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The Hon’ble Supreme Court (“SC”), in Securities and Exchange Board of India v. Sunil Krishna Khaitan and Others [Civil Appeal No. 8249 of 2013], examined the question of delay and laches in initiating proceedings and held that in the absence of any period of time and limitation prescribed by the enactment, every authority is to exercise power within a reasonable period.

Facts

Khaitan Electrical Limited (“KEL”), a listed company, was founded by late Shri Krishna Khaitan, who had passed away on November 4, 2012. The promoter group consists of his family members/relatives and associate entities (collectively, “Respondents”). In the extraordinary general meeting (“EGM”) held on March 23, 2006, the shareholders of KEL had approved issuance of 10,00,000 equity share warrants on preferential basis to the Respondents. In the EGM held on November 29, 2006, the shareholders had approved issuance of 10,00,000 equity share warrants to M/s. Khaitan Lefin Limited (“Respondent No. 3”), an identified member of the promoter group.

On March 12, 2007, the Respondents acquired 13,00,000 shares in KEL in two tranches. Upon receipt of the full consideration in terms of the warrants, KEL had issued shares to the Respondents consequent to which the shareholding of the Respondents underwent a change.

The Respondents were served with the show-cause notice dated March 26, 2012 issued by the Securities and Exchange Board of India (“Board”) with respect to violation of Regulations 10 (pertaining to obligation to make an open offer) and 11(1) (pertaining to creeping acquisition limit) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (“Takeover Regulations, 1997”), calling upon them to show cause why suitable directions under the Securities and Exchange Board of India Act, 1992 (“SEBI Act”) and Regulations 44 and 45 of the Takeover Regulations, 1997 read with corresponding provisions of Regulations 33 and 35 of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 (“Takeover Regulations, 2011”) should not be issued against them. Violation of Regulation 10 was predicated on the ground that on March 12, 2007, shareholding of Respondent No. 3 had individually increased from 10.52% to 17.16% and thereby it was mandatory for it to make a public announcement in accordance with the provisions of Regulation 10 read with Regulation 14(1) of the Takeover Regulations, 1997 within four working days from March 12, 2007. Further, on March 12, 2007, the collective shareholding of the promoter group, including the acquirers, had increased from 25.83% to 34.21% and, therefore, the acquirers collectively were required to make a public announcement in accordance with the provisions of Regulation 11(1) read with Regulations 14(1) of the Takeover Regulations, 1997 within four working days from March 12, 2007.

The Respondents contested the show-cause notice on various grounds. The Whole-Time Member of the Board (“Whole Time Member”) did not agree with the submissions made by the Respondents and vide his order dated December 31, 2012 held that there was a violation of the Takeover Regulations, 1997 and, therefore, the Respondents shall make a combined public announcement to acquire shares of KEL.

The Respondents preferred an appeal before the Securities Appellate Tribunal (“Appellate Tribunal”), which by the impugned order was partly allowed. The Appellate Tribunal held that Regulation 10 was not violated, but Regulation 11(1) was violated albeit the direction with regard to issue of public announcement and open offer was not sustainable at a belated stage. There was a delay of about five years in issuing show-cause notice relating to acquisition/ incidents which pertain to the year 2006-07, and as the impugned order came to be passed only on December 31, 2012, the directions of the Whole Time Member for issue of public announcement and open offer were set aside. However, monetary penalty was imposed.

In this regard, the Respondents have filed the present appeals. However, the Respondents did not challenge the penalty imposed by the Appellate Tribunal for violation of Regulation 11(1) of the Takeover Regulations, 1997.

Issue

Primary questions of law raised in the appeal related to the (i) interpretation of Regulation 10 of the Takeover Regulations, 1997; (ii) the power and exercise of the power by the Board under Regulations 44 read with 45 of the Takeover Regulations, 1997; and (iii) the power and jurisdiction of the Appellate Tribunal under Section 15T of the SEBI Act.

