Recently, the
Securities Appellate Tribunal (SAT) had to deal with two separate situations
pertaining to the disclosure of pledge or other encumbrance over shares. In an order
discussed earlier today, the SAT found that the acquisition of shares by a
public financial institution through the invocation of a pledge was required to
be disclosed in accordance with SEBI’s Takeover Regulations. Separately, in
another order
involving Golden Tobacco Limited, the SAT ruled against any disclosure
requirement on the company to disclose any “encumbrances” on its shares imposed
on promoters through the restraint order of an arbitrator. Both these orders
involved the interpretation of disclosure obligations on pledge or encumbrance
of shares, albeit under different legal requirements.
Securities Appellate Tribunal (SAT) had to deal with two separate situations
pertaining to the disclosure of pledge or other encumbrance over shares. In an order
discussed earlier today, the SAT found that the acquisition of shares by a
public financial institution through the invocation of a pledge was required to
be disclosed in accordance with SEBI’s Takeover Regulations. Separately, in
another order
involving Golden Tobacco Limited, the SAT ruled against any disclosure
requirement on the company to disclose any “encumbrances” on its shares imposed
on promoters through the restraint order of an arbitrator. Both these orders
involved the interpretation of disclosure obligations on pledge or encumbrance
of shares, albeit under different legal requirements.
In the Golden
Tobacco case, SEBI alleged that the company failed under clause 35 of the
listing agreement to disclose to the stock exchange that by an arbitration
order dated July 23, 2009, nine promoter entities of the company were
restrained from selling transferring or creating third party interest in any
manner in the shares of the company held by such promoters. Clause 35 requires
the company to disclose to the stock exchange the details of “shares pledged or
otherwise encumbered”. On account of such failure, SEBI’s adjudicating officer
imposed penalties under section 23E of the Securities Contracts (Regulation)
Act, 1956 and section 15HA of the Securities and Exchange Board of India Act,
1992. It is against this order that the company preferred an appeal to SAT.
Tobacco case, SEBI alleged that the company failed under clause 35 of the
listing agreement to disclose to the stock exchange that by an arbitration
order dated July 23, 2009, nine promoter entities of the company were
restrained from selling transferring or creating third party interest in any
manner in the shares of the company held by such promoters. Clause 35 requires
the company to disclose to the stock exchange the details of “shares pledged or
otherwise encumbered”. On account of such failure, SEBI’s adjudicating officer
imposed penalties under section 23E of the Securities Contracts (Regulation)
Act, 1956 and section 15HA of the Securities and Exchange Board of India Act,
1992. It is against this order that the company preferred an appeal to SAT.
Disclosure of Encumbrances
A peculiar
situation arose in this case. Normally, disclosures regarding shareholding (as
well as pledge or encumbrance) have to be made by the relevant shareholders to
the company, which in turn has to notify that information to the stock
exchanges. This is the scheme of regulation, including under SEBI’s Takeovers
Regulations as well as Insider Trading Regulations. The channel for the flow of
information emanates from the shareholder and passes through the company
ultimately to the stock exchange for public consumption. The peculiarity arose
here because clause 35 requires the company to provide information to the stock
exchanges regarding the encumbrance without a concomitant obligation on the
shareholder to notify the company of the same in the first place. In other
words, it imposes a unilateral obligation on the company to initiate
disclosures without being aided by information from the shareholders. Using
this logic, SAT came to the conclusion that it would not be possible to impose
such an obligation on the company given that it creates an incongruous position
under the listing agreement. On this aspect, SAT observed as follows:
situation arose in this case. Normally, disclosures regarding shareholding (as
well as pledge or encumbrance) have to be made by the relevant shareholders to
the company, which in turn has to notify that information to the stock
exchanges. This is the scheme of regulation, including under SEBI’s Takeovers
Regulations as well as Insider Trading Regulations. The channel for the flow of
information emanates from the shareholder and passes through the company
ultimately to the stock exchange for public consumption. The peculiarity arose
here because clause 35 requires the company to provide information to the stock
exchanges regarding the encumbrance without a concomitant obligation on the
shareholder to notify the company of the same in the first place. In other
words, it imposes a unilateral obligation on the company to initiate
disclosures without being aided by information from the shareholders. Using
this logic, SAT came to the conclusion that it would not be possible to impose
such an obligation on the company given that it creates an incongruous position
under the listing agreement. On this aspect, SAT observed as follows:
14. … It is surprising that the format
attached to clause 35 of the Listing Agreement casts an obligation on the
listed Companies to disclose to the Stock Exchanges details of the shares that
are otherwise encumbered by the promoter/promoter group, without making
corresponding obligation on the promoter/promoter group to make such
disclosures to the listed Company. … If promoter/promoter group are not obliged
to give to the listed Company details of shares that are otherwise encumbered
