SEBI's Role In Regulating Securities Market Cannot Be Circumvented Says SC

In an appeal relating to the scope of the rectificatory jurisdiction of the National Company Law Tribunal under Section 59 of the Companies Act, the Supreme Court on Wednesday affirmed that (NCLT) does not exercise a parallel jurisdiction with SEBI for addressing violations of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015.

Non-disclosure of creeping acquisition

The Appellant is a listed company engaged in the manufacture and sale of rectified spirit, country liquor, marine products, carbon dioxide gas etc. Respondent No. 1 is also a listed company which is engaged in the business of producing carbon dioxide gas and dry ice. Respondent No. 2 is the managing director of Respondent No. 1, Respondent No. 3 is the wife of Respondent No. 2, and Respondent Nos. 4-6 are close relatives of Respondent Nos. 2-3. 

It is the contention of the Appellant that sometime in August 2003, Respondent No. 2 came up with a proposal for a business tie-up between the Appellant and Respondent No. 1. The Appellant is said to have rejected the proposal. It is alleged by the Appellant that after this rejection, the Respondents started acquiring shares of the Appellant from the open market with a view to eliminate competition and strengthen its own dominant position in the relevant market. As of 18.01.2004, the Respondents collectively held just under 5% of the Appellant’s total paid-up share capital. 5. On 19.01.2004, Respondent No. 1 acquired 600 equity shares of the Appellant and this resulted in the aggregate shareholding of the Respondents crossing 5% of the total paid-up share capital of the Appellant, thereby triggering Regulation 7(1) of the SEBI (SAST) Regulations. 

Regulation 7(1) mandates that when an acquirer, either by himself or with any person acting in concert with the acquirer, acquires 5% or more of the total paid-up share capital of a company, then a disclosure has to be made to the acquiree company and the stock exchange. 

In compliance with this Regulation, the Respondents are said to have sent an intimation to the Appellant on the very next day i.e., on 20.01.2004. This intimation was received by the Appellant on 22.01.2004. The Appellant contends that the disclosure under Regulation 7(1) was not in the prescribed format. 

Four months later, on 27.05.2004, Respondent No. 1 acquired additional shares of the Appellant, as a result whereof, its individual shareholding exceeded 5% of the total paid-up share capital of the Appellant. This individual crossing of 5% by Respondent No. 1 triggered the SEBI (PIT) Regulations. Regulation 13 thereof provides that if any person acquires more than 5% shares of a company, then it shall make a disclosure to the acquiree Company. Respondent No. 1 admited to having failed to make this disclosure within the prescribed time. It was the stand of Respondent No. 1 that the failure to issue a notice was not an intentional mistake. The Appellant claims that it got to know about the said acquisition on 04.06.2004 when it carried out an internal investigation into the total number of shares held by the Respondents in the Appellant company.

What did the NCLT say

By its judgment dated 05.07.2017, the Tribunal held that the intimation dated 16.08.2004 is in violation of the SEBI (PIT) Regulations since the said declaration had to be filed within four working days of the receipt of intimation of allotment of shares or the acquisition of shares or voting rights, as the case may be. The Tribunal also held that the term ‘person’ in the SEBI (PIT) Regulations can be construed to include all other Respondents besides Respondent No. 1, as persons acting in concert. The reason for this was that the exercise of control in the management of the Appellant would be done jointly by all the Respondents. Further, the Tribunal also held that there has been a violation of the SEBI (SAST) Regulations as the Respondents did not make the disclosure in the proper format.

In so far as the exercise of power under Section 111A of the 1956 Act is concerned, the Tribunal held that in case of violation of SEBI regulations, Section 111A empowers a company to apply for rectification, and in such cases, the Tribunal is entitled to pass an order to undo the mischief. The Tribunal opined that the regulatory jurisdiction of SEBI would not bar the Tribunal from exercising its power under Section 111A of the 1956 Act. However, the Tribunal held that the powers exercised by the CLB and SEBI fall in different and distinct jurisdictional fields and therefore, the present order will not preclude SEBI from deciding any violation of its regulations. Allowing the company petition, the Tribunal held that the acquisition of shares in excess of 5% was in violation of the SEBI (PIT) Regulations and the SEBI (SAST). 

NCLAT order devoid of reasoning

The Respondents herein carried the matter to the Appellate Tribunal in appeal. The limited question before the Appellate Tribunal was whether the Tribunal was empowered to pass an order of buyback while entertaining a petition under Section 111A of the 1956 Act. The Appellate Tribunal, by its order dated 06.12.2018, allowed the appeal and set aside the order of the Tribunal.

