IL&FS: IL&FS moves SC against show-cause notice by Sebi

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Mumbai: IL&FS Financial Services has moved the Supreme Court against a show-cause notice issued by market regulator Securities and Exchange Board of India. At the heart of the controversy is whether Sebi has the powers to initiate regulatory action against entities placed under moratorium as per Insolvency Bankruptcy Code (IBC).

The case has been admitted by the apex court and a two-member bench comprising Justices Vineet Saran and Dinesh Maheshwari will be hearing it. The matter has been tagged along with another appeal by IL&FS Securities Services where the contention is the same – Sebi has passed orders against entities under the IBC.

Emails sent to Sebi and IL&FS remained unanswered.

“Technically, the IBC moratorium should apply to even Sebi’s regulatory actions and there are even few judgements of the Securities Appellate Tribunal (SAT) upholding this view,” said a lawyer with direct knowledge of the matter. “If IBC entities are subject to regulatory action during liquidation, it sort of defeats the purpose of having a moratorium.”

Sebi issued a notice to IL&FS Financial Services on July 16, 2020, asking the company why action should not be taken against it for various disclosure lapses that happened during the years 2018 and 2019. However, Sebi passed an order on December 24, 2020, quashing the show case notices since its adjudication officer opined that IL&FS was under IBC and hence moratorium would apply.

There is a sparingly used power that the whole-time members of Sebi have, through which the board can review orders passed by the regulator’s adjudication officer.

It used this power and withdrew the December 24 order and issued a fresh show cause notice on July 18, 2021, to IL&FS which contained the same allegations as the July 2020 notice.

IL&FS challenged this order in the Bombay High Court. However, the court on August 12, 2021, ruled in favour of Sebi. IL&FS has now moved the Supreme Court against this order.

Legal experts say IL&FS is not the only entity that has faced such a situation. “Sebi has passed regulatory orders against several entities undergoing liquidation under IBC including Monnet Ispat, Videocon and Raj Oil,” said another lawyer. “Most of the cases are currently pending before the Supreme Court and we hope that the apex court draws a clear line demarcating the powers of Sebi in regard to IBC entities.”

In a January 8, 2021 order, Sebi’s whole time member Madhabi Puri Buch opined that the market regulator was not covered under the moratorium affirmed by the National Companies Law Appellate Tribunal. However, the order added that it wouldn’t act as a precedent.

“The moratorium aims to keep the corporate debtor’s assets together during the insolvency resolution process and facilitate orderly completion of the processes envisaged during the insolvency resolution process,” the order said. “However, the intent of IBC cannot be to protect entities who have indulged in possible violations of regulatory provisions or indulged in fraudulent activities and then seek refuge from the action that follows for such violations, using the moratorium clause under the IBC.”

SAT had quashed Sebi orders against Monnet Ispat and Raj Oils saying that the moratorium applies to Sebi action as well. In both cases, the markets regulator has moved the Supreme Court against the SAT orders.

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