Invocation of pledge by PFI requires disclosure under SEBI regulations

[The following post is contributed by Supreme
Waskar
, partner at Sterling Associates, Mumbai]
The Securities
Appellate Tribunal (SAT) has upheld the order of SEBI against SICOM Ltd. (“SICOM”) imposing penalty of Rs. 5
lakhs for non-disclosure of acquisition pursuant to the invocation of a pledge
under regulations 29(1) and 29(2) of the Securities and Exchange Board of India
(Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“SAST
2011”).
SICOM, a Public Financial Institution (“PFI”), had provided financial
assistance to Raj Oil Mills (“ROM”) in 2010 by way of bill accounting facility
up to a limit of
Rs. 15 crore (“Facility”) for which the promoter/director of ROM had
pledged equity shares of ROM as security towards the Facility. As ROM failed to
repay the amounts due under the Facility, SICOM invoked the pledge on September
28, 2011 aggregating to 6.39% of total share capital and on February 24, 2012
aggregating to 15.35% of the total share capital requiring disclosure under
regulation 29(2) of SAST 2011.
The question dealt
with by SEBI and SAT related to the interpretation of regulation 29(4) of SAST
2011 and proviso thereto, and specifically whether a scheduled commercial bank
(SCB) or a PFI are exempted from disclosure pursuant to invocation of pledge or
with
the
exemption is restricted to the deemed
acquisition of shares
i.e. creation and release of pledge.
SEBI in its order dated May 11, 2014
held that pursuant to the invocation of a pledge on September 28, 2011 of 6.39%
of total share capital and 15.35% of total share capital on February 24, 2012
SICOM was required and has failed to make disclosures under regulation 29(1)
and 29(2) of SAST 2011 respectively. SEBI also held that the exemption available
to the SCB/PFI under the proviso to regulation 29(4) of SAST 2011 is restricted
to the deemed acquisition of shares i.e.
creation and release of pledge and the said exemption cannot be extended to
when shares are actually acquired by them on invocation of pledge. Further, SEBI also held that invocation of
pledge being acquisition required disclosure under regulations 13(1) and 13(3)
of Securities and Exchange Board India (Prevention of Insider Trading)
Regulations,1992 (“PIT Regulations”).
In its appeal before SAT, SICOM
submitted that the exemption under the proviso to regulation 29(4) is available
to a PFI even when shares are acquired by the PFI on invocation of pledge in
the ordinary course of business. SCB/PFI
in the ordinary course of business acquire shares on invocation of pledge to recover
their loan and not to take over the management/control of the company and hence
regulation 10(1)(b)(viii) of SAST 2011 exempts SCB/PFI from making open offer
on invocation of pledge and same principle applies for exemption for disclosure
under regulation 29(4) of SAST 2011.
Refusing to
accept SICOM’s submissions, SAT stated that exemption to SCB/PFI under regulation
10(1)(b)(viii) of SAST 2011 is for making open offer and exemption under regulation
29(4) is specific to the disclosures pursuant to deemed acquisitions i.e.
creation and release of pledge and not to actual acquisition of shares pursuant
to invocation of pledge.  Regulation
29(4) creates a legal fiction –  to
assume existence of a fact which does not exist, by a deeming fiction, the
pledgee is treated to have acquired shares and is required to make disclosures.
Where the shares are acquired on invocation of pledge, the question of
introducing a deeming fiction would not arise because, in such a case, shares
are actually acquired on invocation of pledge. Further proviso to regulation
29(4) exempts SCB/PFI from such deemed acquisition since shares are acquired by
them in ordinary course of business and not when there is actual acquisition of
shares pursuant invocation of pledge.
SAT has reaffirmed SEBI’s view in relation to the disclosure exemption
of SCB/PFI from legal fiction of creation of and release from pledge and not
from actual acquisition of shares pursuant to invocation of the pledge.
– Supreme Waskar

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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