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Appeal No: 39/2002

Date of Hearing


Date of Decision



In the matter of


Appellant – Represented by:

Reliance Industries Limited

J.J. Bhatt, Sr. Advocate



Securities and Exchange Board of India

Respondent- Represented by


Kumar Desai, Advocate


          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.

1.                  The 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 20th February, 1997, a fresh disclosure statement was filed by RIL on 18th April, 1997 as per the requirements of the Takeover Code. However, it seems that some of these shares of L&T were sold by RIL, as a result of which shareholding of RIL in L&T came down to 4.98% at the end of June, 2001. On purchase of some additional shares from the securities market RIL’s shareholding in L&T again crossed the 5% threshold on 5th November, 2001.  Thereafter RIL continued to purchase the shares of L&T in the securities market inasmuch as its shareholding reached as high as 10.98% on 12th November, 2001. This entire block of 2.5 crore shares was sold by RIL to Grasim Industries Limited (‘GIL’ for short) around 16th November, 2001. This deal was ratified by the Boards of Directors of RIL and GIL on 18th November, 2001. As part of this deal shares were sold at Rs. 306.60 per share against the prevailing market price of Rs. 208.50. As per the accompanying covenants, RIL was to withdraw its two Non-Executive Directors from the Board of Directors of L&T and was to undertake not to deal in the shares of L&T for a period of 5 years. The stock exchanges and the target company were informed about this transaction and a press statement was issued by the appellant informing the members of the public of the sale of its shares in L&T to Grasim Industries Limited. 

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.

3.                  It is common ground that RIL’s group holding in L&T went up from 4.80% on 31/10/2001 to 5.32% on 05/11/ 2001.  It is therefore the case of the respondent SEBI that the appellant was required to inform the company within 4 working days i.e., by 09/11/2001 and the target company L&T was thereafter to inform the stock exchanges where its shares were listed. The stock exchanges would in turn have put up this information on their websites for the information of investing public enabling them to take timely investment / disinvestment decisions. The appellant RIL having not done so, it renders them liable to appropriate penalty under Section 15A(b) of the SEBI Act, 1992. The appellant’s case in brief is that since their holding of 5% had been duly notified under Regulations 6 and that since this information had been in the public domain at least since 1992, they were covered under Regulations 6 and not under Regulation 7 of the Takeover Code.  It is their contention that Regulation 7 is applicable only to those who crossed the 5% threshold for the first time and not to those whose holding may temporarily fall below 5% and again cross this threshold in the normal course of management of their investment portfolios. The appellant have therefore argued that since the fact of their holding being more than 5% had been in the public domain for more than a decade it could by no stretch of imagination be concluded that the interest of any investor had been affected by this non-reporting on November 5, 2001. It is thus the appellant’s case that they are in full compliance with the Takeover Code in letter and in spirit. In the light of these rival contentions the following issues arise for determination.

i.                    Whether the appellants were indeed required to inform the target company about their holding having once again crossed the 5% threshold on 05/11/2001.

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.

7.                  We 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 05/11/2001, about its shareholding having exceeded 5%. This issue is therefore answered in the affirmative.

8.                  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 India in appeal No. 24/2000. In this case the Adjudicating Officer had imposed a penalty of Rs. 1,00,000/- on Cabot International Capital Corporation for violation of Regulation 3(4) of the Takeover Code i.e., failure to submit the post-acquisition report to SEBI.  The appellant argued in appeal that he was under bonafide belief that the 1997 Regulations did not apply to preferential allotment. The appellant had further argued that even if it was held that there was a failure to report under Regulation 3(4), such failure was absolutely unintentional because similar reports had been furnished by the appellant to the Stock Exchange and to the Registrar of Companies and that they had nothing to gain from not reporting the matter to SEBI under Regulation 3(4). This Tribunal had accepted this argument basing its findings on the principles established in the rulings of the Hon’ble Supreme Court in cases such as Hindustan Steel Limited Vs. State of Orissa AIR 1970 SC 253; Akbar Badruddin Jiwani Vs. Collector of Customs 1990 (47) ELT 161 (SC); Extrusion Vs. Collector of Customs 1994 (70) ELT 52 (Cal); Supdt. Of Remembrancer of Legal Affairs to Government of West Bengal Vs. Abani Maity [1979]   (4) SCC 83, Gujarat Travancore Agency Vs. CIT AIR 1989 SC 1671, Addl. CIT Vs. I.M. Patel & Co. AIR 1992 SC 1762 and SRG Infotec Ltd. Vs. SEBI [1999] 22 SCL 422.  The matter was taken up in appeal by SEBI before the Hon’ble High Court of Bombay and the Hon’ble High Court in appeal No. 7/2001 in SEBI appeal No. 24/2000 had been pleased to observe as follows in para 28 of their judgment:

“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.”

