Balancing the scales: Empowering minority shareholders in India's insolvency landscape

In the dynamic realm of India's insolvency landscape, a pivotal conversation emerges about striking a harmonious balance to empower minority shareholders while navigating the complexities of insolvency restructuring.

This calls for a robust framework that safeguards all stakeholders and amplifies minority voices. The Insolvency and Bankruptcy Code, 2016 (I&B Code/Code) has revolutionised insolvency resolution via the Corporate Insolvency Resolution Process (CIRP), focusing on efficiency and stakeholder protection. However, the minority shareholders' concerns remain overshadowed. This article explores the imperative of empowering minority shareholders within the I&B Code framework, spotlighting actionable measures for a fair and balanced insolvency ecosystem.

Concept of minority shareholders in light of insolvency framework
In the context of an insolvency framework, minority shareholders are individuals or entities holding a relatively small portion of a company's equity, typically not exercising significant control over the company's management or decisions. These shareholders are distinct from the majority or controlling shareholders, such as the company's promoters, key managerial personnel (KMP), and their immediate relatives, who hold a significant stake and often play a dominant role in the company's operations. These shareholders typically include retail investors, institutional investors, non-promoter public equity shareholders, and any other non-promoter entities holding shares in the company.

Proposed protection by the Securities and Exchange Board of India
The market regulator, Securities and Exchange Board of India (SEBI), vide consultation paper dated 10.11.2022, proposed a mechanism to protect the concerns of public shareholders throughout the CIRP of publicly listed companies (Proposal).

The Proposal suggests that the resolution plan filed by the applicant must include the mandatory open offer for the public equity shareholders or non-promoter public shareholders offering up to 25% of the shareholding.

Further, a minimum of 5% public shareholding has to be maintained to ensure the securities remain listed. In case, 5% public shareholding is not achieved even through the mandatory open offer, the securities shall get delisted from the stock exchange(s). Therefore, by way of the Proposal, the public equity shareholders who would have been pushed out, by the Proposal, would be permitted to participate at the same price that is applicable to the resolution applicant.

Present position of minority shareholders under I&B Code
At the moment, I&B Code does not entail any distinction between a minority shareholder or majority shareholder. The Code puts both minority and majority shareholders under an umbrella.

Section 10 of I&B Code provides for the initiation of CIRP by a corporate applicant including the corporate debtor itself when there is a default committed by the corporate debtor. By passing a special resolution under Section 10(3)(c) of the Code, majority shareholders can initiate CIRP, potentially leading to a loss in the value of minority shareholders' investments, a dilution of their ownership stake, or even the complete loss of their holdings if the CIRP results in liquidation. Although it is for Ld. NCLT to decide if the application is in the interest of all stakeholders, however, this action by majority shareholders not only undermines the financial interests of minority shareholders but also side lines their voices and rights within the company.

The company faces insolvency or liquidation due to actions taken by both its promoters and decisions made by the majority shareholders. When the company eventually ends up in insolvency, Section 29A of the Code prohibits the promoters from participating in the company's resolution process. Consequently, minority shareholders are adversely affected because the combined effect of both the promoters' actions and majority shareholders' decisions has led to a decline in the value of their holdings, even though they themselves did not make any adverse decisions or take any actions that contributed to this situation.

In the case of Jaypee Kensington Boulevard Apartments Welfare Association v. NBCC (India) Ltd. (Civil Appeal No. 3395 of 2020) (decided on 24.03.2021), the shareholders raised an objection saying the resolution plan in question does not deal with the interests of the minority shareholders in a fair manner although, the Apex Court had rejected this contention and stated that here the shareholder grievances cannot be recognised as legal grievances.

Further, the Apex Court held that the legislature has made it clear by providing an Explanation to Section 30 (2) (e) of I&B Code, that any approval required under the Companies Act, 2013 shall be deemed to have been given and will not contravene any act or law. Hence, the endeavour by minority shareholders to raise objections against the resolution plan starkly contradicts the clarity provided in this Explanation to Section 30(2)(e) of the Code.

Hence, it is evident that the current framework prioritises the interests of financial and operational creditors, neglecting the importance of equitable representation for all stakeholders, including minority shareholders.

Conclusion
In essence, the quest for striking a harmonious balance to empower minority shareholders while navigating the intricate complexities of insolvency restructuring stands as a pivotal aspiration in shaping a more equitable corporate landscape.

As the I&B Code continues to evolve, addressing the concerns of minority shareholders becomes imperative for achieving a more inclusive and equitable process. By ensuring transparency, representation, fair valuation, and legal protection can enhance corporate governance ensure that all stakeholders, including minority shareholders, contribute to shaping the future of distressed companies.

Daizy Chawla, is Senior Partner, and Yukta Garg, Associate at S&A Law Offices.