Abstract
The regulatory landscape of corporate insolvency in India has witnessed a paradigm shift since the enactment of the Insolvency and Bankruptcy Code (IBC), 2016. The Securities and Exchange Board of India (SEBI), traditionally focused on capital markets and investor protection, has gradually evolved its role in safeguarding the interests of minority shareholders during the Corporate Insolvency Resolution Process (CIRP). Given the increased cases of resolution under the IBC involving listed companies, concerns have emerged regarding the marginalization of small investors and equity holders, often left voiceless in the restructuring process. This paper examines the dynamic interface between SEBI and IBC, highlighting SEBI’s legal authority, judicial interpretations, regulatory initiatives, and practical challenges in upholding minority shareholder interests. The study offers recommendations for further synergy between SEBI and insolvency frameworks, to ensure equity and transparency in CIRP.
Keywords: SEBI, Minority Shareholders, IBC, CIRP, Regulatory Framework, Investor Protection
Introduction
India’s corporate insolvency framework underwent a tectonic shift with the enactment of the IBC in 2016, aimed at streamlining the process of resolution for distressed assets and ensuring the maximization of value. However, as listed companies began to undergo resolution, it became evident that minority shareholders—despite their statutory presence—remained vulnerable. While creditors, especially financial institutions, were prioritized in the distribution waterfall, equity shareholders often received negligible returns, if any.
SEBI, as the regulator of capital markets, found itself at a juncture where its traditional role had to adapt to the growing need for protecting minority shareholder interests in insolvency scenarios. The intersection between IBC and SEBI regulations raises questions about regulatory overlap, jurisdictional harmony, and safeguarding investor confidence.
This paper delves into SEBI’s evolving role, examining the mechanisms it has employed to shield minority shareholders, judicial backing to its interventions, and the practical constraints faced. It concludes with a set of forward-looking suggestions to strengthen SEBI’s protective role without impeding the objectives of the IBC.
Research Methodology
The research methodology employed in this paper is doctrinal in nature, relying on qualitative legal research. It involves an in-depth study of primary sources such as statutes, case laws, SEBI regulations, circulars, IBC provisions, and judgments from NCLT, NCLAT, and the Supreme Court. Secondary sources like scholarly articles, regulatory reports, consultation papers, and expert commentaries are also reviewed to gain a comprehensive understanding.
Review Of Literature
1. Legal Framework Governing SEBI and Minority Shareholder Rights
SEBI, as the principal regulator of Indian capital markets, was instituted through the SEBI Act, 1992, with the purpose of safeguarding investor interests, promoting the development of securities markets, and regulating them. The Companies Act, 2013 complements this objective by incorporating provisions related to corporate governance, shareholder democracy, and equitable treatment of minority shareholders. For instance, Section 245 provides for class action suits by shareholders, which empowers them to seek redressal against mismanagement. The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 require listed entities to maintain high standards of transparency and corporate governance. Regulations concerning related-party transactions, board independence, and shareholder voting rights also play a critical role in ensuring fair treatment of minority investors.
Despite this framework, the advent of the Insolvency and Bankruptcy Code (IBC), 2016 significantly shifted the balance of power in corporate distress scenarios. Under IBC, shareholders—especially minority ones—have minimal influence over the outcome of the resolution process. They are not represented in the Committee of Creditors (CoC), which takes all major decisions regarding resolution, restructuring, or liquidation. This exclusion becomes even more problematic in listed companies where minority shareholders are numerous and financially exposed. Critics argue that while IBC prioritizes creditor recoveries, it does so at the expense of shareholder democracy. Therefore, SEBI’s intervention becomes critical to reassert minority rights within the broader insolvency ecosystem. The regulatory challenge lies in ensuring that SEBI’s protective jurisdiction coexists harmoniously with the creditor-centric philosophy of IBC.
2. CIRP and the Position of Equity Shareholders
The Corporate Insolvency Resolution Process (CIRP) under the IBC adopts a creditor-in-control approach, which reorients the resolution process around the financial and operational creditors. Shareholders, particularly equity shareholders, are classified as residual claimants under the distribution waterfall specified in Section 53 of the IBC. This means they are entitled to any proceeds only after all claims of secured and unsecured creditors, workmen, employees, and government dues are satisfied. In most cases, this leaves little to no residual value for equity holders, especially in companies where the debt far exceeds the asset base.
