IN THE SECURITIES APPELLATE TRIBUNAL
Appeal No: 39/2002
In the matter of
Justice Shri Kumar Rajaratnam, Presiding Officer
Dr. B. Samal, Member
Shri N.L. Lakhanpal, Member
Per: Justice Kumar Rajaratnam, Presiding Officer
The appeal is taken up for final disposal by consent of parties.
appellant, Reliance Industries Limited (for short ‘RIL’), had been holding more
than 5% shares in the target company, Larsen & Toubro Limited (for short
‘L&T’) since 1988-89 and had been having two of its representatives functioning
as Non-Executive Directors on the Board of Directors of L&T. When the Securities and Exchange Board of
India (SEBI for short) notified the SEBI (Substantial Acquisition of Shares and
Takeovers) Regulations, 1994 requiring disclosure of holdings above 5%, RIL
disclosed its shareholding to the target company L&T and to the concerned
Stock Exchanges. Similarly when SEBI (Substantial Acquisition of Shares and
Takeovers) Regulations, 1997 (for short Takeover Code) was notified by SEBI on
2. In the context of the scale of the transaction and the circumstances in which it was carried out, SEBI received a complaint from Investors Grievance Forum on January 7, 2002 alleging that RIL had increased their holding in L&T from 6.62% to 10.05% prior to their deal with GIL making a huge profit by selling the shares @ 306.36% per share as against the prevailing market price of around Rs. 208/- per share. SEBI conducted the necessary investigations and finally initiated proceedings under Regulation 11 of SEBI (Prohibition of Insider Trading) Regulations, 1992 and exonerated RIL, Shri Mukesh D. Ambani and Shri Anil D. Ambani of the charge of violation of insider trading Regulations. However, SEBI found that even though the huge purchase of shares between 5th November, 2001 to 16th November, 2001 had not been on the basis of any insider information, RIL had violated Regulation 7(1) of the Takeover Regulations, 1997 by not informing the target company and the Stock Exchanges about its holding having once again crossed the threshold of 5% on 5th November, 2001. Accordingly, Adjudicating Officer was appointed, under Section 15I of the SEBI Act, 1992 and the impugned order came to be passed imposing a monetary penalty of Rs. 4,75,000/- on the appellants. Being aggrieved the appellants have filed the present appeal.
is common ground that RIL’s group holding in L&T went up from 4.80% on
the appellants were indeed required to inform the target company about their
holding having once again crossed the 5% threshold on
ii. If yes, whether this violation is required to be necessarily visited with a penalty under Section15A(b).
4. The appellants contention that their holding in the target company had been in excess of 5% since 1998-89 has not been denied by SEBI either in the adjudication proceedings or in appeal even though it has been specifically raised in the memorandum of appeal. It is also seen that it is not SEBI’s case that intimation is required to be given even when the holding falls below 5% as it did, from June to October, 2001. For proper appreciation, Regulation 7 of the Takeover Regulations is reproduced below:
“7(1) Any acquirer, who acquires shares or voting rights which (taken together with shares or voting rights, if any, held by him) would entitle him to more than five per cent shares or voting rights in a company in any manner whatsoever, shall disclose the aggregate of the shareholding or voting rights in that company to the company”.
5. SEBI’s argument therefore is that a plain reading of this provision casts a responsibility on the appellant acquirer to disclose his holdings whenever it exceeded 5% and that non-compliance with this provision renders them liable to the consequences provided for in the Regulations. The respondent SEBI further argued at the time of the hearing of this appeal that if the appellant’s contention were to be accepted it would mean a blanket freedom to any acquirer to play around with the equity structure of a target company within the range of 0 to 10% behind the back of the target company as well as the shareholders after one time reporting of acquisition of shares beyond 5%. According to SEBI such one time disclosures could not remain valid till eternity and that such a construction of the Regulations would negate the very purpose of the Takeover Code. It was therefore argued on behalf of SEBI that the impugned order was well warranted by the facts of the case and should therefore be maintained because it had been passed in the interest of ensuring compliance of the Regulations governing takeovers.
6. As against this, learned Counsel for the appellant argued that Regulations 6, 7 and 8 had to be read harmoniously and in an integrated manner. Regulation 6 thus requires any person holding more than 5% shares in a company at the time of notification of the Takeover Code to disclose his shareholding in that company within two months while Regulation 7 requires any person acquiring more than 5% shares after the promulgamation of the Takeover Code to disclose his aggregate shareholding to the Company. Regulation 8 deals with continual disclosures requiring every person (including the persons covered under Regulations 6 and 7 if and when their shareholding crosses the higher threshold of 15%) holding more than 15% shares in any company to make annual disclosures by 21st April every year. Thus, according to the appellant, if a person holds more than 5% shares on the date of coming into force of the Takeover Code or if a person acquires more than 5% shares thereafter, he must make a disclosure under Regulation 6 or 7 as the case may be. If such person goes on acquiring further shares so that his shareholding goes on to 15% he must disclose his share holding every year. The appellant is thus considering the date of promulgamation of the Takeover Code as the dividing line for the Regulation 6 and the Regulation 7 and has therefore argued that since they were covered by Regulation 6 and since the information about their holding in excess of 5% had already been in the public domain continuously for more than a decade, they did not incur any fresh disclosure obligation under Regulation 7 just because their shareholding happened to have dipped below 5% for a few months in the year 2001 in the normal course of management of their portfolios. The appellants have further argued that there is no provision in the Takeover Code to make any disclosures when the shareholding drops below 5% and it can therefore sincerely be assumed that there is no disclosure obligation if the shareholding crosses 5% after having temporarily gone below the threshold once the disclosure about the holding being above 5% has already been made. Such a curse of action, as adopted by SEBI in the present case, according to the appellant would tantamount to laying more emphasis on the process than on the objects of the Takeover Code and would thus be self-defeating.
have carefully examined the arguments of the learned Counsel on both sides.
