SAT: Extension provided for dilution of shareholding not to be construed as an extension for compliance with MPS norms

Securities Appellate Tribunal: The SAT has held that an extension provided by the Board of Industrial Finance Reconstruction (“BIFR”) to dilute shareholding of company executives is not an extension for compliance with Minimum Public Shareholding (“MPS”) norms unless expressly stated.

The appellant company filed before BIFR which declared the appellant a ‘sick company’ under the Sick Industrial Companies (Special Provisions) Act (“SICA”) and formulated a plan for its revival, which failed, following which a modified rehabilitation scheme was proposed by the BIFR, allowing time beyond SEBI guidelines to the appellant to undertake dilution of the director and promoters’ shareholding.

Rule 19A mandating an MPS floor of 25% for listed companies was inserted in the Securities Contracts (Regulation) Rules (“SCRR”) in June 2010. A Whole Time Member (“WTM”) of the SEBI passed an order against the appellant for non-compliance with this rule, following which the appellant took appropriate steps to fulfil the MPS requirement and the WTM’s order was changed from one of non-compliance to delayed compliance, on which the Adjudicating Officer (“AO”) imposed a penalty of Rs. 7.5 lacs under Section 23E of the Securities Contracts (Regulation) Act (“SCRA”).

It was contended by the appellant that:

i. The BIFR had granted the appellant time extending beyond the guidelines provided by SEBI for diluting shareholding of the directors etc., and the MPS requirement had been fulfilled within the time period stipulated by the BIFR in its rehabilitation plan, hence the SEBI’s order holding the appellant liable for non-compliance was erroneous.

ii. Alternatively, the MPS requirements had, in fact, been achieved in September 2013 but the AO in his order held the same to have been completed in September 2014, hence the penalty imposed was incorrect.

The counsel for SEBI argued that since Rule 19A was not in existence on the day the order by the BIFR was passed, the latter’s order giving extended time to the appellant to dilute shareholding cannot be construed as an extension for compliance with the MPS norms as well, as the BIFR cannot be said to have known on the date of its order in 2008 that a rule such as 19A shall be inserted at a later date (in 2010).

The SAT accepted the contention by SEBI and held that unless the BIFR had issued an order clearly stating an extension for compliance with MPS norms, the AO’s order cannot be considered incorrect. However, the SAT also took notice of documentary evidence produced by the appellant showing that the MPS norms had actually been complied with by September 2013 and not by September 2014, as was held in the orders by the WTM and the AO. This error was due to the appellant’s own failure in producing before the aforesaid authorities correct representations of their shareholding patterns, leading the WTM and the AO to believe that the 25% MPS had not been achieved.

Regardless, since the MPS had been achieved within stipulated time and considering the fact that the appellant was a sick company, the SAT, though held the appellant guilty for violating rule 19A of the SCRR, reduced the penalty from Rs 7.5 lacs to Rs 2 lacs and dismissed the appeal. [Neycer India Limited v. Securities and Exchange Board of India,2018 SCC OnLine SAT 56, decided on 16-05-2018]

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