution plan needs to be permitted
withing 180 days of filing but with the permission of NCLT such period can be extended for
other 90 days. It is the duty of the resolution professional to see through that the plan meets all
the criterias mentioned in IBC, 2016. Such plan can be put forward by any individual, creditor or
any third party interested in revival or restructuring of the company can propose an resolution
plan.31

 If a plan is approved within this period and sanctioned by NCLT: The endorsed resolution
plan gets official on the corporate account holder and its representatives, individuals, banks,
underwriters and other partner associated with the goal plan. It is the obligation of the
resolution professional to acquire all important endorsements required under any law until
further notice in power inside one-year from the date of endorsement by arbitrating authority.
 If no resolution plan is approved within the said period: In case the resolution plan is not
approved then NCLT is obliged to order the liquidation of the corporate debtor. After the
approval of liquidation, COC appoints the liquidator to sell the assets of the corporate debtor
and share them among the stakeholders. The distribution is made according to section 53 of

30
Harish Kr. Agarwal v. Punjab Communications Ltd. [1998] 15 SCL 418
31
H.V. Jayaram v. ICICI Ltd. [2000] 23 SCL 64
the Insolvency and Bankruptcy Code 2016.
 MINIMUM PUBLIC SHAREHOLDING

Securities Contracts (regulation) rules, 1957 contains the definition of the term ‘public
shareholding’ under Section 2(e). It is defined as equity shares of the company held by public
including shares underlying the depository receipts if the holder of such depository receipts has
the right to issue voting instructions and such depository receipts are listed on an international
exchange in accordance with the Depository receipts Scheme, 2014.

The word public under the legal parlance in the present context includes each and every
individual except – (i) the promoters of the company; (ii) subsidiaries and associates of the
company interested in its functioning. Public shareholders includes both individual or financial
institutions and these are the people whogenerally buy shares either through public offer or
secondary markets like stock markets. Concept of minimum public shareholding was introduced
in the business domain so as to bring more transparency in the area making it a safer place for
the investors.32

All listed companies in India are bound to follow the Minimum Public Shareholding (MPS) rule.
Minimum public shareholding requirements are mentioned under rule 19(2) and rule 19A of the
Securities Contracts (regulation) rules, 1957. As perregulation 38 of the Listing regulations any
listed company is required to comply with these rules as mentioned above.The MPS rule stives to
ensure that atleast 25% of the equity shares of any given company available on the market are
subscribed by the public. In this sense public means the non-promoters of the company. If in any
case the promoters i.e. the people involved in initiating the company have more than 75% of the
shares available in the market, then in such case such promoters must divest their additional
shares to the public trading on the exchange so as to meet the MPS requirement.33

First implemented through an amendment to the Securities Contracts Regulation Rules in the
year 2010, MPS rules restricts the promoters of the companies listed in any recognised stock
exchange in India from holding more the 75% of the shares. At the time public sector
undertakings were kept out of the purview of this rule. To comply with this rule the promoters
with shareholding over and above the allowed percentage need to sell such additional holding
32
Ranbaxy Laboratories Limited v. Smt. Indra Kala [1997] 12 SCL 288
33
M.S. Madhusoodanan v. Kerala Kaumudi (P.) Ltd. [2003] 46 SCL 695 (SC)
that could be achieved either by placing shares with institutions or by issuing rights shares to
dilute their holdings.