SEBI Act must be read in addition to the Companies Act says P Chidambaram

P. Chidambaram, learned Senior Advocate on behalf of the Appellant, contended that – (i) no timely intimation in the prescribed format was given by the Respondents when Regulation 7(1) of the SEBI (SAST) Regulations got triggered; (ii) Respondent Nos. 1 – 6, as “connected persons” (as per 2(c) of the SEBI (PIT) Regulations) were “acting in concert” (as per 2(e) of the SEBI (SAST) Regulations) thereby violating Regulations 13 and 14 of the SEBI (PIT) Regulations. He emphasized that the Respondents have admitted to the non-disclosure, and (iii) as Securities and Exchange Board of India Act, 1992, must be read in addition to, and not in derogation of the Companies Act. The Appellant is entitled to approach the Tribunal under Section 111A of the 1956 Act for rectification of the register. In support of these submissions, reliance was placed on the decisions of this Court in  Mannalal Khetan & Ors. v. Kedar Nath Khetan & Ors, Chairman, SEBI v. Shriram Mutual Fund & Another. 

Filing of a petition under Section 111A is an abuse of process says Senior Advocate Shyam Divan

Mr. Shyam Divan, learned Senior Advocate appearing for the Respondents, contended that – (i) filing of a petition under Section 111A is an abuse of process; (ii) there is no violation of the SEBI (SAST) Regulations as the Respondents had given a timely intimation in the prescribed format; (iii) the Section 111A Petition did not allege any violation of the SEBI (SAST) Regulations, and no attempt was made to make any amendment to the same; (iv) the SEBI (PIT) Regulations are not applicable to Respondent Nos. 2-6 as their individual shareholding never crossed 5%. It was only Respondent No. 1 whose shareholding crossed 5%, which it inadvertently failed to disclose; (v) the SEBI (PIT) Regulations are not applicable to Respondent Nos. 2-6 as there is no concept of ‘persons acting in concert’ under the said Regulations; (vi) under section 111A (3), the Tribunal has no power to annul the transfer or to direct the buy-back of the shares.

The questions of forum and parallel jurisdiction

Which is the appropriate forum for adjudication and determination of violations and consequent actions under the SEBI (SAST) Regulations 1997 and the SEBI (PIT) Regulations 1992? 

The Court had to determine the appropriate forum for adjudication and determination of violations of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeover) Regulations, 1997, and Securities and Exchange Board of India (Prohibition of Insider, Regulations, 1992, framed under the Securities and Exchange Board of India Act, 1992.

The scope and ambit of Section 111A of the 1956 Act, as amended by Section 59 of the 2013 Act, to rectify the register of members, also came under consideration before the Bench of Justices AS Bopanna and PS Narasimha.

Rectification to the register of members under section 59 is a summary power

The declaration to hold the acquisition of shares by the Respondents as null and void in a petition under Section 111A has to be examined in the context of the scope and ambit of the rectificatory jurisdiction of the Tribunal and, in particular, the specific wordings of the said provision. 

The rectificatory powers of a Board/Company Court under Section 38 of the Companies Act, 1913, then under Section 155 of the 1956 Act, followed by Section 111A introduced by the 1996 Amendment to the 1956 Act, and finally, Section 59 of the 2013 Act, demonstrate that its essential ingredients have remained the same. It is a summary power to carry out corrections or rectifications in the register of members. The rectification must relate to and be confined to the facts that are evident and need no serious enquiry.

Transactions falling within the province of the regulators are necessarily subjected to their scrutiny and regulation 

While deciding on the question of the appropriate forum to adjudicate the matter the Supreme Court was of the view that public administration is dynamic and ever-evolving. 

"It is now established that governance of certain sectors through independent regulatory bodies will be far more effective than being under the direct control and supervision of Ministries or Departments of the Government. Regulatory control by an independent body composed of domain experts enables a consistent, transparent, independent, proportionate, and accountable administration and development of the sector," the court said.

"All this is achieved by way of legislative enactments which establish independent regulatory bodies with specified powers and functions. They exercise powers and functions, which have a combination of legislative, executive, and judicial features. Another feature of these regulators is that they are impressed with a statutory duty to safeguard the interest of the consumers and the real stakeholders of the sector", it added.

Laying emphasis on the comprehensive role of the SEBI in regulating the securities market with respect to insider trading, the Supreme Court dismissed the appeal and said that the important role of the Regulator cannot be circumvented by simply asking for rectification under Section 111A of the 1956 Act. Such an approach is impermissible. The scrutiny and examination of a transaction allegedly in violation of the SEBI (PIT) Regulations will have to be processed through the regulations and remedies provided therein.