SC to choose between Sebi, RBI circulars for stressed assets' resolution

The Supreme Court (SC) will soon decide on the conflict over applicability of two circulars for resolution of stressed assets—one issued by banking sector regulator RBI and the other by securities regulator Sebi.

Under the RBI circular, any decision agreed by lenders representing 75 per cent by value of total outstanding credit facilities (fund based as well non-fund based) and 60 per cent of lenders by number shall be binding upon all the lenders. Meanwhile, a Sebi circular mandates that casting of votes by debenture holders take place at the ISIN-level.

An International Securities Identification Number (ISIN) is a 12 -digit alphanumeric code that uniquely identifies a specific security. An ISIN is generated for a particular issue of debt securities which have similar terms and conditions of such issue.

According to the Sebi circular, if any one of the ISIN debenture holders doesn’t approve the settlement, the security held by them would not be released to the resolution applicant.

Sebi’s rationale behind mandating an ISIN-wise consent is to protect the rights of debenture holders. Currently, the Insolvency and Bankruptcy Code (IBC) doesn’t specify the manner in which the votes of debenture holders should be classified or aggregated.

The issue gains importance as Sebi wants its circular on ISIN-level voting---issued in October 2020—to be applied to cases such as Reliance Capital and SREI-- where the inter creditor agreement (ICA) could have been signed prior to the issuance of the circular.

In the case of Reliance Commercial Finance, the Bombay High Court has ruled Sebi’s circular can only be applied prospectively. And as the ICA in this matter was signed in July 2019, the voting need not take place as per the Sebi circular. The market regulator, however, has moved the apex court challenging Bombay HC’s order.

The matter is to be heard next week by the SC bench led by Justice DY Chandrachud.

“Such issues of conflict are either resolved by judicial intervention (as is in this case) or the two regulators aligning their circulars/regulations. Until then, both sets of regulations need to be complied with, which effectively means the stricter of the two will have to be followed, in this the Sebi’s circular. However, until the Supreme Court overrules the High Court order, the HC order allowing voting as per the RBI circular will hold good,” said Lalit Kumar, partner, J Sagar Associates.