MPS Rule enhances liquidity in stocks

One of the objections of market players has been that liquidity in the Indian markets is very low
if you go outside the top 200 companies. This is despite India having over 5000 listed companies
in the stock market. This is largely because the holdings are still concentrated with promoters
and promoter groups. Limited public shareholding reduces the volumes in the stock market. The
MPS rule was brought in essentially to reduce this promoter domination and ensure that stocks
are widely held and hence more liquid.34

There is also a corporate governance perspective to this move. Compelling promoters to relax
their grip on listed companies will improve corporate governance by giving institutional
investors a greater say in corporate actions. This will ensure better alignment between the
objectives of the company and the objectives of the minority shareholders. Additionally, it will
also ensure better monitoring of companies and offer more investment opportunities in the stock
market. To cut a long story short; the minimum public shareholding rule ensures better liquidity,
price discovery and governance in the stock market.35

Time limit for achieving Minimum Public Shareholding

Requirement to follow MPS rule as well as the time frame within which this criteria must be met
is given under Rule 19A of the Securities Contracts (Regulation) Rules, 1957. These provisions
can be summed up as under:

1. Every listed company (other than public sector company) shall maintain public shareholding
of at least twenty-five per cent.

2. There is an obligation on the companies whose public shareholding is less that prescribed 25%
at the date of commencement of the Securities Contracts (Regulation)(Amendment) Rules, 2014.

34
Raj Singh Chopra v. Jagat Singh Chopra [2018] 90 (NCLAT) 156,
35
George Mathai Noorani v. Federal Bank Ltd. [2007] 76 SCL 528 (CLB).
These companies are put on a time watch of 3 years to comply with the rule in the manner
prescribed by SEBI.

3. In furtherance of the previous point, those companies that has offered its shares for public
allotment (in compliance to clause (b) of sub-rule (2) of rule 19) after the commencement of the
said act must maintain such minimum percentage after it reaches the requirement as stipulated
under the MPS rule.

4. Under the MPS rule if the public shareholding in a company falls below the required 25%,
then the company is offered a time of 12 months to again meet the requirement and bring the
public shareholding up to the necessitated percentage in the manner prescribed by SEBI.

Penal Action for Non-compliance with the Minimum Public Shareholding Requirements
It is clearly held by the Securities Exchange Board of India that MPS rule is not merely directory
but must be followed at all times. Through its Circular No. CFD/CMD/CIR/P/2017/115 dated 10
October, 2017, SEBI notified the penal actions that would be taken against the companies who
fail to comply with the MPS rule.36

1. Imposition of fine of 5,000 per day of non-compliance on the listed entity till the date of
compliance. In case, the listed entity continues to be non-compliant for a period of more than one
year an increased fine of ` 10,000 per day of non-compliance shall be imposed till the date of
compliance. On failure to pay fine despite receipt of notice by the listed entity, the stock
exchange may initiate appropriate action.

2. The stock exchange shall intimate the depositories to freeze the entire shareholding of the
promoters and promoter group in such non-compliant listed entity till the date of compliance. In
case, the listed entity continues to be non-compliant for a period of more than one year, the stock
exchange shall intimate the depositories to freeze all the securities held in the demat accounts of
promoters and promoter group till the date of compliance. This restriction shall not be an
impediment for the listed entity for compliance with the minimum public shareholding norms
through the methods specified/ approved by SEBI.

36
S.A. Padmanabha Rao v. Union Theatres (P.) Ltd. [2002] 36 SCL 353 (Kar.)
3. The promoters, promoter group and directors of such non-compliant listed entity shall not hold
any new position as director in any other listed entity till the date of compliance. Intimation to
this effect shall be provided to the listed entity by the stock exchange and the listed entity shall
subsequently intimate the same to its promoters, promoter group and directors.37

4. The stock exchange may also consider compulsory delisting of the non-compliant listed entity.

5. In case of an entity which is non-compliant on the date of this Circular the stock exchange
shall take penal action depending upon the period of non-compliance by the entity. However, the
fines, as applicable, shall be imposed prospectively from the date of this Circular.

6. The provisions of this Circular shall not apply to those entities where orders have already been
passed by SEBI in relation to non-compliance with minimum public shareholding requirements.

7. The stock exchange may keep in abeyance the action or withdraw the action in specific cases
where specific exemption from compliance with minimum public shareholding requirements
under the Listing Regulations/moratorium on enforcement proceedings has been provided under
any Act or Order of Court/Tribunal.