This matter is one of its kind. The learned Counsel on
both sides have presented very strong submissions in
support of their contentions. We are impressed by the submission of the learned
Counsel for the appellant that the construction placed on the regulation by
SEBI would tend to give more importance to the process of disclosure rather
than giving credence to the purpose such disclosure is supposed to serve,
namely, that all investors and the target company be made aware of somebody
acquiring more than 5% shareholding in a target company. We cannot at the same
time ignore the plain meaning of the provision as it stands. Simply stated, regulation
7(1) enjoins on any acquirer to report his shareholding once it exceeds 5%
regardless of whether his shareholding was acquired or re-acquired. It is well
established law that when the meaning is plain and evident on the face of a
provision, there is no need to go behind these words to look for the impact and
purpose of such legislation. Besides, Regulation 7(1) is a simple transparency
requirement in harmony with the over-all objectives of the Takeover Code and
does not adversely impact the legitimate business interests nor imposes any
undue costs. We therefore hold that the appellant was under an obligation under
Regulation 7 to inform the target company on
the second issue it was SEBI’s argument during the hearing of this appeal that
the information which was required to be given by 9th November, 2001
under the Takeover Regulations was actually given by the appellant only on 13th
February, 2002 and the appellant had thus rendered themselves liable for
penalty under Section 15A(b) of the SEBI Act, 1992. According to SEBI the
Adjudicating Officer had thus correctly calculated the amount of penalty @ Rs.
5,000/- per day as provided under Section 15A(b) multiplied by the period of
delay of 95 days. The learned Counsel for the appellant argued that he had no
quarrel with the method of calculation or the amount of penalty imposed on the
appellants which had already been paid without prejudice to their contentions.
The learned Counsel, however, invited our attention to the orders passed by
this Tribunal in Cabot International Capital Corporation Vs. Adjudicating Officer,
Securities and Exchange Board of
“28. Thus, the following extracted principles are summarized.
“(A) Mens rea is an essential or sine qua non for criminal offence .
“(B) Strait jacket formula of mens rea cannot be blindly followed in each and every case. Scheme of particular statute may be diluted in a given case.
“(C) If, from the scheme, object and words used in the statute, it appears that the proceedings for imposition of the penalty are adjudicatory in nature, in contre-distinction to criminal or quasi criminal proceedings, the determination is of the breach of the civil obligation by the offender. The word “penalty” by itself will not be determinative to conclude the nature of proceedings being criminal or quasi criminal. The relevant considerations being the nature of the functions being discharged by the authority and the determination of the liability of the contravenor and the delinquency.
“(D) Mens rea is not essential element for imposing penalty for breach of civil obligations or liabilities.
“(E) There can be two distinct liabilities, civil and criminal, under same act.
“(F) Even the administrative authority empowered by the Act to ‘adjudicate’ have to act judicially and follow the principles of natural justice, to the extent applicable.
“(G) Though looking to the provisions of the statute, the delinquency of the defaulter may itself expose him to the penalty provision yet despite, that in the statute minimum penalty is prescribed, the authority may refuse to impose penalty for justifiable reasons like the default occurred due to bonafide belief that he was not liable to act in the manner prescribed by the statute or there was too technical or venial breach etc.”
9. On the basis of these extracted principles the Hon’ble High Court had gone on to examine the question of penalty imposed by the adjudicating authority and upheld the orders of the Tribunal setting aside the order of the adjudicating officer with the following observations:
“33. ……………… Therefore, SAT, cannot be said to have erred in the factual background of the case that the respondents never intended or consciously or deliberately avoided to comply with the obligations under the SEBI Act and the Regulations and the non-filing of the Report in question was a technical and a minor defect or breach based on bonafide belief that respondents were not liable or required to submit the said Report in view of the admitted exemption available under the SEBI Act and the Regulations. In the facts and circumstances of the present case the reversal of the order of the Adjudicating Authority, by the SAT cannot be faulted.”
the light of the Hon’ble High Court’s observations, the issue that we are
required to examine therefore is whether the non-fulfillment of the reporting
obligation by the appellant on November 5, 2001 could have been under the
bonafide belief that Regulation 7 was not applicable to them because of their
having already made the disclosure under Regulation 6 and because their
shareholding had been always above 5% except for a brief period of few months
during 2001. Secondly we are required to examine whether this breach of
Regulation 7 can be considered as technical or a venial breach not amounting to
conduct contumacious. For examining these issues we may have to re-visit the
events that happened in November, 2001 in relation to RIL, GIL and L&T. The
Reliance group is seen to have been buying and selling shares of L&T for
the normal purposes of portfolio management until about
we find it difficult to sustain this version also from the sequence of events
during the relevant period. Regulation 7(2) states that the disclosures mentioned
in Sub-regulation (i) shall be made within 4 days of
the acquisition of shares or voting rights. The shareholding of the appellant
exceeded 5% only on
12. No order as to costs.