Securities Appellate Tribunal: In an appeal challenging the order passed by the Adjudicating Officer (‘AO'), wherein Reliance Industries Holding Private Limited (‘Reliance') have been imposed with the liability of Rs. 25 crores under Section 15H of the Securities and Exchange Board of India Act, 1992 (‘SEBI Act') for violating Regulation 11(1) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (‘SAST Regulations'), the two-member Bench of Tarun Agarwala* J., and Meera Swarup ( Technical member) set aside the impugned order and directed SEBI to refund the amount of Rs. 25 crore that was deposited by Reliance as security.
Background
On 10-10-1992, Reliance approved the issuance of Non-Convertible Secured Redeemable Debentures (‘NCDs') with warrants. On 28-04-2000, Reliance filed a disclosure under Regulation 8(3) of the SAST Regulation intimating that the shareholding of the persons acting in concert with the promoters had increased by 6.83 percent on 31-3-2000 due to allotment of equity shares upon exercise of warrant conducted by them since 1994. At that time, SEBI was satisfied with the disclosure made by Reliance, however, after two years, SEBI had sent a complaint to Reliance alleging that there has been violation of the SAST Regulations by the promoters of Reliance.
Reliance filed a consent application for settlement of the alleged contravention that was rejected by SEBI. Later, the matter was again taken up and the AO passed the impugned ordered imposing a penalty of Rs. 25 crores on Reliance for violation of Regulation 11(1) of the SAST Regulations, which prescribes the acquisition of shares to be 5%, however, the Reliance had acquisition of 6.83% of the shares. Therefore, it triggered the obligation to make an open offer.
Issues Whether an obligation to make an open offer is triggered under Regulation 11(1) of the SAST Regulations at the time of acquisition of such convertible securities or at the time of conversion of such convertible securities into shares carrying voting rights.
Whether the SAST Regulations will apply to warrants which have been acquired on January 12, 1994 and such warrants were converted into equity shares carrying voting rights on January 7, 2000.
Whether the acquisition of warrants by person acting in concert constitutes an agreement to acquire shares carrying voting rights.
Whether the obligation to make a public announcement for an open offer under Regulation 11(1) of the SAST Regulations is at the time of conversion of warrants into equity shares which warrants were acquired in January 1994 and is, therefore, a retrospective application or a retroactive application of the SAST Regulations.
Whether the impugned proceedings are barred by limitation, delay or laches.
Whether the violation of Regulation 11(1) is continuing violation and, therefore, monetary penalty under the amended Section 15H of the SEBI Act could be imposed.
Analysis
The Tribunal took note of the purpose, objective, intent, and scope of the SAST Regulations. Further, it noted that the term ‘acquirer' as defined in Regulation 2(1)(b) applies to the term ‘acquirer' used in Regulations 10 and 11, to mean any person who directly or indirectly acquires or agrees to acquire shares or voting rights of the target Company, either by himself or with any person acting in concert with the acquirer.
After perusing the Regulations 10 and 11 of the SAST Regulations , the Tribunal said that, SEBI, as a regulator thought fit that public investors should be given an exit opportunity whenever a person agrees to acquire ‘substantial' shares or voting rights in a listed Company under Regulation 10 and where a shareholder agrees to acquire more than 5% shares or voting rights in a listed Company in a financial year under Regulation 11(1).
The Tribunal further perused the definition of ‘acquirer' in Regulation 2(1)(b) for Regulations 10 and 11 of the SAST Regulation and said that the words “agrees to acquire” do not mean that there is actual consideration of the acquisition. Thus, if an acquirer agrees to acquire or decides to acquire the percentage specified in Regulation 10 or 11, then it triggers the obligation for an acquirer to make a public announcement for an open offer. Further, the Regulation 2(1)(k) defines shares’ which includes any security which would entitle the holder to receive shares with voting rights. Section 2(h) of SCRA Act defines “securities” which amongst others includes debenture warrants. Thus, shares include warrants.
The Tribunal said that the Regulation 11(1) contemplates acquisition of shares or voting rights. It does not contemplate shares and voting rights. Therefore, there can be a situation where an acquirer acquires shares or agrees to acquire shares which includes bonds, warrants, etc., and which may or may not carry voting rights. Thus, if the acquirer acquires shares which includes warrants beyond a 50-percentage specified in Regulation 11, then it triggers an obligation to make an open offer. Thus, the contention that acquisition of warrants does not trigger the obligation to make an open offer under Regulation 11 as the warrants does not carry any voting rights is misconceived. Further, the contention that such obligation is triggered only when the warrants are converted into equity shares carrying voting rights is also erroneous.
The Tribunal said that the acquirer who agrees to acquire or acquires security/warrants which in future would entitle the acquirer to exercise voting rights, is under an obligation to make an announcement to make an open offer. Further, opined that the acquisition and the obligation to make a public announcement is not contingent upon the acquisition of shares which would entitle the acquirer to exercise voting rights. Thus, the Tribunal viewed that the specific definition of ‘shares' can only mean that the obligation to make the public announcement for an open offer covers a situation even where a security does not carry voting rights but could be converted into shares carrying voting rights.
As per the Tribunal, the words “security which could entitle the holder to receive shares with voting rights” as defined in the term ‘shares' cannot be ignored. The heart and fulcrum of the SAST Regulations is substantial acquisition of shares. The inclusive definition of ‘shares' cannot be dismissed as irrelevant or being repugnant to the words “unless the context otherwise requires” as provided in Regulation 2(1). Any other interpretation would result in complete absurdity. Thus, the Tribunal rejected the contention of SEBI that the words “includes any security which would entitle the holder to receive shares with voting rights” as provided in the definition of the word ‘shares'.