Arguments

Contentions of the Board

The Board contended that there was a violation of both Regulation 10 and Regulation 11(1) of the Takeover Regulations, 1997, as the shareholding of Respondent No. 3 increased beyond the stipulated threshold and no public announcement was made. Regulations 10 and 11(1) have to be read accordingly and in line with the objective of the Takeover Regulations, 1997 which is to ensure that an exit option is provided to the existing shareholders once any person, whether individually, and/or along with any another person acting in concert with each other, acquires shares that cross the % threshold.

The Board has been conferred with powers under the SEBI Act under Section 11 thereof to issue appropriate direction for protection of interest of the shareholders. The Board stated that the Appellate Tribunal should not have interfered with the directions to make an open offer, which are in line with the objectives of the SEBI Act read with Regulation 44 of the Takeover Regulations, 1997. The order passed by the Whole Time Member directing making of public announcement for open offer along with paying interest to the shareholders of the target company, was made with the larger objective of protecting interests of the shareholders who have a right and expectation to be provided with the opportunity to exit the company in case the shareholding/voting rights of a person and/or persons acting in concert crosses the stipulated threshold at any point of time.

Scope of power of the Appellate Tribunal enumerated in Section 15-T (pertaining to appeals) of the SEBI Act does not extend to substituting directions issued by the Board with monetary penalty. The scope of power of the Appellate Tribunal is wide but cannot be exercised in a manner which is inconsistent with the scheme of the SEBI Act. Further, the directions issued for public announcement and open offer are in line with the objectives of the SEBI Act which states that as soon as the contravention of the statutory obligation is established, penalties must follow.

The Board further contended that the Appellate Tribunal does not exercise jurisdiction under Article 226 of the Constitution of India and is a creation of the statute and, therefore, cannot pass any order inconsistent with the scheme of the SEBI Act. Thus, imposition of monetary penalty for violation of Regulation 11(1) of the Takeover Regulations, 1997, as directed by the Appellate Tribunal, is contrary to law and would also result in weakening of investor confidence in securities market as defaulters would be able to escape the obligation.

Further, the delay in issue of show-cause notice itself would not exonerate the defaulters under the SEBI Act and the relevant regulations, as has been held in Adjudicating Officer, Securities and Exchange Board of India v. Bhavesh Pabari [(2019) 5 SCC 90] (“Bhavesh Pabari Judgment”).

Observations of the Supreme Court

Regulation 10 of the Takeover Regulations, 1997 applies to the ‘acquirer’ acquiring voting rights, with reference to the existing holding as a person and in concert with other persons, because the acquisition is to be “taken together with shares or voting rights held by the acquirer himself or by person acting in concert with him”. The combined holding of the person and the ‘person acting in concert’ determines application of Regulation 10. If an ‘acquirer’ already holds more than 15 % shares or voting rights in concert with other persons, such holding is not be fragmented to calculate the shares or voting rights of the ‘acquirer’ in his personal capacity under Regulation 10. The expression ‘acquirer’, as defined in the Takeover Regulations, 1997, is broad, wide and is given an expansive definition.

The object of the wide definitions in the Takeover Regulations, 1997 is to ensure that no one is able to dribble past and defeat its objects by resorting to camouflage and subterfuge. Thus, the contention of the Board that the interpretation by the Appellate Tribunal defeats the object and purpose of the Takeover Regulations, 1997 was a feeble and evanescent argument. In the context of the present case, it is to be noted that the Board is the draftsman of the legislation having enacted the Takeover Regulations, 1997 and hence, their interpretation and understanding of the Regulations is of importance and relevance. In the context of the present case, the Board, nearly five years after the transactions, had issued the show-cause notice and then passed an order taking a view on interpretation of Regulation 10, which was contrary to the view expressed by it in several communications as also orders passed by the adjudicating authority. Past is passe and not present, and by giving ‘retroactive’ operation without good reason and ground, the direction violates fundamental notions of predictability and legal stability.

