Consequences of Inaccurate Shareholding Disclosures

Both the SEBI (Substantial
Acquisition of Shares and Takeovers Regulations), 2011 (the Takeover
Regulations) as well as the SEBI (Prohibition of Insider Trading) Regulations,
1992 (the PIT Regulations) require a timely disclosure of acquisition or change
in shareholdings beyond certain thresholds by substantial shareholders and
promoters. Such disclosure requirements are also captured in clause 35 of the
listing agreement. The consequences of inaccurate disclosures came up in a decision
of the Securities Appellate Tribunal
(SAT) that was issued yesterday.
In the case involving GHCL Limited,
SEBI has passed an order against the company, its company secretary, chairman
and several promoters in connection with disclosures of shareholdings made by
them. SEBI’s allegation was that the promoters “wrongly and illegally projected
their shareholdings far in excess of their real shareholding by taking into
consideration shareholdings of third parties as part of their own shareholding
in an illegal manner”. The company had included shares of other parties as the
promoters had informed it that the promoters had a mutual understanding with
those other parties who held shares in the company in their own right (but to
include those shares in the disclosures in the name of the promoters).
The decision of the SAT and its
various grounds are set out below with some commentary as relevant.
Inaccurate Disclosures
In arriving at its decision, the SAT
paid specific attention to the policy and philosophy behind shareholding disclosures:
18. … Next, the purpose
underlying the requirement of making regular and true disclosures by a company
as regards the shares which the promoters may come to hold from time to time is
to bring about greater transparency in the functioning of the companies. It is
through such disclosures that the investors take an informed decision in a given
situation to invest in the scrip of that company or even to exit. This is extremely
important for the growth of a healthy capital market. … Thus, true and correct
disclosures as to the exact shareholding pattern of promoters assume greater
Hence, SAT found that the company
as well as the chairman and company secretary bore the primary responsibility
to ensure proper disclosure in consonance with the applicable SEBI regulations.
Comment: The importance of
disclosure and the need to sanction against its lapses is understandable.
Readers may recall that the sensitivity of disclosures became quite apparent
during the Satyam corporate governance scandal whereby the pledge of
shareholding by the promoters was not made known to the markets. As a result,
the Takeover Regulations have been amended to require disclosures of pledges as
well, as discussed here.
See also, chapter V of the current version of the Takeover Regulations.
Fraudulent and Unfair Trade Practices
What appears to have been a case of
mis-disclosure got elevated to a case of fraudulent and unfair trade practice. The
appellants were therefore also charged under the SEBI (Prohibition of
Fraudulent and Unfair Trade Practices Relating to Securities Markets)
Regulations, 2003 (the PFUTP Regulations). The relevant statutory provisions
relating to fraudulent and unfair trade practices are as follows:
SEBI Act, 1992
12A.    Prohibition
of manipulative and deceptive devices, insider trading and substantial
acquisition of securities or control. –
No person shall directly or
indirectly —
(a)        use or employ, in
connection with the issue, purchase or sale or any securities listed or
proposed to be listed on a recognized stock exchange, any manipulative or
deceptive device or contrivance in contravention of the provisions of this Act or
the rules or the regulations made thereunder; …
PFUTP Regulations
Prohibition of certain dealings in
3.         No person shall directly
or indirectly –
(a)    buy,
sell or otherwise deal in securities in a fraudulent manner; …
The SAT found that the present
mis-disclosure was not a result of an inadvertent error, but due to deliberate
and conscious actions on the part of the promoters. Hence, it concluded that “the
present case would undoubtedly amount to unfair trade practice, if not a fraud
played upon the market”.
As for the interpretation of the
aforesaid legal provisions, SAT explained as follows:
22. Similarly, a
simple reading of section 12(A)(a) of the SEBI Act, 1992 read with Regulation
3(a) of the PFUTP Regulations, 2003 as reproduced above clearly reveals that it
is not only the fraudulent or manipulative buy or sale of securities which is
prohibited but any dealing in securities “otherwise” also may be illegal and
hence amounts to fraud on the market. The expression “…otherwise deal in
securities…” occurring in Regulation 3(a) read with section 12A(a) of SEBI Act,
1992 is vide enough to cover cases like the one in hand where general investors
are sought to be drastically misguided by the promoters of the Company by
inclusion of the third parties’ shares which the promoters admittedly do not
own. The law is absolutely clear on this and there is no ambiguity as sought to
be projected by the appellants. Whatever is not included in the Regulation has
to be excluded in the interpretation.
Comment: The aforesaid
interpretation supplied by SAT appears to be too wide. In this case, there is
nothing from the decision to suggest that the promoters either bought or sold
shares when the inaccurate disclosure was in force. Hence, it is unclear as to
how Reg. 3(a) of the PFUTP Regulations can be attracted. Even the use of the
expression “otherwise deal” ought to be read ejusdem generis with the “buy” and “sell”. The mere existence of
incorrect disclosures, however deliberate, cannot without more be deemed to be
a fraudulent or unfair trade practice. If this interpretation were to stick,
then every deliberate non-disclosure or mis-disclosure of shareholding by substantial
shareholders or promoters could potentially amount to a fraudulent or unfair trade
practice. It is not clear if such is the intention.
Reliance on Legal Advice
The categorical stance of the SAT
is that the company’s or promoter’s reliance on legal advice in making the
disclosure is not an excuse for facing the consequences. It stated:
23.       The Appellants should have acted more diligently
and responsibly and should not have been guided by mere legal opinions. It is
settled law that legal opinions are only advisory in nature and not binding on
anyone. Therefore, no legal infirmity can be attributed to the impugned order
which holds all the appellants guilty of violating the PFUTP Regulations, 2003
and imposes monetary penalties on them.
Comment: The SAT decision
reinforces the point that violators of securities laws cannot escape blame by
simply passing it on to their legal advisers. They ought to take full
responsibility, and cannot seek any excuse or safe harbour in civil penalty
Persons Acting in Concert
Finally, SAT found that Reg. 7(1A)
of the Takeover Regulations were not attracted in the present case. It
justified its finding as follows:
40.       Moreover, Regulation 7(1A) requires an
individual acquirer to disclose regarding any change in its shareholding if it
goes 2% up or down and for the purpose of calculating such change of 2%
shareholding, the shareholding of “person acting in concert” may not be clubbed
unless they admittedly act in concert. Therefore, clubbing of the shareholdings
of various promoter entities, without proving that they were persons acting in
concert with each other by cogent and convincing evidence is untenable in law
and such a finding is liable to be quashed and set aside qua the appellants in
these 10 appeals as far as the violation of Regulation 7(1A) of FUTP Regulations
is concerned.
As a matter of law, the SAT also
clarified that Reg. 7(1A) of the Takeover Regulations are in pari materia with Regs. 13(3) and 13(5)
of the PIT Regulations, due to which there is no violation of the latter as
On these grounds, the SAT affirmed
a violation of Section 12(A)(2) of the SEBI Act and the PFUTP Regulations, but
it set aside SEBI’s finding of a violation of Reg. 7(1A) of the Takeover Regulations.

In all, the decision underscores the importance
of disclosures and warns against simply relying on legal advice to exclude
regulatory sanctions. However, it appears to stretch matters a bit far by
concluding that a deliberate mis-disclosure of the present kind also amounts to
a fraudulent and unfair trade practice.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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