2015 (4) TMI 233 - AT - Companies Law

Penalty due to violation of clause 35 of the Listing Agreement and Regulations 3(d) and 4(2)(f) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations (PFUTP), 2003 - Non disclosure of encumbrance on shares to the stock exchange - Encumbered pursuant to an order passed by the arbitrator in the arbitration proceedings Held that - In view of the words shares pledged or otherwise encumbered in the format annexed to clause 35 of the Listing Agreement (as amended), appellants were obliged to disclose to the Stock Exchanges details of shares which are otherwise encumbered by the promoter/promoter group and since the appellants have failed to make such disclosures, appellants have violated clause 35 of the Listing Agreement as well as PFUTP Regulations is unjustified, because, firstly, neither any regulation framed by SEBI nor clause 35 of the Listing Agreement cast an obligation on the promoter/promoter group to make such disclosures to the listed Company, and in the absence of such disclosure made by promoter/ promoter group, SEBI is not justified in directing the listed Company to disclose to the Stock Exchanges details of shares which are otherwise encumbered by the promoter/ promoter group. Secondly, as per the press release issued by SEBI on January 21, 2009, clause 35 of the Listing Agreement was to be amended so that details of pledged shares and release/sale of shares are first made by promoter/promoter group to the listed Company and in turn, the listed Company would disclose the same to the public through the Stock Exchanges. Since the promoter/ promoter group are not obliged to disclose to the listed Company details of shares that are otherwise encumbered by them, SEBI is not justified in directing the listed Company to disclose to the Stock Exchange details of otherwise encumbered shares which are not furnished to it by the promoter/promoter group. Thirdly, when an Adjudicating Officer of SEBI has already construed the words shares pledged or otherwise encumbered and held that the said words would cover particulars relating to pledged shares only, the Adjudicating Officer in the present case is not justified in taking a contrary view that too without assigning any reasons.Such a conduct on part of the Adjudicating Officer is highly objectionable. We hope that the officers of SEBI shall henceforth ensure that no orders are passed by them which are mutually contradictory to each other. For the reasons stated hereinabove, we set aside penalty of ₹ 1crore and ₹ 1.25 crore imposed on each appellant by SEBI on ground that the appellants have failed to disclose to the Stock Exchanges, fact that the shares of the appellant Company held by the respective promoter/promoter group have been encumbered pursuant to an order passed by the arbitrator in the arbitration proceedings between the promoter/promoter group and some third party. -Decided in favour of appellant.

Summary

Issues Involved:
1. Obligation of listed companies to disclose "otherwise encumbered" shares under Clause 35 of the Listing Agreement.
2. Interpretation of SEBI circulars and amendments related to disclosure requirements.
3. Consistency in adjudication by SEBI officers.

Issue-wise Detailed Analysis:

1. Obligation of listed companies to disclose "otherwise encumbered" shares under Clause 35 of the Listing Agreement:

The appellants contested the penalties imposed by SEBI for not disclosing "otherwise encumbered" shares as required by Clause 35 of the Listing Agreement. The adjudication officer found that the appellants violated Clause 35 and PFUTP Regulations by not disclosing the arbitration order that restrained the promoters from selling or transferring shares, which SEBI considered an encumbrance. The appellants argued that the obligation to disclose under Clause 35 only pertains to pledged shares, not other forms of encumbrance, and cited a previous adjudication order in the Dewan Housing Finance Corporation Ltd. case, which supported their interpretation.

2. Interpretation of SEBI circulars and amendments related to disclosure requirements:

The appellants argued that there was no clear evidence that Clause 35 had been amended by the stock exchanges as per SEBI's circular dated February 3, 2009. They contended that the circulars referred specifically to the disclosure of pledged shares, not "otherwise encumbered" shares. SEBI countered that the amendments were indeed made, and the format for reporting shareholding patterns included the requirement to disclose both pledged and otherwise encumbered shares. SEBI emphasized that the term "otherwise encumbered" should be interpreted broadly to include all forms of encumbrance, including those resulting from arbitration orders.

3. Consistency in adjudication by SEBI officers:

The appellants highlighted that the adjudication officer in the Dewan Housing Finance Corporation Ltd. case had interpreted "shares pledged or otherwise encumbered" to refer only to pledged shares. They criticized the current adjudication officer for not providing reasons for deviating from this interpretation, which they argued was inconsistent and unjust. The tribunal condemned this inconsistency and emphasized the need for SEBI officers to respect each other's orders unless there are valid reasons for taking a contrary view.

Judgment Summary:

The tribunal found in favor of the appellants, stating that the obligation to disclose "otherwise encumbered" shares was not clearly established by SEBI regulations or Clause 35 of the Listing Agreement. The tribunal noted that the format requiring disclosure of "otherwise encumbered" shares was beyond the scope of the Listing Agreement and SEBI's policy decision, which focused on pledged shares. The tribunal criticized SEBI for creating an anomalous situation where listed companies were required to disclose encumbrances without corresponding obligations on promoters to provide such information. The tribunal also condemned the inconsistency in SEBI's adjudication process and set aside the penalties imposed on the appellants. Both appeals were allowed with no order as to costs.