under any provision framed by SEBI, then, making it mandatory for listed
Companies to disclose to the Stock Exchanges details of shares that are ‘other
[sic] encumbered’ by the promoter/promoter group would be wholly unjustified
and contrary to the policy decision taken by SEBI which was made public by
press release dated January 21, 2009. … Thus, the format annexed to clause 35
of the Listing Agreement goes beyond the scope of clause 35 of the Listing
Agreement and contrary to the policy decision of SEBI …
attached to clause 35 of the Listing Agreement casts an obligation on the
listed Companies to disclose to the Stock Exchanges details of the shares that
are otherwise encumbered by the promoter/promoter group, without making
corresponding obligation on the promoter/promoter group to make such
disclosures to the listed Company. … If promoter/promoter group are not obliged
to give to the listed Company details of shares that are otherwise encumbered
under any provision framed by SEBI, then, making it mandatory for listed
Companies to disclose to the Stock Exchanges details of shares that are ‘other
[sic] encumbered’ by the promoter/promoter group would be wholly unjustified
and contrary to the policy decision taken by SEBI which was made public by
press release dated January 21, 2009. … Thus, the format annexed to clause 35
of the Listing Agreement goes beyond the scope of clause 35 of the Listing
Agreement and contrary to the policy decision of SEBI …
15. … SEBI has created an anomalous
situation, because, promoter/promoter group who have details of shares that are
‘otherwise encumbered’ are not obliged to disclose the same to the listed
Company, whereas, listed Companies to whom such details are not furnished by
the promoter/promoter group are made to disclose such details to the Stock
Exchange. …
situation, because, promoter/promoter group who have details of shares that are
‘otherwise encumbered’ are not obliged to disclose the same to the listed
Company, whereas, listed Companies to whom such details are not furnished by
the promoter/promoter group are made to disclose such details to the Stock
Exchange. …
This conclusion is
entirely reasonable. On matters of shareholding, it would be unduly onerous to
impose disclosure obligations on the company without similar obligations on
shareholders. The primary disclosure ought to come from the shareholders who
are best placed to make these disclosures. Moreover, the expression “or
otherwise encumbered” must be read in the context of a pledge (which concept
precedes the words in quotes). In other words, the encumbrance must be in the
nature of a security interst or something similar over the shares. Viewed in
that light, a restraint order of arbitrator (or judicial authority) cannot
operate as an encumbrance. Similarly, a negative covenent (sometimes referred
to as a negative pledge) or a non-disposal undertaking or a contractual lock-in
on the shares would not operate as an encumbrances. In any event, it would be
wholly unnecessary to require a disclosure of such matters to the stock
exchanges.
entirely reasonable. On matters of shareholding, it would be unduly onerous to
impose disclosure obligations on the company without similar obligations on
shareholders. The primary disclosure ought to come from the shareholders who
are best placed to make these disclosures. Moreover, the expression “or
otherwise encumbered” must be read in the context of a pledge (which concept
precedes the words in quotes). In other words, the encumbrance must be in the
nature of a security interst or something similar over the shares. Viewed in
that light, a restraint order of arbitrator (or judicial authority) cannot
operate as an encumbrance. Similarly, a negative covenent (sometimes referred
to as a negative pledge) or a non-disposal undertaking or a contractual lock-in
on the shares would not operate as an encumbrances. In any event, it would be
wholly unnecessary to require a disclosure of such matters to the stock
exchanges.
The genesis of the
requirement to disclose pledge and other encumbrances arose after the Satyam
scandal where promoter shares were pledged to financial institutional
unbeknownst to the remaining shareholders. The drastic fall of the promoter
shares upon invocation of the pledge adversely affected the shareholders.
Hence, if a pledge or other encumbrance is likely to result upon invocation in
a divestment of promoter share, then that is information worthy of disclosure
to the other shareholders. But, in a restraint order or negative covenant, that
objective does not even exist. To the contrary, the promoter is unable to sell
the shares and exit from the company, which ought to be of additional comfort to
shareholders rather than something that shakes the foundations of their trust
in the company and its promoters. Although the SAT did not adopt the approach
of analyzing these issues and objectives, they are consistent with the ultimate
conclusion it arrived at.
requirement to disclose pledge and other encumbrances arose after the Satyam
scandal where promoter shares were pledged to financial institutional
unbeknownst to the remaining shareholders. The drastic fall of the promoter
shares upon invocation of the pledge adversely affected the shareholders.
Hence, if a pledge or other encumbrance is likely to result upon invocation in
a divestment of promoter share, then that is information worthy of disclosure
to the other shareholders. But, in a restraint order or negative covenant, that
objective does not even exist. To the contrary, the promoter is unable to sell
the shares and exit from the company, which ought to be of additional comfort to
shareholders rather than something that shakes the foundations of their trust
in the company and its promoters. Although the SAT did not adopt the approach
of analyzing these issues and objectives, they are consistent with the ultimate
conclusion it arrived at.