The Tribunal opined that the entitlement to exercise voting rights is not with reference to the security acquired but is with reference to the acquirer who acquires the security, since the term ‘shares' has been consciously and specifically defined to include security entitling the holder to receive shares with voting rights.
Further, the Tribunal opined that in case of warrants, the public announcement for open offer is triggered under Regulation 11(1) at the time of acquisition to acquire such warrants which can be made at any time from the date of agreement to acquire such warrants up to four working days prior to the acquisition of voting rights upon conversion. The acquirer can make the open offer even immediately after agreement to acquire warrants since it is not later than four working days before he acquires and such decision to make an open offer immediately cannot be termed illegal.
The Tribunal said that the language of the SAST Regulation is unambiguous and, from a plain reading of the term ‘shares' in Regulation 11(1) as defined in Regulations 2(1)(k) the words “entitling him to exercise more than 5% of the voting rights” only attaches the entitlement to the acquirer and not to the security acquired. It cannot be interpreted that the entitlement for the voting rights should arise from the security acquired and should be exercised immediately upon acquiring such securities. Any other interpretation would make it unworkable. Hence, it held that the reading the term ‘shares' along with the words “entitling him to exercise more than 5% of the voting rights” does not make Regulation 11(1) otiose or unworkable.
The Tribunal opined that the interpretation given by SEBI to Regulation 11(1) of the SAST Regulations, that the open offer is triggered only upon acquisition of shares in excess of 5%, has been given effect to only in the 2011 SAST Regulations by amending the definition of the term ‘shares'.
Further, the Tribunal viewed that the whole idea under the SAST Regulations is to provide an exit opportunity at the earliest point of time to the shareholders which is in the interest of the shareholders. If two views are possible on the interpretation of Regulation 11, then the regulator should take a view which is in the interest of the shareholders. Thus, in the case of convertible securities like warrants, the obligation to make an open offer under Regulation 11(1) is triggered at the time of acquisition.
Therefore, the Tribunal held that:
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The terms of Regulation 11(1) read with Regulations 2(1)(b), 2(1)(k), 14(1) and 14(2) of the SAST Regulation obligates to make a public announcement for an open offer and could be triggered at the time of acquisition of convertible securities.
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The contention of SEBI that under Regulation 11(1) read with Regulation 14(2) the obligation to make a public announcement for an open offer is triggered at the time of conversion of warrants into equity shares carrying voting rights was rejected.
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The person would be considered an ‘acquirer' under Regulation 2(1)(b) only if he has acquired convertible securities after the SAST Regulations came into effect and only such acquisition will be ‘an acquisition' governed by the SAST Regulations. Further, if the person has acquired convertible securities before SAST Regulations came into force, he would not be considered an ‘acquirer' for the purpose of the SAST Regulations. Therefore, the appellants had the right to obtain shares in 1994 when detachable warrants were issued, and such vested right could not be rendered nugatory.
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Reliance was not ‘acquirer' within the meaning of Regulation 2(1)(b) of the SAST Regulation, thus there was no acquisition by them, and consequently, the SAST Regulations could not be applied to the warrants allotted to them on 12-01-1994. Thus, the detachable warrants that were acquired prior to the SAST Regulations would not be governed by any of the provisions of the SAST Regulations.
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The SAST Regulations are prospective in nature i.e. w.e.f. 20-02-1997 when the Regulations came into force.
Moreover, the Tribunal said that SEBI after completing its investigation in 2005 , sent show cause notice to Reliance in 2011 after six years after the submission of the investigation report. The reason of the delay by the SEBI was not a plausible explanation. Further, after perusal of the investigation report, the Tribunal said that there had been no mention of an alleged violation under Regulation 11(1) of the SAST Regulations i.e., the threshold of 5% was violated by Reliance
The Tribunal rejected SEBI's contention that the proceedings were not barred by limitation because it was a continuing violation because even if the shares were acquired without making the public announcement, then, there was the injury to the public shareholders, but the injury was once and for all. Further, the Tribunal reiterated that, when no limitation period is prescribed, the proceedings should be initiated within a reasonable time. Thus, the Tribunal said that there was an inordinate delay in the issuance of the show cause notice and it has caused serious prejudice to Reliance.
The Tribunal further said that the provision 15H existing as on January, 2000, would apply, which at that point was a maximum penalty of Rs.5 lakh, Thus, a penalty of Rs.25 crores could not have been imposed, and even assuming that the violation had occurred, a maximum penalty of Rs.5 lakhs could be imposed . Further, it viewed that Reliance has not violated Regulation 11(1) of the SAST Regulations. Thus, the imposition of penalty upon Reliance is without any authority of law. Therefore, the Tribunal set aside the impugned order and directed SEBI to refund the amount of Rs. 25 crores that was deposited by the appellant as security.
[Reliance Industries Holding Pvt. Ltd. v. SEBI, 2023 SCC OnLine SAT 402, decided on 28-07-2023]
Advocates who appeared in this case :
Counsel for the Appellant: Senior Advocate Harish Salve, Advocate Somasekhar Sundaresan, Advocate Raghav Shankar, Advocate Ashwath Rau, Advocate Vivek Shetty, Advocate Ramya Suresh, Advocate Cheryl Fernandes, Advocate Praneeta Ragji, Advocate Dhaval Vora
Counsel for the Respondent: Senior Advocate Arvind Datar, Senior Advocate Shiraz Rustomjee, Advocate Suraj Chaudhary, Advocate Prateek Pai, Advocate Mihir Mody, Advocate Arnav Misra, Advocate Mayur Jaisingh