8. Where the listed entity has adopted a method for complying with minimum public
shareholding requirements which is not prescribed/ approved by SEBI, the stock exchange shall
refer such case to SEBI.

9. Stock exchange shall disclose on its website name of non-compliant entity, amount of fine
imposed, other actions taken against such entity and status of compliance including details of
fines paid by the listed entity.

10. Upon intimation of compliance by the listed entity with the minimum public shareholding
requirements, the stock exchange shall, on being satisfied of such compliance, take the following
actions:

i. Intimate the depositories to unfreeze the securities of the promoters and promoter group of the
listed entity.

37
Martin Castelino v. Alpha Omega Shipmanagement (P.) Ltd. [2001] 33 SCL 210 (CLB).
ii. Intimate the listed entity that restrictions imposed on its promoters, promoter group and
directors on holding any new position shall not continue and the listed entity shall subsequently
delisted.
 EFFECT OF PANDEMIC ON CIRP AND MSP RULE

The outbreak of Covid-19 has inevitably caused economic activities to slow down causing
disruption in demand and supply chain due to which many companies are facing severe financial
crunch. Among these, Start-ups and Micro, Small and Medium Enterprises are the worst
impacted. To protect such companies from being forced into insolvency proceedings, the
Government of India vide notification dated March 24, 2020 amended section 4 of the
Insolvency and Bankruptcy Code, 2016 (hereinafter the ‘Code’) by which it raised the minimum
amount of default to Rs. 1 crore.

Even though, the Government has planned revival of the economy in a phased manner, the
shutdown of economic activities for the last 3 months and the continued slowdown has
pressurized the Government to provide further reliefs to defaulting companies, amongst others.
Thus, through an Ordinance dated June 5, 2020, it suspended sections 7, 9 and 10 of the Code by
introducing sections 10A to the Code. Section 10A of the Code provides for the following as
reliefs to borrowers: -

 Initiation of Corporate Insolvency Resolution Process (hereinafter CIRP) by financial

creditors, operational creditors and the company itself is barred for defaults arising on or
after March 25, 2020.
 Section 10A is applicable for a period of 6 months w.e.f March 25, 2020 and extendable upto
1 year.
 The proviso to section 10A further absolutely bars initiation of CIRP against a corporate
debtor for a default arising for a period of 6 months w.e.f March 25, 2020 and 1 year, if and
when notified.
 The explanation clarifies that it is not applicable to defaults that have occurred before March
25, 2020.
The Government of India vide Ordinance dated June 5, 2020 has further prohibited resolution
professional to file applications in respect of defaults against which CIRP is suspended under
section 10A of the Code by introducing section 66(3) to the Code.
The rationale behind the suspension of the CIRP altogether is to mitigate the impact of the
outbreak of Covid-19 on borrowers and provide breathing space for defaulting companies to
survive the financial turmoil while also adhering to the Government directives for maintaining
their workforce and making full payments of wages. Notwithstanding the fact that these
defaulting companies are operating at a time when they generating insignificant to zero revenue.
The survival and operation of these companies have been further challenged by continued
disruption and obstruction in transportation of goods, commutation of workforce, reduction in
workforce due to social distancing norms, ill functioning of logistics, etc.

Backdrops of relaxing CIRP and MSP rules

The suspension of initiation of CIRP while provides borrowers/defaulters time to recoup their
losses and gradually realize the value of their assets and re-stabilize themselves, the lack of
protection to the creditors has reversed the insolvency game that is envisaged under the Code.
The essence of the Code was to provide control to the creditors to be able to drag defaulters into
insolvency proceedings for admitted liabilities. This not only reduced the time, effort and cost of
recovery of admitted liability and stabilized cash flow, it also provided incentives to the debtors
to clear their dues on time for the fear of being dragged into bankruptcy proceedings.

