Supreme Court on Interpretation of Regulation 10 of Takeover Regulation 1997: Sebi V. Sunil Krishnan Khaitan
Introduction
The Supreme Court recently dealt with the issue of the interpretation of Regulation 10, Regulation 44 read with Regulation 45 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulation, 1997 (hereinafter referred to as the “Takeover Regulations 1997”); and the power and jurisdiction of the Appellate Tribunal under Section 15T of the SEBI Act (“Act”) in the case of the Securities and Exchange Board of India v. Sunil Krishnan Khaitan on July 11, 2022.[i]
Brief Facts
The brief facts of the case are that the Board gave the respondents a show-cause notice for violating Regulations 10 and 11(1) of the Takeover Regulations 1997 on the ground of KLL’s (respondent 1) shareholding in Khaitan Electric Limited increasing from 10.52% to 17.16% while the promoter group’s collective shareholding increased from 25.83% to 34.21%. Although neither the respondent nor the acquiring group made a public declaration, the respondents’ stake in PLL (Respondent 2) increased from 11.87% to 16.25% and again from 14.88% to 15.77% in the second appeal case.
The purpose of the public announcement is to inform the company’s shareholders of any change in the company’s substantial ownership and to offer an exit opportunity through an open offer in the event of such a significant change. The responses were instructed by the Board’s full-time director to collectively announce their intention to acquire shares of the target company in addition to the consideration amount shall pay interest of @10% per annum.
Observations & Ruling
The Appellate Tribunal ruled that while Regulation 10 was not breached, while Regulation 11(1) was. The respondents had filed an appeal, which the Tribunal accepted. In the current case, the respondent received a show cause notice from the Board nearly five years after the transaction. The Tribunal stated that it was not reasonable to make a public announcement and open offer at such a late date. The Tribunal noted that the total shareholding of the group of people acting in concert would need to be estimated in order to assess whether or not the limit under Regulation 10 has been exceeded. The Whole Time Members’ directives for the release of a public statement and an open offer were disregarded, and a fine of Rs 25,000,00/- has been levied. The goal of Regulation 10 is to make sure that existing shareholders are given an exit option once any person,[ii] either alone or in concert with another person, acquires shares that exceed the 15% threshold in order to have more influence over the company’s management. In contrast, Regulation 11 offers an exit option to shareholders who raise their ownership or voting rights by more than 5% at any time within a fiscal year while still owning 15% or more of the voting rights or the shares, individually or in concert with other shareholders.[iii] A public offer must be made if a member of the group exceeds the required minimum shareholding threshold, according to Regulation 3(3) of the Takeover Regulations 2011, even though the total shareholdings of the group of individuals acting jointly have not changed.[iv]
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The Apex Court further ruled that, contrary to what was decided in the case of Adjudicating Officer, Securities and Exchange Board of India v. Bhavesh Pabari,[v] the delay in issuing the show cause notice would not, by itself, absolve the defaulters under the act and the applicable regulations. An acquirer may act on their own or as a member of a team of people working together. On the other hand, the definition of “persons acting in concert” makes clear that individuals would be regarded as “persons acting in concert” if they work together to get substantial voting rights in a specific company. According to the court, Regulation 10 states that no “acquirer” shall acquire voting rights that, when combined with the shares or voting rights held by him or by a “person acting in concert”, would allow the “acquirer” to exercise 15% or more of the voting rights in the company unless such an acquirer publicly announces their intention to acquire shares in accordance with the regulations.
Apex Court agreed with the Appellate Tribunal’s view that the word “acquirer” should not be restricted to shares or voting rights of the individual shareholders as the term as defined includes the “person acting in concert” with the shareholder. Therefore Regulation 10 does not apply when the collective voting rights of the individual shareholders and the persons acting in concert taken together is 15% or more on the date when fresh shares or voting rights are acquired. The draftsman has consciously used the expression “acquirer; in regulation 10 instead of the word “person” as used in Regulations 6 and 8 of 1997 Regulation. Regulation 10 is applied in two situations –
“…
- When the acquirer as a single entity without taking into consideration the shareholding or voting rights of the persons acting as concert
- When the single entity together with the person s acting in concert, acquire voting rights, and in either case to cross the stipulation of 15% of the voting rights.”
