Supreme Court rules that for listings, approval from the company’s shareholders is mandatory

The BSE rejected the application, citing two primary reasons:

1. Jyoti Limited had not obtained in-principle approval from the BSE.
2. Jyoti Limited failed to secure shareholder approval for the allotment of shares to RARE, as required under Section 62(1)(c) of the Companies Act.

The Supreme Court dismissed Jyoti Limited’s appeal, reaffirming the decisions of the BSE and SAT. The Court emphasized that Section 62(1)(c) of the Companies Act mandates shareholder approval through a special resolution when a company proposes to increase its subscribed capital by issuing additional shares. While Jyoti Limited argued that the proposal originated from RARE under the SARFAESI Act and therefore does not need shareholders’ approval, the Court observed that:

1. The Board of Directors of Jyoti Limited passed a resolution on 02 May 2018, agreeing to the debt-to-equity conversion.
2. Jyoti Limited subsequently applied to the BSE for listing the shares.
3. These actions indicated that the proposal to increase the share capital originated from Jyoti Limited itself.

Consequently, the requirement for shareholders’ approval was triggered, which Jyoti Limited failed to obtain. The Supreme Court further held that while the SARFAESI Act empowers asset reconstruction companies to convert debt into equity, this power is subject to compliance with the Companies Act. Thus, RARE cannot bypass shareholders’ approval requirements when facilitating such conversions.

The Supreme Court’s judgment highlights the importance of adhering to corporate governance norms, particularly shareholder approval, even in the context of statutory debt-restructuring schemes. Here are our key takeaways:

1. Balancing statutory frameworks: The decision harmonizes the provisions of the SARFAESI Act with the Companies Act ensuring that statutory powers granted to asset reconstruction companies do not override statutory shareholder rights. It reinforces that restructuring measures, while critical for economic recovery, must align with the principles of transparency and corporate democracy.
2. Corporate Decision-Making: The judgment highlights the necessity for companies to involve shareholders in decisions affecting their ownership and equity structure. Board resolutions, while authoritative, cannot substitute the mandate of a special resolution from shareholders, particularly when increasing subscribed capital.
3. Compliance with SEBI Regulations: The Court’s emphasis on compliance with the Securities and Exchange Board of India (Listing Obligation and Disclosure Requirements) Regulations, 2015 signals to companies the criticality of obtaining in-principle approvals and adhering to procedural mandates for listing shares. This ensures market integrity and protects investor interests.
4. Implications for ARCs: The ruling serves as a cautionary note for asset reconstruction companies engaged in debt-to-equity conversions. While empowered to undertake such measures under the SARFAESI Act, they must account for corporate law requirements and work collaboratively with borrower companies to ensure compliance.