India: Securities Law Update – For April & May 2017

REGULATORY AMENDMENTS

I. Significant amendments proposed to the SEBI Act

In the month of November, 2015, the Hon'ble Supreme Court has passed judgment in case of Roofit Industries v. SEBI wherein it was held that for the offences committed during the period October, 2002 to September, 2014, the Adjudicating Officer, SEBI has no power to exercise discretion under section 15J of the SEBI Act, 1992 for deciding the quantum of penalty and therefore, failure to furnish the required document, report or return to SEBI would attract a penalty of Rs. 1 lakh for each day of such failure or Rs. 1 crore, whichever is less. As per the said order, the intention of the legislature amending the SEBI Act was to impose harsher penalties for certain offence and therefore, the court found no reason to water them down. The said judgment has caused a fair bit of ripples in the securities market for obvious reasons.

Soon after the aforesaid Roofit judgment was passed, another appeal came up before the division bench of the Apex Court on involving a similar question of law in the case of Siddharth Chaturvedi v SEBI. By an order dated March 14, 2016, the division bench expressed its disagreement over the interpretation of law laid down by the Roofit judgment and observed that if interpretation taken in the Roofit case is correct, it would be difficult for Section 15J to be construed as a reasonable provision, as it would then arbitrarily and disproportionately invade the appellants' fundamental rights. The matter has for now been referred to a larger bench of the Apex Court.

Government of India and SEBI have been equally concerned over the law down by the Roofit judgment and have been hoping for viable solution from the larger bench of the Apex Court. Since there is no certainty as to when the larger bench of the Supreme Court would take up the said matter, GoI in consultation with SEBI has taken recourse to the legislative route so as to break the deadlock created by the two conflicting views of the Hon'ble Supreme Court. It is against this background that the Finance Act, 2017 which has received the President's assent in April, 2017 has amended Section 15J of the SEBI Act, 1992 by inserting the following Explanation:

By inserting the aforesaid explanation to Section 15J of the SEBI Act, the Parliament has clarified that SEBI always had the discretion to decide the quantum of penalty by having due regard to the factors enumerated under Section 15J. With this amendment, the law is settled for now unless the Hon'ble Supreme Court holds otherwise.

II. SEBI suggests significant changes in its board meeting

On April 26, 2017, SEBI Board met for the first time under the chairmanship of its newly appointed Chairman, Mr. Ajay Tyagi which did not fail to meet the public expectations and approved several significant changes to the existing securities market regime. Some of the major changes approved at the said Board meeting are as follows:

1. Trading in 'options' on commodity derivative exchanges has been approved and suitable amendments to the relevant provisions of Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012 will follow.
2. The Board has approved to amend stock brokers' regulation to integrate stock brokers in equity and commodity derivative markets. This will enable the single same entity to operate in both the aforesaid markets.
3. The Board considered and approved the proposal for including NBFCs registered with RBI and having a net worth of more than Rs. 500 crore as a Qualified Institutional Buyers (QIB) for participation in IPOs.
4. It will henceforth be mandatory to appoint a monitoring agency for all public issues (IPOs/FPOs/Rights Issues) where the issue size (excluding offer for sale component) is more than Rs. 100 crore. As per the extant laws, a public issue with issue size of more than Rs. 500 Crores was required to be monitored by a monitoring agency. In addition to that, few more compliances/disclosures in relation to Monitoring Agency are introduced such as increase in infrequency of submission of Monitoring Agency Report from half-yearly to quarterly, mandating the disclosure of the Monitoring Agency Report on Issuer Company's website in addition to submitting it to Stock Exchange(s) for wider dissemination and requirement of comments of Board of Directors and Management of Issuer Company on the findings of Monitoring Agency.
5. The Board also cleared the proposal for having explicit provisions to prohibit resident Indians and NRIs or the entities which are beneficially owned by Resident Indians/NRIs from investing in Offshore Derivative Instruments.

III. SEBI Circular on Listing of NCRPS/ NCDs through a scheme of arrangement

Henceforth where Non – Convertible Redeemable Preference Shares/ Non - Convertible Debentures are issued, in lieu of specified securities under a scheme of arrangement and where such NCRPS/ NCDs are proposed to be listed on recognized stock exchanges, the listed entity will be required to comply with following requirements in addition to compliance with the SEBI Circular dated March 10, 2017:

