A key hurdle for Reliance Commercial Finance Ltd. to restructure its debt has been cleared by the Supreme Court, making way for Authum Investment and Infrastructure Ltd. to implement its resolution plan.
Market regulator SEBI had approached the apex court challenging the manner in which the approval of debenture trustees was taken for the resolution. In principle, the Supreme Court agreed with SEBI’s view, but invoked its powers under Article 142 to avoid “unscrambling of the resolution process”.
The matter relates to non-convertible debentures issued by Reliance Commercial Finance in 2017-18, for which Vistra ITCL (India) Ltd. was the debenture trustee. RCFL committed its first default under the debenture trust deeds in March 2019.
Meanwhile, RCFL’s lenders sought to restructure their debt under the Reserve Bank of India’s stressed assets framework notified in 2019. This required them to sign an inter-creditor agreement, which the lenders did, with Bank of Baroda as the lead bank.
Since the RBI’s framework didn’t cover debenture trustees, the Securities and Exchange Board of India had issued a circular in 2020 laying down the procedure for their participation. This was notified anticipating that ICA lenders may approach other financial creditors—not covered by the RBI framework—to participate in the resolution.
Under the SEBI framework, debenture trustees can consent to enforce their security and/or enter into an ICA. The threshold for consent is not less than 75% of the investors by value of the outstanding debt and 60% of the investors by number at the ISIN level.
It’s this ISIN-level voting prescribed by SEBI which became the point of contention between RCFL and the regulator.
ISIN or International Securities Identification Number is a unique code assigned to identify securities. ISIN-wise voting ensures that rights of small investors are protected against the excesses of large investors, SEBI argued.
As in the case of RHFL, it’s possible that one entire ISIN series resides with one investor. Prior to the matter landing in the apex court, the Bombay High Court division bench articulated this problem in RHFL’s case:
The apex court agreed with the market regulator that the 2020 circular envisages an ISIN-level vote.
But it pointed out that under the ICA-approved resolution plan, RHFL’s retail debenture holders with an exposure of up to Rs 10 lakh will receive 100% of their principal dues. And those with an exposure of more than Rs 10 lakh would realise 29.69%. In comparison, the secured ICA lenders would receive 24.96% of their principal amount, which is lower than the recovery made by the debenture holders.
This prompted the court to invoke its powers under Article 142 to do complete justice.
The different voting mechanism proposed under the SEBI circular will further delay the resolution process and potentially disrupt the efforts undertaken by the stakeholders, including the retail debenture holders, the apex court noted.
Even as it upheld the resolution, the Supreme Court accepted SEBI’s stance that since the voting in this case didn’t happen at the ISIN-level, it cannot bind dissenting debenture holders.
The apex court directed that such creditors should either be given the option to accept the terms of the resolution plan. If they refuse, their right to stand outside the ICA-approved plan and enforce their security continues to be alive.