The SC observed that the principle of doubtful penalisation would be applicable in the present case. The SC, in the case of Tolaram Relumal and Another v. State of Bombay [(1955) 1 SCR 15] had held that it is a well settled rule of construction of penal statutes that if two views and reasonable constructions can be put on a provision, the court must lean in favour of construction which exempts the subject from penalty rather than one which imposes penalty.

Regulation 10 of the Takeover Regulations 1997, as interpreted and applied by the Board for over ten years, was sought to be overturned by the Board, thereby, creating penal consequences. The SC noted that this should not be permitted and is hardly acceptable if the principle of good governance is applied. Further, the argument of the Board that Takeover Regulations, 2011 are retrospective was rejected. It is a general rule of law of interpretation that unless explicitly mentioned, a law cannot be presumed to be retrospective.

Regulation 44 states that the Board, without prejudice to their rights to initiate action under Chapter VI-A and Section 24 of the SEBI Act, may in the interest of the securities market or for protection of the interests of the investors, issue such directions as it may deem fit. Thereafter, it specifies certain directions in clauses (a) to (i), using the word ‘including’, which implies that the directions issued by the Board can include the directions given in clauses (a) to (i), albeit the Board may issue directions even beyond what is stated in clauses (a) to (i). Thus, the Board’s power to give directions is wide. Regulation 44 states that the Board while issuing directions, has to keep in mind the interest of the securities market and its role as a protector of interest of investors.

The SC agreed with the reasoning given by the Appellate Tribunal for setting aside the directions given in the order passed by the Whole Time Member. The violation alleged relates to the years 2006-07. The order issuing the directions was passed on December 31, 2012, several years after the alleged violation. The direction given is that the shareholders should be given an option to sell the shares held by them on June 16, 2007 by directing the respondents to make a public announcement to acquire the shares. Direction has also been given to pay interest @ 10% per annum from June 16, 2007 till shares have been accepted in the open offer.

The SC observed that, though this direction can be issued, the exercise of discretion to issue the said direction has to be predicated and based upon good grounds and reasons. The directions of such nature are not automatic and are to be issued only when they are warranted and justified. The directions were for the reason that the acquirer had failed to comply with Regulation 10 of the Takeover Regulations, 1997 in the remote past, that is, in the year 2006 and 2007. It is whimsical and arbitrary exercise of discretion by the Board.

The SC, in the Bhavesh Pabari Judgment, had examined the question of delay and laches in initiating proceedings under Chapter VI-A of the SEBI Act and the principle of law that when no limitation period is prescribed proceedings should be initiated within a reasonable time and what would be reasonable time would depend upon facts and circumstances of each case. Whenever a question with regard to inordinate delay in issuance of a show-cause notice is made, it is open to the noticee to contend that the show-cause notice is bad on the ground of delay and it is the duty of the authority/officer to consider the question objectively, fairly and in a rational manner.

Further, in the present appeal, it is to be noted that an order in the form of directions was issued. It was this order which was made subject matter of challenge before the Appellate Tribunal. The SC did not accept the contention of the Board that the Appellate Tribunal while exercising appellate power could not have set aside and quashed the directions given in the appeal.

Decision of the Supreme Court

The SC upheld the order of the Appellate Tribunal, setting aside the directions of public announcement with open offer, given by the Whole Time Member for violation of Regulation 11(1) of the Takeover Regulations, 1997.

However, the SC disagreed with the Appellate Tribunal on the aspect of the power of Appellate Tribunal under Section 15T (pertaining to appeals) of the SEBI Act. It clarified that the power of the Appellate Tribunal under Section 15T of Chapter VI-A of the SEBI Act is confined to examination of correctness and legality of the order under challenge.

VA View:
The SC has rightly upheld the Bhavesh Pabari Judgment and observed that in the absence of any period of time and limitation prescribed by the enactment, every authority is to exercise power within a reasonable period. What would be the reasonable period would depend upon facts and circumstances of each case. As there is public interest involved, regulatory authorities should take actions and exercise their powers in a timely manner. When no limitation period is specified, they should endeavor to take actions within reasonable time.

For any query, please write to Mr. Bomi Daruwala at [email protected]

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