On October 17, the Securities Appellate Tribunal ("SAT"), passed an order in the matter of G.R.K Reddy v. SEBI, which held that (i) the issuance of direction by SEBI to make an open offer at the belated stage, without considering factors contemplated under Regulations 44 and 45 of the (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 ("SAST Regulations"), is arbitrary; (ii) the penalty under Section 15HB cannot be imposed for enforcement of an order of the Whole time Member ("WTM") passed under Section 11 and 11B of the SEBI Act, 1992 ("SEBI Act"). Additionally, SAT reduced the quantum of penalty to Rs 40 Lakhs.
Background
The sequence of events began with Akshaya Infrastructure Ltd. ("Akshaya") making a public announcement on October 20, 2011, declaring a voluntary open offer to acquire 76,51,572 equity shares of M/s. MARG Ltd. at a price of Rs. 91 per share, entailing an acquisition cost of approximately Rs. 69.62 crore. Subsequently, Akshaya submitted a draft letter of offer in accordance with SAST Regulations to consolidate the appellant group's shareholding. However, no comments were received from SEBI in relation to the draft letter. Due to delays in finalizing the draft letter of offer on account of compliance with the 5% creeping acquisition limit, Akshaya withdrew the offer on March 29, 2012.
On November 30, 2012, SEBI issued an observation letter stating that the open offer obligations had been triggered by Akshaya under Regulation 11(1) of the SAST Regulations on several prior dates. This observation letter led to a series of challenges, that went up to the Hon'ble Supreme Court which upheld SEBI's position that the withdrawal would be detrimental to shareholders' interests and market integrity.
Following this, SEBI issued a show cause notice in 2016, and subsequent proceedings led to penalties for violations related to the voluntary offer and creeping acquisition. The matter underwent various stages of adjudication and penalty imposition through orders passed by the AO and WTM. Being aggrieved by the same, the appellants filed three different appeals before SAT related to the same issue.
SAT Ruling
In relation to the question of whether an open offer direction was warranted at this stage of the proceedings, SAT observed that the unreasonable delay in SEBI's response to creeping acquisitions and voluntary offers, made the open offer compliance practically unviable. Relying on the Hon'ble Supreme Court's order in SEBI v. Sunil Krishna Khaitan, SAT underlined the discretionary nature of SEBI's power, using the term "may" in Regulation 44, which does not mandate open offer directions for every violation. It stressed the need for SEBI to consider all relevant factors, including the interest of the securities market and investor protection, before issuing any directions under Regulations 44 and 45. Furthermore, SAT highlighted the changed circumstances of the appellants, and the impracticality of complying with an open offer. SAT ultimately concluded that direction for an open offer at this belated stage is arbitrary and lacks proper application of mind to the case's unique circumstances.
In relation to the penalty imposed by the AO, SAT reduced the penalty imposed from Rs. 74.75 crore to Rs. 40 lakhs as according to SAT, the original penalty was arbitrary and had been imposed without due consideration of the provisions of Section 15H of the SEBI Act. Section 15H(ii) allows for a penalty in cases of failure to make a public announcement to acquire shares, ranging between Rs. 10 lakhs to 25 crores or three times the profits made. In the instant case, the AO had not calculated the profits, yet had imposed a penalty of Rs. 74.75 crores, almost thrice the maximum permissible penalty of Rs. 25 crores.
Considering the protracted nature of the dispute, the financial condition of the Appellants, and with a view to bring finality to the matter, SAT, exercising the powers of SEBI, imposed a penalty of Rs. 40 lakhs on the Appellants.
Setting aside the penalty of Rs. 1 crore imposed by the AO, SAT observed that the penalty order was patently erroneous, as it was issued during the pendency of an appeal challenging the WTM's order before SAT. Further, SAT emphasized that a penalty under Section 15HB cannot be imposed for the enforcement of an order issued by the WTM under Section 11 and 11B of the SEBI Act, along with Regulations 44 and 45 of the SAST Regulations. It was observed that Section 15HB pertained to non-compliance with directions issued by the Board, and the penalty was applicable when no separate penalty provision had been specified. SAT noted that Section 11B involved directions issued after due inquiry, akin to orders. To reinforce this argument, SAT referred to legal definitions, such as "direction" being synonymous with "order" and cited Rajinder Nath vs. Commissioner Of Income Tax to hold that a direction is an order issued by an empowered authority or court in the course of deciding a case.
The order passed in this matter lays down key jurisprudence on various issues. SAT's decision to set aside the order for making an open offer highlights the importance of issuance of directions in a diligent manner, and on consideration of all relevant factors by SEBI. The order also provides a vital clarification on the scope of penalties under Section 15HB of the SEBI Act. SAT's interpretation limits the application of Section 15HB to non-compliance with Board-issued directions, not the enforcement of orders following inquiry and adjudication under Sections 11 and 11B.
The contents of this article should not be construed as legal opinion. Recipients should take independent legal advice before acting on any views expressed herein. The comments in the article are as of the laws prevalent on the date the article was originally published. The views stated in the article are not binding on any authority or court, and so, no assurance is given that a position contrary to that expressed herein will not be asserted by any regulatory authority/courts. For any further queries or follow up, please contact Finsec Law Advisors.