While the above
constitutes the principal substantive issue that required SAT’s consideration,
a few other incidental issues are noteworty, as discussed below.
constitutes the principal substantive issue that required SAT’s consideration,
a few other incidental issues are noteworty, as discussed below.
Amendments to Listing Agreement
While SAT did not
have to conclusively rule on the issue, the case raised some issues regarding
the legal veracity of the listing agreement as a regulatory instrument, and
more particularly the manner in which it can be amended. In amending clause 35
to introduce its current language, it was argued that while SEBI’s circular
merely advised the stock exchanges to amend the clause, there was no actual
evidence of amendment by the exchanges. However, based on statements provided
by the stock excahnges that they have amended the listing agreement, SAT
“proceeded on the basis that the amendments have been carried out in accordance
with law”.
have to conclusively rule on the issue, the case raised some issues regarding
the legal veracity of the listing agreement as a regulatory instrument, and
more particularly the manner in which it can be amended. In amending clause 35
to introduce its current language, it was argued that while SEBI’s circular
merely advised the stock exchanges to amend the clause, there was no actual
evidence of amendment by the exchanges. However, based on statements provided
by the stock excahnges that they have amended the listing agreement, SAT
“proceeded on the basis that the amendments have been carried out in accordance
with law”.
Although the issue
did not emerge to the forefront in this case, the manner of regulating
corporate governance and disclosure norms through the listing agreement is
bound to raise some consternation. While the listing agreement is essentially
contractual in nature between the issuer company and the stock exchange, it
derives its legal validity from the Securities Contracts (Regulation) Act.
Despite its contractual foundations, it can be amended at SEBI’s instance so as
to bind the listed companies without their concurrence. In that sense, it
begets unilateral alteration to which issuers are implicitly bound. Matters of
procedure regarding the announcement and effectuation of amendments ought to be
streamlined further between SEBI and the stock exchanges to obviate such
issues.
did not emerge to the forefront in this case, the manner of regulating
corporate governance and disclosure norms through the listing agreement is
bound to raise some consternation. While the listing agreement is essentially
contractual in nature between the issuer company and the stock exchange, it
derives its legal validity from the Securities Contracts (Regulation) Act.
Despite its contractual foundations, it can be amended at SEBI’s instance so as
to bind the listed companies without their concurrence. In that sense, it
begets unilateral alteration to which issuers are implicitly bound. Matters of
procedure regarding the announcement and effectuation of amendments ought to be
streamlined further between SEBI and the stock exchanges to obviate such
issues.
Consistency in Adjudication
SAT also called
for uniformity in the approach of SEBI’s adjudicating officers in similar
cases, and also reaffirmed their duty to passed reasoned orders after
considering relevant circumstances. The allegation was that the adjudicating
officer in this case disregarded a contrary view of another officer in a
different case without assigning reasons. SAT observed:
for uniformity in the approach of SEBI’s adjudicating officers in similar
cases, and also reaffirmed their duty to passed reasoned orders after
considering relevant circumstances. The allegation was that the adjudicating
officer in this case disregarded a contrary view of another officer in a
different case without assigning reasons. SAT observed:
However,
the Adjudicating Officer, in the present case, has neither found fault with the
order passed in case of Dewan Housing Finance Corporation Ltd. (Supra) nor
assigned any reason for taking a view contrary to the view taken therein. Such
an attitude on part of the Adjudicating Officer of SEBI deserves to be
condemned. View taken by one Adjudicating Officer of SEBI cannot be disregarded
by another Adjudication order without assigning any reasons. It is high time
that SEBI takes remedial measures and ensure that its Adjudicating Officers
respect orders passed by each other. We make it clear, respecting each others
order does not mean that even an erroneously order, passed by the Adjudicating
Officer must be followed blindly. In such a case, contrary view could be taken
by recording reasons for taking such contrary view.
the Adjudicating Officer, in the present case, has neither found fault with the
order passed in case of Dewan Housing Finance Corporation Ltd. (Supra) nor
assigned any reason for taking a view contrary to the view taken therein. Such
an attitude on part of the Adjudicating Officer of SEBI deserves to be
condemned. View taken by one Adjudicating Officer of SEBI cannot be disregarded
by another Adjudication order without assigning any reasons. It is high time
that SEBI takes remedial measures and ensure that its Adjudicating Officers
respect orders passed by each other. We make it clear, respecting each others
order does not mean that even an erroneously order, passed by the Adjudicating
Officer must be followed blindly. In such a case, contrary view could be taken
by recording reasons for taking such contrary view.
This step would
introduce greater consistency in SEBI’s approach in similar cases.
introduce greater consistency in SEBI’s approach in similar cases.