The court held that the combined holding of the person and the “person acting in concert” determines applicability of Regulation10. If an “acquirer” already holds more than 15% shares or voting rights in concert with other persons, such holding is not to be disintegrated to calculate the shares or voting rights of the “acquirer” in his personal capacity under Regulation 10.
The Hon’ble Court stated: “Regulation 10 does not apply when the “acquirer” already holds more than 15% shares or voting rights in the target company. Regulation 11(1) applies when the “acquirer” who holds between 15% to 55% of shares or voting rights, post the acquisition of the additional shares or voting rights is entitled to exercise more than 5% of the voting rights. The Board as well as the Adjudicating Officer have treated the expression “acquirer” for the purpose of Regulation 10 to include a “person acting in concert” and the combined shareholding were taken into consideration for deciding whether there was a breach of Regulation 10. Where the “acquirer” including “person acting in concert” already had shares or voting rights over the prescribed limit, they were not held guilty of violating Regulation 10.”
Since the Board drafted the 1997 Regulation, great weight must be placed on their interpretation. Nearly five years after issuing the show cause notice, the Board passed an order interpreting Regulation 10 that was at odds with the position it had taken in previous communications and orders made by the adjudicating authority. The Board is now seeking to overturn this decision because it resulted in penalties. Fundamental principles of predictability and legal stability are broken by the directive.
The Board argues that the Tribunal shouldn’t have changed the directions given by the Whole-Time member requiring public announcement and a fine of Rs. 25,00,000/-. In accordance with Regulation 44 of the Takeover Regulation 1996, the Board may issue any directions it deems appropriate in the interest of the securities market or for the protection of investors” interests, without prejudice to its rights to take action under Chapter VI-A and Section 24 of the Act. The word “may” in Regulation 44 and the language of Sections 11(1), 11B, and 11(2)(h) show that the Board has been given a lot of flexibility in its decision-making. While issuing the instructions, the Board must keep in mind the interest of the securities market and its position as a protector of investors” interests because the word “may” is interpreted as permissive rather than imperative.
The court also addressed the Appellate Tribunal’s authority under Section 15-T, which does not include the ability to substitute a monetary fine under Section 15-H of the Act for directives made under Sections 11 and 11B. The Supreme Court ruled that although the Appellate Tribunal has broad authority, it cannot be used in a way that is at odds with the overall objective of the Act. As a result, imposition of a monetary fine for violation of Regulation 11(1) of the 1997 Regulation as directed by the Appellate Tribunal is illegal and would also undermine investor confidence as defaulters would be allowed to escape their obligations.
The initial appeal against the Board’s judgement is made to the Tribunal under Section 15T, and it is thought of as a valuable right of the person who was wronged. The Appellate Tribunal is a forum for appeals only; it lacks the ability to begin penalty procedures pursuant to Section 15-H or to unilaterally issue directives pursuant to Sections 11, 11B, or 11(4)(d) of the Act.
Verdict
The Board was directed by the Supreme Court to put the matter on hold and not start any Chapter VI-A of the Act procedures.
Author: Abhishek Singh, in case of any queries please contact/write back to us at support@ipandlegalfilings.com or IP & Legal Filing.
REFERENCES
[i] https://main.sci.gov.in/supremecourt/2013/25980/25980_2013_14_1503_36269_Judgement_11-Jul-2022.pdf
[ii] https://www.sebi.gov.in/acts/act15a.pdf
[iii] https://www.sebi.gov.in/acts/act15a.pdf
[iv] https://www.sebi.gov.in/legal/regulations/apr-2017/sebi-substantial-acquisition-of-shares-and-takeovers-regulations-2011-last-amended-on-march-6-2017-_34693.html
[v] https://indiankanoon.org/doc/144717824/