However, the Ordinance has taken away the control from the creditors to recover admitted
liabilities from companies that are capable of paying their dues completely for a period of 6
months w.e.f March 25, 2020 which may be extended upto 1 year. This has rendered the
creditors remediless under the Code. Without an incentive or a deterrence for borrowers to
willfully clear their dues may result in a domino effect of debts and insolvency. The creditors
who have been surviving on the repayments of their dues are more likely to default of their own
debts.

Furthermore, a complete bar on initiation of CIRF for defaults occurring from March 25, 2020
for a period of 6 months, extendable up to 1 year, will also cause lenders to be more critical due
to lack of remedies for recovery in the event of default. Thus, the blanket suspension of CIRP
without providing any measure for the continuous circulation of finances and liquidity may
contribute towards a further slowdown in the economy. The major impact of reversing the
essence of the Code will be noticeable in future on debt restructuring of the companies and in the
number of cases that will be filed for insolvency.

A complete suspension of initiation of CIRP for 6 months has not only taken away the threat
looming over borrowers who are capable to clearing their dues of being dragged into insolvency
proceedings but has brought with it issues such as:

 Attempts to defeat the rights of the creditors

 Scope for Directors and Promoters to indulge in fraudulent, undervalued and preferential
transactions.
 Siphoning of funds and assets to reduce the realization value of the assets
Thus, Ordinance dated June 5, 2020 urgently also calls for a revisit to sections 43, 44 and 66 of
the Code and the need for its further strengthening to avoid the section from being mis-utilized
by the debtors.

The Ordinance dated June 5, 2020 has also suspended initiation of CIRP by defaulting company
by which it could have otherwise restructured its assets to pay of its debts. The suspension of
section 10 of the Code in the current scenario has forced the defaulting companies, willing to
self-initiate CIRP that have realized that operation would be unviable for its survival, into a
limbo.

The introduction of section 10A to the Code has also rendered section 14 of the Code, which
provides asset protection to the corporate debtor by prohibiting a creditor from initiating or
continuing a suit or a recovery action by a third party. This moratorium period under section 14
of the Code can only be triggered while a resolution scheme is ongoing and with the suspension
of CIRP, there is no other provision providing for such security to the debtors. As such section
66(3) of the Code bars resolution professional to file any application in respect of defaults
specified under section 10A of the Code.

The creditors now have no option but to avail remedies available under the laws such as
Companies Act, 2013 and Securitization and Reconstruction of Financial Assets and
Enforcement of Securities Interest Act, 2002. Notwithstanding the fact that the earlier remedies
available for recovery of debts due to the creditors were far more complex, time consuming and
cost inefficient, a creditor may still choose to opt for a harsher course of recovery of its due than
to face bankruptcy.

To conclude, even though the creditors may not be able to initiate CIRP against the debtors, they
will still be able to initiate bankruptcy proceedings against the promoters who have provided
personable guarantees to the borrowings under Part III of the Code. However, adapting any other
remedy will not be as efficient as the remedies available to the creditors under sections 7, 9 and
10 of the Code, which provided certainty of process, time and outcome for recovery of admitted
liability.
 CONCLUSION AND SUGESSION

The existing public shareholding requirement of 25% in Indian markets is generally consistent
with norms prevailing in other sophisticated international jurisdictions. While the proposed move
to increase public shareholding from 25% to 35% could be considered as raising the bar for listed
companies in India, it may also be disruptive. It would be unfair to penalize companies who do
not need capital and may be forced to raise funds through a fresh issue or face the consequences
of non-compliance with such higher threshold. Similarly, existing promoters may not desire to
sell shares as they may not need the liquidity or achieve the desired return in the currently
volatile Indian and global markets. If a company has more than one promoter, these promoters
may need to agree on inter-se arrangements to comply with the increase in public float
requirements. Also, there are other regulations to consider, such as takeover regulations where
open offer requirements are triggered if a person acquires 25% or more shares in a listed
company and it is unclear if changes to such regulations need to be made. Finally, from a policy
perspective and as noted above, the concentration of promoter ownership in India has declined
over the past ten years.

