Holders of convertible preference shares in a spot

Holders of optionally convertible redeemable preference shares (OCPRS) are in a quandary after the Supreme Court ruled recently that investors do not have a “sacrosanct” right to redeem such instruments.The top court also made clear that investors cannot redeem such shares before the National Company Law Tribunal has ruled either way – whether investors can convert such shares or not – under the Insolvency and Bankruptcy Code.Preference shares represent that part of a company’s capital that is preferred over equity shares with respect to payment of dividends and repayment of capital in case of bankruptcy. They are, however, subordinate to the debts of a company.Preference shareholders are to be paid out of a company’s profits unlike debt, which is payable even if the borrower does not generate any profit.The apex court ruling could open a window to attempts by holders of such instruments to take the issue of non-redemption -- of redeemable preference share (RPS) and OCRPS -- under the IBC. This is especially so by foreign investors where the RPS or OCRPS are treated as external commercial borrowings, experts said.The SC ruling — in the Indus Biotech versus Kotak India Venture case — did not touch upon the issue of whether RPS or OCRPS can be treated as debt on default of the redemption clause.This may put a question mark on the rights of RPS and OCRPS holders under IBC, industry trackers said.“The treatment of preference shares is clear under the IBC and its treatment as ‘debt’ appears to be untenable under law at present. Allowing this may tinker with the protection to creditors under IBC,” said Yashesh Ashar, a partner at tax advisory firm Bhuta Shah & Co. 83493492“However, it would be interesting to see the status of the default of an arbitration award in the case for non-redemption of preference shares under the IBC, specifically in case of foreign investors,” Ashar added. Some experts, however, said the NCLT has a right to examine every debt before the debt holders enforce their rights in insolvency cases.The Supreme Court has held that the NCLT has to examine whether a debt is due and payable and just filing an application under the IBC cannot automatically trigger the insolvency process, said Abhishek Goenka, partner at Aeka Advisors.“This is important in the context of convertible instruments since… it is important to clearly capture the events and terms for conversion and the situations in which the amounts are repayable as a debt without being converted,” Goenka added.Some investors have been looking to tweak existing contracts, and the ruling could lead to insertion of new clauses to safeguard their rights in new investments, industry insiders said.

from Economic Times https://bit.ly/3xgLkAE
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