1. Compliances before the scheme is submitted for sanction by NCLT:
   
   
   1. It fulfils the eligibility requirements i.e. the NCRPS/ NCDs should be issued to holders of the listed entity which is a part of the scheme of arrangement. Such scenario would broadly consist of the demerged entity which gets transferred to another entity and that entity issues NCRPS/ NCDs to the holders of specified securities of the demerged listed entity; or the amalgamated entity issuing NCRPS/ NCDs to the listed amalgamating entity as a consideration under the scheme.
   2. Minimum tenure of the NCRPS/ NCDs shall be one year.
   3. The NCRPS/ NCDs have been assigned requisite credit rating by a SEBI registered credit rating agency.
   4. Valuation report mentioned in the previous circular dated March 10, 2017 shall include valuation of the underlying NCRPS/ NCDs.
   5. Disclosures pertaining to the NCRPS/ NCDs such as Face Value, Price, Dividend details, features, other terms, etc. shall be made in draft scheme of arrangement.
   6. Other conditions such as issue of NCRPS/ NCDs in compliance with the Companies Act, 2013/ LODR Regulations, NCRPS/ NCDs to be issued in dematerialization form, Appointment of debenture trustee in case of NCDs, etc. to be fulfilled.
2. A detailed compliance report as per the specified format duly certified by the Company Secretary and MD confirming compliance of the previous circular dated March 10, 2017 shall be included with the application for relaxation of Sub – rule (7) of Rule 19 of the SCRR, 1957.

The circular will be applicable for all draft schemes filed after the date of the circular.

IV. Online Registration Mechanism for SEBI Intermediaries

In furtherance of Central Government's objective of digitalization, SEBI has on May 2, 2017 operationalized an online portal for the intermediaries to submit their registration applications. The portal would include online application for registration, processing of application, grant of final registration, application for surrender/ cancellation, submission of periodical reports, requests for change of name/ address/ other details.

The said online registration mechanism is operationalized for eight categories of market intermediaries viz. stock brokers, sub-brokers, merchant bankers, underwriters, registrar to an issue and share transfer agents, debenture trustees, bankers to an issue and credit rating agency. The intermediary portal would be operational for depository participants from May 31.

It may also be worthwhile to mention that by another circular dated May 30, 2017, SEBI has introduced an online registration and regulatory compliance system for Portfolio Managers and Venture Capital Funds.

V. SEBI Consultation Paper on streamlining the process of monitoring of ODIs

Overseas Derivative Instruments (which include Participatory Notes) are instruments issued by registered FPIs to overseas investors who wish to invest in Indian stock market without registering themselves with SEBI. In addition to checks and balances which were in place with respect to issue of P Notes, SEBI has on May 29, 2017 suggested various new proposals to further tighten norms pertaining to issuance of Overseas Derivative Instruments which measures including:

1. It is proposed that w.e.f April 01, 2017, for a period of every three years, regulatory fees of US$ 1,000 to be levied on each ODI issuing FPI for each and every ODI subscriber coming through such FPI. It is anticipated that such a move will discourage the ODI subscribers from taking ODI route and encourage them to directly take registration as a FPI.
2. It is proposed to prohibit ODIs from being issued against derivatives for speculative purpose. In such cases, ODI/PNs issuers shall be given time till December 31, 2020 to wind up the ODI/PNs issued against derivatives which are not for hedging purpose. It will be incumbent on ODI/PNs issuing FPI to ensure that ODI is issued against those derivatives which are purely for hedging purpose and not for naked speculation. The ODI/PNs issuing FPI shall put in place necessary system to ensure the same.
   

RECENT ORDERS & JUDGMENTS

I. SAT's view on inter – se Promoter transfers

SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011 ("Takeover Regulations") provide that if any person (together with persons acting in concert with him) acquires voting rights or control in a target company in excess of the threshold limits stipulated under the regulations, he is required to provide an exit opportunity to other shareholders of the target company by making an open offer in accordance with the Takeover Regulations. Regulation 10 (1) (a) (ii) of the Takeover Regulations exempts the aforesaid obligation if the acquisition made pursuant to inter se transfer of shares amongst qualifying persons, inter alia including persons who have been named as 'promoters' in the shareholding pattern filed by the target company in terms of the listing agreement or Takeover Regulations for not less than three years prior to the proposed acquisition.

Against the above background, the question that arises is whether the period of being disclosed as promoter of the target company prior to getting listed could be considered for the purpose of computing the aforesaid period of three years prior to the proposed acquisition. In other words, whether inter se promoter transfers could be made under Regulation 10 (1) (a) (ii) prior to completion of three years of listing?

The Securities Appellate Tribunal ("SAT") by its recent order dated April 5, 2016 passed in the matter of Arbutus Consultancy LLP vs SEBI (Appeal No. 123 of 2016) has after thoroughly examining the issue, answered the question in the negative and observed that "it is irrelevant whether the same promoters were holding the same shares for over a long period either in the target company or in the parent company or both, prior to listing the target company. The only relevant factor is date of listing the target company and the promoter holding filed by the target company as part of the listing agreement."

