Shikhar Aggarwal is a 3rd year B.A.LL.B. (Hons.) student at National Law University, Delhi]
On 7 April 2021, the Adjudicating Officer (“AO”) of the Securities and Exchange Board of India (“SEBI”) imposed a monetary penalty of ₹25 crore jointly on 34 entities, including brothers Mukesh and Anil Ambani and other promoters of Reliance Industries Limited (“RIL”), for their failure to comply with the SEBI (Substantial Acquisitions of Shares and Takeovers) Regulations, 1997 (“1997 Takeover Code”) in the year 2000. While RIL plans to appeal this decision before the Securities Appellate Tribunal (“SAT”), the imposition of the penalty after a long delay of 21 years certainly casts doubt over SEBI’s ability to uphold investor interests in such cases. This post explores the legal implications of such inordinate and unexplained delays, and their possible effect on the capital market.
Securities Law, ‘Economic Offences’ and Delayed Proceedings
The Supreme Court has observed in Government of India v Citedal Fine Pharmaceuticals that assessees in taxation matters may contend that a notice is bad on account of inordinate delay in its issuance. Accordingly, relevant officers are to consider whether the demand for recovery is made within a reasonable period, based on the facts and circumstances of each case. In Universal Generics Pvt. Ltd v Union of India, the Bombay High Court quashed a show-cause notice (“SCN”) when adjudication proceedings were sought to be initiated ten years after the concerned breach. In this case, authorities were unable to explain why adjudication proceedings were not completed within ten years. Additionally, the Court did not deem the imposition of penalty after the lapse of ten years as just and fair.
The Bombay High Court has also observed in Bhagwandas S. Tolani vs B.C. Aggarwal how the Enforcement Directorate is not entitled to take up old matters in a suo moto manner. It also recognised that this position may be different if noticees had indulged in any act of omission, commission, or default, which resulted in such long periods of delay. In State of Punjab v Bhatinda District Co-op Milk Union Ltd, the Supreme Court categorically iterated that where a statute does not prescribe any limitation period, the reasonable period within which authorities must exercise their jurisdiction depends upon the scheme of the concerned legislation.
The SEBI Act, 1992 does not prescribe any period of limitation for the issuance of SCNs and for the initiation of adjudication proceedings. Section 2(2) of the Act in its original form provided for SEBI to perform functions and exercise powers as under the Capital Issues (Control) Act, 1947. While that legislation was repealed shortly after the SEBI Act entered into force, its violations were considered to be economic offences.
To that end, in Metex Marketing Pvt. Ltd v SEBI, the SAT held that a delay on SEBI’s part to initiate proceedings for violating any provision of the SEBI Act (or the regulations enacted thereunder) cannot be a ground to quash the penalty imposed. This is in furtherance of the regulator’s statutory objective to promote investors’ interests and fair play in the capital market. Further, it has been repeatedly observed that entities’ failure to make a public announcement containing an open offer seriously prejudices shareholders, since they are deprived of an exit opportunity by offering their shares to the acquiring entity.
Furthermore, in Sahara India Real Estate Corporation Ltd v SEBI, the Supreme Court affirmed that offences under securities laws are economic offences, and must be dealt with sternly. Accordingly, the expression “economic offence” includes proceedings involving adjudications over civil penalties as well. Therefore, any delay in initiating proceedings for substantive securities laws offences is not deemed fatal to the proceedings. Even the Parliament has recognised securities fraud, insider trading and violation of takeover norms as scheduled offences under the Fugitive Economic Offenders Act, 2018.
Why the Delay in RIL’s Case Matters
In January 2000, the promoters of RIL and other entities acting in concert raised their stake in the company by 6.83% through conversion of warrants issued in 1994, without making an open offer. Under the 1997 Takeover Code, the open offer requirement is triggered upon any acquisition of more than 5% shares. RIL’s failure to make this open offer came to light in April 2000: however, the matter was not pursued until a decade thereafter, despite the expiration of terms of three successive SEBI chairmen. In 2010, under the Chairmanship of C.B. Bhave, SEBI issued notices to the concerned entities (including the entire Ambani family), with the appointment of an AO in December 2010.
