Supreme Court: Explaining the scope of the rectificatory jurisdiction of the Company law Board (CLB), the bench of AS Bopanna and PS Narasimha, JJ has held that CLB’s jurisdiction cannot be invoked to rectify the register of members under Section 111A of the Companies Act, 1956, as amended by Section 59 of the 2013 Act, for violation of SEBI regulations.
The Court observed that the power of CLB is narrow and can only consider questions of rectification. If a petition seeks an adjudication under the garb of rectification, then the CLB would not have jurisdiction, and it would be duty-bound to re-direct the parties to approach the relevant forum.
The Court was called upon to determine the appropriate forum for adjudication and determination of violations of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeover) Regulations, 1997, and Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992, framed under the Securities and Exchange Board of India Act, 1992.
In the case at hand, the Appellant had rejected a business tie-up proposal by the Respondent and allegedly, after that the Respondents started acquiring shares of the Appellant from the open market with a view to eliminate competition and strengthen its own dominant position in the relevant market and ended up acquiring more than 5% of the Appellant’s total paid-up share capital.
Interestingly, Regulation 7(1) of the SEBI (SAST) Regulations mandates that when an acquirer, either by himself or with any person acting in concert with the acquirer, acquires 5% or more of the total paid-up share capital of a company, then a disclosure has to be made to the acquiree company and the stock exchange.
Regulation 13 of the SEBI (PIT) Regulations provides that if any person acquires more than 5% shares of a company, then it shall make a disclosure to the acquiree Company.
While a disclosure was made under Regulation 7(1) of the SEBI (SAST) Regulations, the Respondent unintentionally failed to make this disclosure under Regulation 13 of the SEBI (PIT) Regulations within the prescribed time.
Hence, the appellant filed a petition before the CLB under Section 111A of the 1956 Act praying for rectification of its register by deleting the name of the Respondents as the owner of shares which are over and above the 5% threshold. As of the date of filing of the Section 111A petition, the Respondents collectively held around 8.22% of the Appellant’s paid-up share capital.
National Company Law Appellate Tribunal (NCLAT) had set aside the judgment of the National Company Law Tribunal (NCLT), allowing the company petition filed by the Appellant under Section 111A of the Companies Act, 1956, (which is Section 59 of the 2013 Act), for rectification of Members Register. The Tribunal while allowing the petition, directed the Appellant to buy-back its shares which were held by the Respondents. In appeal, the Appellate Tribunal set aside this direction on the ground that the Tribunal exceeded its jurisdiction.
When the matter reached before the Supreme Court, it explained that the rectificatory powers of a Board/Company Court under Section 38 of the Companies Act, 1913, then under Section 155 of the 1956 Act, followed by Section 111A introduced by the 1996 Amendment to the 1956 Act, and finally, Section 59 of the 2013 Act, demonstrate that its essential ingredients have remained the same. It is a summary power to carry out corrections or rectifications in the register of members. The rectification must relate to and be confined to the facts that are evident and need no serious enquiry.
Considering that the Court was concerned with the SEBI (SAST) Regulations and the SEBI (PIT) Regulations in the case at hand, it explained the entire regulatory regime as follows:
SEBI (PIT) Regulations
The SEBI (PIT) Regulation prohibits dealing, communicating etc., on matters relating to insider trading. Even if there is a suspicion about the transgression of the prohibition, the Board has the power to inquire (Regulation 4A) and come to a prime facie conclusion about the need to investigate (Regulation 5). Chapter III of the said Regulations provides for the entire procedure to be followed in the inquiry process. This includes – procedural safeguards to be afforded to the insider (Regulation 6), submission of the report by the investigating authority (Regulation 8), communication of findings to the insider (Regulation 9), and the final orders/directions to be passed by SEBI (Regulation 11).
For an effective exercise of its ex-ante powers, the Board has provided the policy on disclosures in Chapter IV of the said Regulations. Under Regulation 13, any person holding more than 5% shares or voting rights in a company, shall disclose to the company within four working days, the number of shares or the extent of voting rights held by such person. Regulation 13 places a continual obligation of disclosure. Regulation 14 provides that any person violating the said Regulations shall be liable for action under Sections 11, 11B, 11D, 24 and Chapter VI-A of the SEBI Act.
The Court observed that this regulatory regime is all-encompassing and prescribes the prohibition, which is normative. The Regulation also provides for the method of detecting the violation, the methods of investigation, the manner of appointment of the investigating authority, the timeline within which the report is to be submitted, the opportunity for an insider to respond to the report as well as the final decision to be taken by the SEBI, and lastly, the consequential orders and restitutionary directions which the SEBI is entitled to pass. It is also important to note that the SEBI has the power under Regulation 11 to pass necessary directions to remedy an act of insider trading in order to have a complete and comprehensive control over the securities market.
SEBI (SAST) Regulations
The position with respect to the SEBI (SAST) Regulations is similar to that of the SEBI (PIT) Regulations. Regulation 7 of Chapter III obligates the acquirer of more than 5% shares in a company to disclose the same to the company and the stock exchange. This is the prohibition, and non-disclosure is punitive. Chapter V deals with investigation and action by the Board, which includes the power of the Board to appoint an investigating officer (Regulation 38), the issuance of show-cause notice to the acquirer (Regulation 39), the obligation of the investigating authority to submit a report at the earliest (Regulation 41), the duty to supply the report to the acquirer and give him an opportunity of hearing before passing penal orders (Regulation 42) and lastly, the powers of the Board to take action/pass directions under Chapter VI-A and Section 24 of the SEBI Act (Regulation 44). It is significant to note that Regulation 45 provides for penalties for non-compliance with the said Regulations. The liability will be in terms of the Regulations and the SEBI Act.
Here again, the SEBI (SAST) Regulation is a comprehensive scheme providing for inquiry, investigation, submission of report by the investigating officer, procedural safeguards in favor of the acquirer, and finally, the restitutionary order/directions to be passed by the Board. This whole procedure cannot be short-circuited by making an application under Section 111A of the 1956 Act on the ground that there exists parallel jurisdiction with the SEBI and CLB/Tribunal. The transaction complained of must suffer scrutiny by the regulator, and it is only for the regulator to determine a violation of the provisions of the SEBI Act and the Regulations.
Keeping in mind the regulatory regime and the comprehensive role of the SEBI in regulating the securities market with respect to insider trading, the Court noticed that,
“The important role of the Regulator cannot be circumvented by simply asking for rectification under Section 111A of the 1956 Act. Such an approach is impermissible. The scrutiny and examination of a transaction allegedly in violation of the SEBI (PIT) Regulations will have to be processed through the regulations and remedies provided therein.”
The Court, hence, held that the Appellant was not justified in invoking the jurisdiction of the CLB under Section 111A of the Act for violation of SEBI regulations and that NCLT committed an error in entertaining and allowing the company petition filed under Section 111A of the 1956 Act and therefore, NCLAT was correct in setting aside NCLT’s judgment.
[IFB Agro Industries Ltd v. SICGIL India Ltd, CIVIL APPEAL No. 2030 of 2019, decided on 04.01.2023]
*Judgment by: Justice PS Narasimha
For appellant: Senior Advocate P. Chidambaram
For respondent: Senior Advocate Shyam Divan