10.             In 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 4/11/2001. In fact between 01/10/2000 and 04/11/2001 its shareholding in L&T fluctuated between 4.22% to 4.80%. It then acquired 1289000 shares on 05/11/2001 and sold only 8,000 shares taking its holding to 5.32%, breaching the 5% threshold. From this date to 09/11/2001 - the date by which it was required to disclose its holding to the target company, it went on acquiring additional shares and its holding reached 9.53% on November 9, 2001 and thereafter, after the weekend closure, to 10.14% on 12/11/2001 where it finally rested. As per SEBI’s order dated 21st January, 2004 passed separately in the proceedings against the appellant under Insider Trading Regulations and produced before us at the time of hearing, JM Morgan Stanley (hereinafter ‘JMMS’) initiated the proposal for the sale of the RIL stake in L&T to GIL on 06/11/2001. SEBI started investigations in the matter on the basis of the Complaint that RIL had made a huge profit by selling its stake to GIL at a price of Rs. 306.60 per share against the average market price of about Rs. 200/-.  In the worst case scenario against the appellant, it can be alleged that they made a deal with GIL at a very attractive price for the shares which they did not actually possess.  In that case however, the aggrieved party would be GIL and not the Regulator SEBI. The appellant’s argument in this regard is that the attractive price was not as such for the block of shares but because of the covenants requiring them to withdraw their Directors from L&T and to undertake not to deal in L&T shares for a period of 5 years. It is their argument that it cannot, by any stretch of imagination, be said that a company like GIL would be unaware of the market  price of the shares prevailing at the relevant time in the securities market and that it could have bought the same amount of shares from the market at cheaper price.  If despite that GIL chose to pay a much higher price, it must be assumed that they paid it after correct assessment of the value of the shares and considerations contained in the covenants namely, the undertakings by RIL to withdraw their Directors and to stay away from L&T for five years. We do not find any difficulty in accepting this logic.

11.             However, 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 November 5, 2001. According to the impugned order itself the intimation was required to be given by the appellant to the target company by November 9, 2001, which was a Friday. The acquisition of the shares allegedly promised to GIL was almost complete by November 9, 2001 itself except for about 15 lakhs shares purchased on November 12, 2001. There were no further purchases after this date and all the shares held by RIL was sold to GIL on November 16, 2001.  We are unable to accept the respondent’s contention that the breach of Regulation 7 continued till February 13, 2002 when the intimation was actually given simply because the appellant was in possession of the shares in excess of 5% only for the period November 5, 2001 to November 16, 2001 and the penalty, if any, can at best be only for a period of less than a week depending on whether the weekend after November 9, 2001 is counted this way or that. This cannot, by any stretch of imagination, be termed as a deliberate act on the part of the appellant. We also do not think that the appellant had deliberately suppressed the information with ulterior motive.  The appellant can, at best, be held to have made a technical lapse. In such circumstances, the role of a regulator is to rehabilitate and bring to an end litigation, which may not cast a stigma on the appellant, who otherwise, admittedly, has maintained a good track record.  The High Court in Cabot’s case has pronounced that if a breach was merely technical and unintentional, it does not merit penal consequence. It ultimately depends on the facts of each case. In this case, the breach was bona fide and the appellant was under the impression since it had already made a disclosure earlier it was not necessary to make a fresh disclosure once again.  This, in our view, is an error of judgment and, at best, an error of understanding the law. Ignorance of law is no excuse but an erroneous interpretation is a mitigating factor especially if such interpretation is honest and bona fide to the knowledge of the appellant.  Following the judgment in Cabot International and for the reasons stated herein, we hold that the breach cannot be called as deliberate and the non-disclosure was due to lack of understanding of the law.  In that view of the matter, the impugned order is set aside. The respondent is directed to refund the amount of penalty if paid by the appellant during the pendency of the appeal within six weeks from the date of receipt of this order. 

12.             No order as to costs.


 (Justice Kumar Rajaratnam)

Presiding Officer



(Dr. B. Samal)


(N.L. Lakhanpal)



Place: Mumbai

Date:  31/08/2004