The Supreme Court has emphasised the requirement for obtaining shareholder approval before a company's shares, particularly those arising from debt-to-equity conversion, can be listed on a stock exchange. The Court's judgment clarifies the significant requirement under Section 62(1)(c) of the Companies Act, 2013, stating that "the approval of the shareholders would be mandatory before the shares are accepted for listing on the BSE."
The case centered on Jyoti Ltd., which had sought to list 59,63,636 equity shares on the Bombay Stock Exchange (BSE) following the conversion of a portion of its debt, amounting to Rs. 32.80 crores, into equity. These shares were issued to Asset Reconstruction Company (ARC) under the provisions of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Act, 2002 (SARFAESI Act). The issue emerged when Jyoti Ltd. failed to obtain in-principle approval from its shareholders before allotting the shares.
The appellant contended that because the conversion process was initiated by the ARC under the SARFAESI Act, shareholder approval was unnecessary. The company argued that once the ARC exercised its right to convert debt into equity, the shares should be automatically eligible for listing without further shareholder consent. However, the Court disagreed, emphasising that the company’s internal resolution process, initiated by its Board of Directors, triggered the debt-to-equity conversion. As a result, the approval of shareholders was deemed mandatory before the shares could be listed.
“We find that the conversion of the debt into additional shares had taken place with the agreement of the appellant company and RARE, and it is based on such an agreement between the parties that a resolution was passed on 02.05.2018 by the Board of Directors of the appellant company accepting the proposal to convert the debt into shares and to allow them in favour of RARE,” the Court stated. This, the Court ruled, meant that the proposal to increase the company's equity capital originated with Jyoti Ltd., not the ARC.
Additionally, the Court upheld the finding of the Securities Appellate Tribunal (SAT) that the absence of approval from the BSE, in line with Regulation 28 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, justified the rejection of the listing application. "Insofar as the other ground for rejection of the application is concerned, that is to say, for want of approval of the BSE, the Securities Appellate Tribunal has returned a clear finding that the approval of the BSE is necessary," the Court noted, affirming the requirement for BSE’s consent for listing.
The judgment further stressed that the failure of Jyoti Ltd. to secure the necessary special resolution from its shareholders under Section 62(1)(c) of the Companies Act meant that the listing request could not be approved. "In view of the aforesaid facts and circumstances, we think that no error or illegality has been committed either by the BSE or the Securities Appellate Tribunal in refusing to accept the request of the appellant company for the listing of the shares at the Stock Exchange inasmuch as Section 62 of the Companies Act stands duly attracted.” the Court concluded, rejecting the appeal.
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