In 2011, SEBI issued a SCN to these entities, within six days of appointment of U.K. Sinha as its Chairman. Amongst other procedural and substantive grounds, the Noticees resisted charges on the ground that the 10-year delay in instituting proceedings was inordinate, unreasonable and unexplained, thereby vitiating the same. RIL quoted the 2008 SAT ruling in Ashok Chaudhary v SEBI, wherein it was observed that long delays in issuing SCNs act against the interest of the securities market, without serving the purpose for which SEBI had been set up. Later in 2011, when hearings were being conducted, RIL filed a consent application before SEBI, following which the matter went into cold storage again.
In the meantime, two Noticees approached the SAT, challenging the unreasonable nature of SEBI’s delay in initiating proceedings, praying for the SCN to be set aside. In 2013, the SAT held that the AO may conclusively decide on the case only after the board of SEBI had decided on the Noticees’ consent application. Subsequently, SEBI rejected RIL’s consent application in May 2020, two years after Ajay Tyagi’s appointment as Chairman in 2018, with the Order issued in April 2021 penalising them for their failure to make the open offer.
In its Order, the AO asserted that the promoters’ failure to make an open offer had essentially deprived shareholders of their statutory rights, including an exit opportunity from the target company. However, it is not the case that shareholders have not been able to benefit from RIL’s shares in the absence of an open offer. The company’s shares had been valued at around ₹60/share when the impugned warrants had been converted into share capital back in 2000. The current market price of each share is around ₹1900, representing a 30-fold increase. Additionally, one may also consider the additional shares allotted to shareholders when Reliance split between the Ambani brothers into RIL and the Anil Dhirubhai Ambani Group (“ADAG”).
Remarkably though, nowhere in this Order did the SEBI admit to having made delays. The AO relied on the Delhi High Court’s judgment in SRG Infotech Ltd v SEBI, where it was held that the limitation period would commence after the examination of facts is complete and submitted to SEBI for initiating action and concerned approvals have been obtained for filing a complaint. The AO noted the approval of enforcement actions in 2010 with the issuance of SCNs and the conduct of hearings. Accordingly, the AO observed how the matter had been kept in abeyance since 2011 in accordance with securities law, while considering the undertakings given and requests made by the RIL group (referring to the pendency of its consent application).
That said, SEBI fails to explain its delays on two occasions: first, in initiating proceedings: between 2000 and 2010; and second, in deciding on the consent application: between 2011 and 2020. Accordingly, it should not be presumed that no prejudice can occur to Noticees on account of such delays merely because hearings had been conducted. This calls for moving beyond the notion that unwarranted delays shall be deemed to be unreasonable and prejudicial in nature only when the same hinder the application of the principles of natural justice.
It should also be noted that, in its Order, SEBI did not compute the unfair gains made by RIL promoter entities by not making an open offer. The AO opined how the promoters’ liability to make the open offer continued even 20 years after the conversion of warrants into shares. To that end, the regulator’s shocking conclusion may be summarised as follows: an order imposing an exorbitant penalty 20 years after a straightforward violation not requiring long-drawn investigation is devoid of unreasonable delays and stands wholly justified.
SEBI had been established as an independent regulator of the securities market to ensure speedy investigation and enforcement action by a trained cadre with domain knowledge, especially in light of the fast-changing nature of the financial markets. While its delays in RIL’s case did not cause any major monetary loss to investors, its Order would have defeated investors’ interest if similar delays had been occasioned in respect of proceedings against any entity belonging to ADAG (and not RIL), whose share prices collapsed in light of ever-increasing losses and debt.
In this context, it is imperative for SEBI to consider the impact of this ‘delay’ jurisprudence on the pendency of matters, and thereby on the securities market. It is recommended that SEBI reserve this strict approach for situations when defaulting entities engage in delaying tactics. To that end, in Pramod Jain v SEBI, the regulator refused to permit a withdrawal of a takeover offer when delays in obtaining the requisite regulatory approvals were caused and accompanied by: first, multiplicity of complaints filed by applicants; and second, deliberate siphoning of company funds by promoters.
Even in SEBI v Akshya Infrastructure, while the Supreme Court did not permit the withdrawal of a takeover offer, it came down heavily on SEBI for delaying regulatory approvals, which was the reason why the applicant had sought withdrawal. Its ruling recognised how open offers are meant to benefit shareholders, and must be completed without undue hindrances. Accordingly, in cases where delays on SEBI’s part are unexplained and not caused by the defaulting parties either directly or indirectly, then rulings such as Ashok Chaudhary may be given weight. Instead of leading to a total exoneration of liability, the delay may be taken as a mitigating factor while computing the quantum of the monetary penalty imposed on entities.
– Shikhar Aggarwal