The Supreme Court’s ruling in Swiss Ribbons Pvt. Ltd. v. Union of India reinforced the legitimacy of this hierarchy, emphasizing that equity holders, being risk-bearers, should accept the residual nature of their claims. However, legal scholars and market analysts have raised concerns about the practical and moral implications of such a framework when it comes to listed companies. These shareholders, who may include pensioners, retail investors, and employees holding stock options, often suffer substantial financial losses without recourse. Furthermore, decisions like delisting of shares or change in shareholding patterns are often made without any consultation with these stakeholders.
The situation is further exacerbated when the market is unaware of the financial stress a company is undergoing due to limited disclosures, leaving shareholders unable to take timely action. In such cases, SEBI’s regulatory intervention becomes crucial to ensure proper disclosures and accountability by resolution professionals and corporate debtors. The protection of these shareholders is not only a legal issue but also a matter of investor confidence and market integrity.
3. SEBI’s Regulatory Actions and Circulars
To mitigate the risks faced by investors during CIRP, SEBI has increasingly resorted to regulatory action and has issued circulars aimed at improving transparency and protecting minority shareholders. One significant move was the issuance of the SEBI circular dated October 22, 2020, which imposed enhanced disclosure norms for listed companies undergoing CIRP. Under this circular, companies are required to disclose material events such as the initiation of insolvency proceedings, the appointment of an interim resolution professional (IRP), and outcomes of CoC meetings. Furthermore, resolution plans approved by the CoC must be disclosed in detail, especially where there is a significant impact on existing shareholders.
This step marked a turning point in SEBI’s approach to CIRP-related oversight, as it emphasized the need for continuous and accurate dissemination of information to investors. The aim was to curb insider trading and speculative activity while empowering retail investors with timely data. SEBI also mandated that exchanges ensure that listed entities comply with disclosure requirements throughout the CIRP.
SEBI’s actions have not been limited to disclosure mandates alone. It has initiated discussions with the Insolvency and Bankruptcy Board of India (IBBI) and other stakeholders to ensure that resolution professionals (RPs) understand and adhere to securities law obligations. For example, listed companies under CIRP must continue to file quarterly results, update financial information, and respond to investor queries.
Additionally, SEBI has released consultation papers to gather public and institutional feedback on how to strengthen investor protections in CIRP scenarios. These papers have highlighted the need for a well-defined regulatory interface between SEBI and IBC, particularly in areas like delisting, equity restructuring, and corporate governance. Collectively, these actions signal SEBI’s evolving role as not merely a market regulator but as a participant in India’s insolvency regime with a mandate to uphold investor trust.
4. Jurisprudence and Regulatory Clashes
The interaction between SEBI and the IBC has inevitably given rise to jurisdictional overlaps and legal ambiguities, which have been addressed through judicial interpretation over time. One of the early cases to highlight this tension was Monnet Ispat & Energy Ltd. v. SEBI, where the NCLAT held that once a moratorium under Section 14 of the IBC is in effect, SEBI cannot initiate or continue proceedings against a corporate debtor. This decision drew criticism for potentially immunizing companies from capital market violations during insolvency.
However, subsequent rulings have brought nuance to this interpretation. In the case of Dewan Housing Finance Corporation Ltd., the tribunal clarified that SEBI’s jurisdiction continues in matters relating to securities market violations and that the moratorium does not extend to prevent investigations or regulatory oversight unrelated to debt recovery. The Delhi High Court in Tata Steel BSL Ltd. v. Union of India held that SEBI’s powers to investigate violations of securities laws are not extinguished during CIRP unless the actions directly affect the debtor’s assets or impede the resolution process.
In another landmark case, Anil Agarwal v. SEBI, the tribunal held that SEBI retains the power to enforce penalties for prior defaults even after a resolution plan is approved. This reinforces the idea that SEBI’s regulatory objectives — investor protection and market integrity — operate in a parallel domain that does not necessarily obstruct IBC processes.
