[The following post is contributed by Supreme Waskar, who is a corporate lawyer in Mumbai]
The Securities and Exchange Board of India (“SEBI”) has, by way of its order passed on July 28, 2017 (“Recent Order”), reversed its earlier view and held that the disclosure obligation under regulation 8(2) of the erstwhile takeover norms, i.e., Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (“1997 Takeover Regulations”) and regulation 30(2) of the Securities and Exchange Boardof India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“2011Takeover Regulations”) is a single and unitary obligation of the promoter group of listed company.
Background
Regulation 8(2) of the 1997 Takeover Regulations and regulation 30(2) of 2011 Takeover Regulations deal with the obligation of the promoter and promoter group to make yearly disclosures of their shares and voting rights together with persons acting in concert (“PACs”) with them in the listed company. In the present case, there was delay of seven days for disclosure under regulation 8(2) beyond the stipulated time. The issue which came up before SEBI was whether the obligation to make the disclosure under regulation 8 (2) of the 1997 Takeover Regulations is on each individual member of the promoter group or jointly on the promoter group or joint and several on the promoter group. The relevant provisions are extracted below:
Regulation 8(2) of the 1997 Takeover Regulations
A promoter or every person having control over a company shall, within 21 days from the financial year ending March 31, as well as the record date of the company for the purposes of declaration of dividend, disclose the number and percentage of shares or voting rights held by him and by persons acting in concert with him, in that company to the company.
Regulation 30(2) of the 2011 Takeover Regulations
The promoter of every target company shall together with persons acting in concert with him, disclose their aggregate shareholding and voting rights as of the thirty-first day of March, in such target company in such form as may be specified.
SEBI’s earlier view
In its order dated January 29, 2014 (“SEBI Order 2014”), SEBI had held that under regulation 8(2) the obligation to make yearly disclosure is on each individual member of the promoter group and not on entire promoter group collectively, since it is difficult for a promoter in the promoter group to know the shares held by the other promoters in the promoter group and their PAC before making disclosure. Therefore, SEBI held that every promoter must make yearly disclosures and, in case of failure to make such disclosure, each and every individual member of the promoter group is liable to pay penalty. Accordingly, SEBI imposed penalty on each individual member of the promoter group.
SAT’s View
On appeal to SEBI Order 2014, the Securities Appellate Tribunal (“SAT”) did not agree with SEBI’s view for the various reasons including some of the material reasons mentioned below:
- Imposition of obligations on non-shareholder members of the promoter group: The definition of promoter group is wide and also includes promoters not holding any shares or voting rights in the listed company, and if obligation is imposed on each member of promoter group, it would also mean that promoters would also be required to make yearly disclosure even if they do not hold shares or voting rights in the listed company.
- Each promoter/every promoter: If it was intended by the 1997 Takeover Regulations that every promoter of a listed company must make yearly disclosure, then, regulation 8(2) or regulation 30(2) would have commenced with the words ‘Each promoter’ or with the words ‘Every promoter’. The use of the word ‘A promoter’ instead of the word ‘every promoter’ clearly indicates that the disclosure could be made not only by promoter but also by a promoter group.
Hence for the reasons mentioned above and in the SAT order, SAT held that the obligations to make yearly disclosures under regulation 8(2) of the 1997 Takeover Regulations and regulation 30(2) of the 2011 Takeover Regulations is a unitary obligation of the promoter group, and failure to make disclosures within the time stipulated is a single violation of such unitary obligation. Hence, it is appropriate to impose a single penalty for violation of the unitary obligation, and the penalty cannot be imposed on each constituent of the promoter group. Accordingly, SAT set aside the SEBI Order 2014 and restored the appeals to the file of SEBI for passing fresh order on merits and in accordance with law.
In line with the SAT observations, SEBI, by way of its Recent Order, revised its earlier view/order and imposed a single penalty on the promoter group as against the separate penalty imposed on each member of the promoter group vide SEBI Order 2014.
Settled Norm
The norm appears to be crystal clear and settled now that disclosure obligation under the erstwhile regulation 8(2) of 1997 Takeover Regulations was, and under regulation 30(2) of the 2011 Takeover Regulations is, a unitary obligation of promoter group and failure to such disclosures within the time stipulated is considered a unitary violation of the promoter group. Accordingly, a single penalty on the promoter group must follow for the violation of single and unitary obligation.
– Supreme Waskar