Sebi moves SC over jurisdiction issues with NCLT
Securities lawyers said there are merits to Sebi’s argument.
The Securities and Exchange Board of India (Sebi) has approached the Supreme Court after the capital-markets regulator and the National Company Law Tribunal (NCLT) passed separate orders under the Sebi Act and the Insolvency and Bankruptcy Code (IBC), respectively, on Collective Investment Schemes (CIS). These schemes were used to raise money from ordinary savers.
At the centre of the dispute is the recovery of more than Rs 1,000 crore that New Delhi-based HBN Dairies and Allied had illegally collected from thousands of individuals through a scheme. Sebi took up the investigation and attached the assets of the company and promoters. Sebi’s action was later upheld by the Securities Appellate Tribunal (SAT).
However, the delay in the recovery of invested money prompted a few investors in the CIS to approach the NCLT and start proceedings against HBN Dairies under IBC. Sebi had passed orders against HBN Dairies as early as 2015, instructing its recovery officer to attach all the immovable assets of the company and promoters and sell these assets to repay investors.
NCLT took the view that provisions of IBC override Sebi Act and had asked the market regulator to hand over the attached properties to the insolvency resolution professional. It also said that once a company is admitted for insolvency proceedings, a payment moratorium kicks in to help complete the resolution within 270 days. Appellate tribunal NCLAT also upheld the NCLT order, forcing Sebi to move the Supreme Court, which would now hear the matter in July.
The case underscores some of the conflicts between the Sebi Act and IBC. NCLT earlier this year passed a verdict saying IBC would prevail over the Sebi act. The verdict was based on a special clause in IBC, Section 238, which says if there are any inconsistencies between IBC and other laws, IBC will prevail.
“All recovery proceedings by creditors are meant to be governed by IBC and to that extent IBC overrides Sebi Act,” said Ashwin Bishnoi, partner, Khaitan & Co. “However, this doesn’t foreclose Sebi from initiating criminal investigation against the accused.”
Securities lawyers said there are merits to Sebi’s argument. To start with, HBN Dairies had illegally collected funds from investors through a CIS scheme, which is a criminal offence. Since raising the money and deviation from the business model adopted by HHB are illegal under Sebi laws, a resolution plan cannot be adopted in the case.
Further, there was also a view taken that the provisions of IBC would not apply to CIS schemes since the investors were not lenders but were more like unit holders in a mutual fund.
“Since HBN was running an illegal CIS scheme by collecting money from gullible small investors, primacy should be given to the rights of investors whose money has not been refunded by the company,” said Anil Choudhary, partner, Finsec Law Advisors. “It would be incorrect for NCLT to treat such investors as financial creditors as they are akin to an investor in pooled assets, such as mutual funds.”
Sebi Moves Apex Court Over Jurisdiction Issues with NCLT
Lawyers said any adverse verdict for Sebi in the matter would set a precedent and dozens of CIS cases where Sebi is undertaking recovery proceedings could be affected. “If the verdict goes in favor of the resolution professionals, then investors of other CIS schemes too will approach NCLT delaying the recovery process further,” said a lawyer in direct knowledge of the development.
One of the key issues that investors face with Sebi’s recovery proceedings is that the process takes longer. For instance, in the HBN case, Sebi took cognizance of the matter more than five years ago, although the recovery is still due. Promoters of the companies use several strategies to slow down recovery proceedings. For instance, they purchase properties outside India and attaching such properties through a foreign court takes time.
“This leads to anxiety among investors, who chase other judicial forums for remedy,” Choudhary added.