These rulings collectively suggest that SEBI’s mandate and the IBC’s objectives must be harmonized rather than seen as antagonistic. Courts have leaned towards an interpretation that respects the autonomy of both regimes while ensuring that insolvency proceedings are not used as a shield for escaping securities law obligations. Scholars argue for a statutory clarification to demarcate the precise contours of SEBI’s jurisdiction during CIRP, as ambiguity continues to result in conflicting interpretations and delayed enforcement. Therefore, jurisprudence in this area is evolving, but a consistent legal framework is still a work in progress.
Method
This paper employs doctrinal legal research to explore the interplay between SEBI and the IBC framework, especially during CIRP. Comparative analysis is also conducted with jurisdictions such as the USA and UK to examine international models of shareholder protection during insolvency. The methodology includes:
- Analysis of SEBI regulations, circulars, and consultation papers
- Study of judicial decisions from NCLT, NCLAT, and Supreme Court
- Review of expert committee reports and recommendations (e.g., Insolvency Law Committee)
- Evaluation of academic and industry literature on minority shareholder rights
Sebi’s Regulatory Role During Cirp
SEBI has adopted a multifaceted approach to address the challenges presented by the Corporate Insolvency Resolution Process (CIRP), with a focus on enhancing transparency and safeguarding investor interests. One of its key interventions was the issuance of a circular in October 2020, mandating listed entities undergoing CIRP to make timely disclosures regarding critical developments such as the appointment of resolution professionals (RPs), Committee of Creditors (CoC) meetings, resolution outcomes, and liquidation decisions. These mandatory disclosures are aimed at reducing information asymmetry and enabling investors to make informed decisions in real time. Additionally, SEBI has established guidelines to govern the delisting and re-listing of shares following CIRP. The SEBI (Delisting of Equity Shares) Regulations, 2021, ensure fair exit opportunities for minority shareholders through mechanisms such as reverse book-building and transparent price discovery.
Beyond disclosures and listing norms, SEBI actively monitors market behaviour involving distressed companies. Its surveillance systems are designed to detect unusual trading patterns and issue timely investor alerts to curb speculative trading and potential losses. Furthermore, SEBI has engaged in collaborative efforts with the Insolvency and Bankruptcy Board of India (IBBI) by forming joint working groups. These partnerships aim to address regulatory overlaps and develop coordinated, investor-centric policies. Through such initiatives, SEBI continues to assert its relevance during insolvency proceedings while aligning its regulatory objectives with the broader goals of the IBC framework.
Judicial Recognition Of Sebi’s Role
Several landmark judgments have affirmed the judicial recognition of SEBI’s role during the Corporate Insolvency Resolution Process (CIRP), highlighting the continued relevance of its investor protection mandate even amidst insolvency proceedings. In Ricoh India Ltd., SEBI was permitted to proceed with its investigation into allegations of fraudulent financial disclosures despite the ongoing CIRP. This case underscored that SEBI’s regulatory oversight does not automatically come to a halt when a company enters insolvency. Similarly, in Anil Agarwal v. SEBI, the Securities Appellate Tribunal upheld SEBI’s authority to intervene in matters concerning the protection of minority shareholders. Even though the company was undergoing resolution, the tribunal made it clear that SEBI’s jurisdiction could not be ousted solely due to the pendency of insolvency proceedings.
Further strengthening SEBI’s standing, the Supreme Court in Essar Steel v. Satish Guptaemphasized the need to harmonize the provisions of the Insolvency and Bankruptcy Code (IBC) with the regulatory powers of other statutory bodies, including SEBI. The Court recognized that while the IBC has primacy in matters of insolvency, this does not render other regulatory statutes redundant. Instead, a balanced approach is necessary to ensure that while resolution processes are not obstructed, regulatory oversight—especially that which safeguards investor interests—continues to function within a coordinated framework. Collectively, these judgments reinforce that SEBI’s role does not get extinguished during CIRP; rather, it persists in a complementary manner, aligned with the objectives of the IBC.
Challenges Faced By Sebi
Despite SEBI’s proactive regulatory stance, it continues to face significant hurdles in asserting its role during the Corporate Insolvency Resolution Process (CIRP). One major challenge is jurisdictional ambiguity, particularly due to the moratorium imposed under Section 14 of the IBC. This moratorium often curtails SEBI’s enforcement actions, resulting in periods of regulatory inaction even in cases of apparent wrongdoing. Another pressing issue is the limited representation of shareholders—especially minority shareholders—within the insolvency framework. Since shareholders do not have voting rights in the Committee of Creditors (CoC), SEBI’s ability to influence resolution plans in favor of retail investors is severely restricted.