It would perhaps be more prudent for the regulators to focus on monitoring and implementation
of existing norms, including those specifically for PSUs which have periodically been provided
with concessions, before opening the next chapter.
 BIBLIOGRAPHY

CASES
1. Securities and Exchange Board of India Vs. Ajay Agarwal 2010 3 SCC 764.
2. Banhem Securities Pvt. Ltd vs. National Stock Exchange &ors 2005 (5) COMPLJ 224
(BOM)
3. Raj Kumar Kishorepuri Vs General Manager, Securities & Exchange Board of India &
Ors.2005 127 CompCas 18 (Cal)
4. K. Venkateswarlu Vs The Regional Manager, SEBI &Anr 2008 (2) TMI 629
5. The Securities & Exchange Board of India vs. Cabot International Capital Corporation
(2004) 2 Comp LJ 363 (Bom).
6. C.P. Singhania v. Garware Club House [2003] 46 SCL 659 (Bom.)
7. Mrs. ProddaturiMalathi v. SRP Logistics (P.) Ltd. [2018] 96 565 (NCL-AT),
8. Rose Valley Real Estates & Construction Ltd. v. Securities and Exchange Board of India
[2014] 42 188 (SAT - Mumbai),
9. Rahul Subodh Windoors Ltd. v. A.K. Menon [1999] 96 Comp. Cas. 597 (SC)
10. A P L Industries Ltd. v. Securities Exchange Board of India [2016] 76 133 (Delhi)
11. Rich Paints Ltd. v. Vadodara Stock Exchange Ltd. [1998] 15 SCL 128/92 Comp. Cas. 282
12. Harikumar Rajah v. Ashok R. Thakkar [2004] 51 SCL 735 (Mad.)
13. Sajal Dutta v. Ruby General Hospital Ltd. [2015] 56
14. Babu Khandelwal v. Andhra Ferro Alloys Ltd. [2015] 129 SCL 719/53 99
15. D. Link (India) Ltd. v. SEBI [2008] SCL 385 (SAT - Mum.)
16. Gurmeet Singh v. Polymer Papers Ltd. [2003] 45 SCL 251 (CLB).
17. Hill Crest Realty Sdn. Bhd. v. Ram Parshotam Mittal [2010] 103 SCL 80 (Delhi)
18. Harish Kr. Agarwal v. Punjab Communications Ltd. [1998] 15 SCL 418
19. H.V. Jayaram v. ICICI Ltd. [2000] 23 SCL 64
20. Ranbaxy Laboratories Limited v. Smt. Indra Kala [1997] 12 SCL 288
21. M.S. Madhusoodanan v. Kerala Kaumudi (P.) Ltd. [2003] 46 SCL 695 (SC)
22. Raj Singh Chopra v. Jagat Singh Chopra [2018] 90 (NCLAT) 156,
23. George Mathai Noorani v. Federal Bank Ltd. [2007] 76 SCL 528 (CLB).
24. S.A. Padmanabha Rao v. Union Theatres (P.) Ltd. [2002] 36 SCL 353 (Kar.)
25. Martin Castelino v. Alpha Omega Shipmanagement (P.) Ltd. [2001] 33 SCL 210 (CLB).

REVIEW OF LITERATURE

1. Guide to the Companies Act, A. Ramaiya, 18th ed., LexisNexis

This book has helped me developing an understanding of the wide array of powers that SEBI
has.
2. Company Law, R.K. Bangia, Allahabad Law Agency
This book provided me with a detailed view of the nuances that the company has to take care
while listing on any of the recognised stock exchanges.
3. Company Law and Practice Book, G K Kapoor, Taxmann
Through this book I came to know about the various rules that a company has to follow like
minimum public shareholding rule.
4. Company Law Handbook, Tejpal Seth, Taxmann Publications
This book assisted me in understanding the meaning of insolvency in the light of Insolvency
and Bankruptcy code of 2016. Also helped me in understanding the corporate insolvency
process undertaken by the company or its investors.