During the course of the arguments, another interesting question of law which emerged was whether the informal guidance given by SEBI would be binding on it?

As per the appellant, one of the reasons for undertaking the impugned inter se promoter transfer by it was on account of the informal guidance given by SEBI vide its letter dated October 25, 2012 in the matter of Weizmann Forex Limited wherein on facts similar to the present appeal, SEBI had opined that transfer of shares would be eligible for exemption under regulation 10(1)(a)(ii). This opinion, however, was superseded by another informal guidance given by SEBI subsequently in the matter of Commercial Engineers and Body Builders Company Ltd. which was also available in the public domain on the same issue at the relevant time when the appellants acquired shares through inter se promoter transfers.

SEBI relied upon the subsequent informal guidance and submitted that official of SEBI had erred in the Weizmann Guidance by inadvertently providing an interpretation in the spirit of Takeover Regulations, 1997 oblivious of the changes that happened in terms of Takeover Regulations, 2011 and that such a mistake made by an officer of the respondent cannot be used to furtherance of the mistake. It was further argued by SEBI that when the statute is clear, informal guidance should not be relied on and that the informal guidance issued by SEBI is the view of the concerned department of SEBI and cannot be said to be binding on the SEBI Board. According to SEBI, the informal guidance should not be construed as a conclusive decision or determination of any question of law or fact by SEBI and that such a letter cannot be construed as an order of SEBI under section 15T of the SEBI Act.

After hearing the parties at length, SAT came to the conclusion that an interpretation provided under informal guidance by an official of the department of SEBI cannot be used against the correct interpretation of law. SAT also placed reliance on the order passed by it on August 28, 2009 in the matter of Deepak Mehra v. SEBI wherein the legality of informal guidance was examined by SAT and held that informal guidance was the view of the department of SEBI and cannot be construed as law.

In a nutshell, for the purpose of reckoning the period of being named as a promoter in the shareholding pattern of the target company for claiming exemption under Takeover Regulations, the same will be deemed to commence from the date of the target company's listing. Major takeaway from the SAT's order is that a party cannot blindly rely upon the informal guidance given by SEBI in some earlier case if SEBI's opinion is patently faulty vis-à-vis clear provisions of the statute on that point. To prevent the market participants from erring by relying on SEBI's informal guidance, it is expected that SEBI will strengthen its internal mechanism to ensure that its informal guidance given in any manner is legally sound and tenable. While technically SEBI Board may not be bound by the view of its department, repeated rejection of informal guidance at a later date could seriously dent the sanctity of such opinion. Consequently, the market participants could lose confidence in the mechanism which was evolved to provide guidance in a highly complex regulatory regime of securities market.

It is not clear what would have been the outcome of the matter if the appellant itself had taken the informal guidance in its case and SEBI had tried to take a different position later on. Certainly, if in such a situation also one is not certain then perhaps, no purpose is being served by the Informal Guidance Scheme.

II. Adjudicating Officer, SEBI taking a considerate view while adjudicating charges pertaining to violation of disclosure norms under Insider Regulations and Takeover Regulations

On May 12, 2017, the Adjudicating Officer, SEBI has not viewed the technical non-disclosure under Regulation 13 (1) of Insider Trading Regulations as a breach of the said regulations in view of the fact that the noticee had made similar disclosure about acquisition of shares under Regulations 29 (1) of SEBI SAST Regulations, 2011.

In the instant case, the Noticee had made timely disclosures under 29 (1) of the SAST Regulations but failed to make disclosures under Regulation 13 (1) of Insider Trading Regulations. In this regard, the Noticee contended that the disclosure under Regulation 13 (1) of Insider Trading Regulations and Regulation 29 (1) of SAST Regulations, 2011, are substantially the same and since the Noticee had already complied with disclosures requirement under Regulation 29 (1) of SAST Regulations, 2011, it should be treated as sufficient disclosures under Regulation 13 (1) of Insider Trading Regulations. The AO held that both the disclosures under Regulation 29 (1) of SAST Regulations, 2011 and Regulation 13 (1) of Insider Trading Regulations are quite similar in nature and that the intention of both the Regulations is dissemination of information. On filing of said disclosures under Regulation 29 (1) of SAST Regulations, 2011, the essential information about the said acquisition of shares had already been disseminated to the general public and therefore, in such circumstances, the noticee having complied with regulation 29 (1) of SAST Regulations, 2011, the non-compliance of Regulation 13 (1) of Insider Trading Regulations ought not be viewed seriously and be visited with any penalty.

The above order may be a relief for such market participants who may have made necessary disclosure under one of the two Regulations but have inadvertently failed to make corresponding disclosure under the other Regulations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.