Additionally, SEBI grapples with the problem of information lag. In many instances, by the time companies comply with SEBI’s disclosure requirements, the harm to investor confidence and wealth has already been inflicted. This time gap undermines the very objective of timely investor protection. Moreover, SEBI constantly walks a tightrope in balancing investor interests with the overarching goal of ensuring a smooth and efficient resolution process under the IBC. While protecting investor rights is central to SEBI’s mandate, overly assertive intervention could disrupt the resolution process, which is designed to maximize value for creditors. This necessitates a careful and nuanced approach from SEBI in navigating the insolvency landscape.
International Comparative Analysis
A comparative analysis of global practices reveals that several jurisdictions have successfully integrated shareholder rights into their insolvency frameworks, thereby ensuring a more balanced approach between creditor primacy and investor protection. For instance, in the United States, Chapter 11 of the Bankruptcy Code permits shareholders to vote on reorganization plans if they are expected to receive any distribution under the plan. This mechanism ensures that shareholder interests are not entirely disregarded during restructuring. Similarly, the United Kingdom’s Companies Act, 2006, in conjunction with its insolvency regime, mandates that shareholders be kept informed through disclosures and are allowed to participate in meetings during the administration process. This ensures transparency and provides minority shareholders with an opportunity to voice concerns or objections.
Singapore provides another instructive model with its Insolvency, Restructuring and Dissolution Act, 2018, which explicitly includes minority shareholder safeguards, particularly in pre-packaged insolvency arrangements. These safeguards are designed to ensure that even in expedited restructuring procedures, the rights of minority investors are not overshadowed by majority decision-making or creditor dominance. These international frameworks demonstrate that it is possible to protect investor voices without undermining the efficiency or objectives of insolvency proceedings. India, in its evolving insolvency landscape, could benefit from adopting similar safeguards to better harmonize the interests of shareholders—especially minorities—with the broader goals of the Insolvency and Bankruptcy Code.
Suggestions
To strengthen investor protection during the Corporate Insolvency Resolution Process (CIRP), several reforms must be introduced to clarify and enhance SEBI’s role. Foremost among these is the need for legislative codification of SEBI’s powers during CIRP. Clearly defining SEBI’s jurisdiction would help eliminate regulatory ambiguities and ensure that its investor protection functions continue seamlessly alongside the IBC framework. Additionally, introducing a statutory mechanism to allow minority shareholders to nominate a non-voting observer in the Committee of Creditors (CoC) would ensure their interests are at least represented, even if not directly influential in decision-making.
To address concerns related to asset undervaluation, third-party valuation audits should be made mandatory for all listed entities undergoing insolvency. This would enhance trust in the process and ensure fair treatment of public investors. A fast-track grievance redressal mechanism—such as a dedicated SEBI-IBC appellate panel—should also be established to deal with investor complaints specifically arising during insolvency proceedings. This would provide a more responsive and focused remedy system, which is currently lacking.
Further, to empower retail investors, SEBI must launch targeted awareness campaigns to educate them about the implications of CIRP and corporate restructuring. Finally, a joint SEBI-IBBI digital portal should be introduced to consolidate all insolvency-related disclosures made by listed companies. Such a centralized platform would improve transparency, facilitate real-time updates, and ensure that investors can access crucial information without delays or fragmentation. Collectively, these reforms would significantly enhance the inclusivity, transparency, and fairness of India’s insolvency regime.
Conclusion
The corporate insolvency regime in India is maturing, and with it, the role of SEBI is undergoing significant transformation. While the IBC rightly prioritizes creditors, equity shareholders—especially minorities—form the bedrock of investor confidence. SEBI’s evolution from a market watchdog to a quasi-participant in insolvency regulation is a positive development. However, greater institutional synergy, legal clarity, and participatory mechanisms are needed to institutionalize minority shareholder protection. Only then can India claim to have an equitable insolvency ecosystem that does justice to all stakeholders.