2022 (7) TMI 582 - SC - SEBI

Interpretation of Regulation 10 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 referred to as Takeover Regulations 1997 - increase in shareholding beyond 15% (beyond the open offer) - to yield greater influence over management of the company - Power to levy penalty - HELD THAT - As the Board as well as the Adjudicating Officer have treated the expression acquirer , for the purpose of Regulation 10, to include a person acting in concert and the combined shareholding were taken into consideration for deciding whether there was a breach of Regulation 10. Where the acquirer , including the person acting in concert , already had shares or voting rights in excess of the prescribed limit, they were not held guilty of violating Regulation 1028. It is important for the regulator to be consistent and predictable. Further regulations must be clear as ambiguous regulations cause confusion and uncertainty. Regularity and predictability, along with certainty, are hallmarks of good regulation and governance. These principles underpin the rule of law , check arbitrariness and are read as the intent of the legislation, which the Courts, if need be, will enforce as a principle of interpretation. The Board is entrusted to preform legislative, executive, investigative and adjudicatory functions. In the context of the present case, it is to be noted that the Board is the draftsman of the legislation having enacted the Takeover Regulations 1997 and hence, their interpretation and understanding of the Regulations is of importance and relevance. In the context of the present case, the Board, nearly five years after the transactions, had issued the show-cause notice and then passed an order taking a view on interpretation of Regulation 10, which was contrary to the view expressed by it in several communications as also orders passed by the adjudicating authority. Past is passed and not present, and by giving retroactive operation without good reason. Regulation 10 of the Takeover Regulations 1997, as interpreted and applied by the Board for over ten years, is sought to be overturned by the Board, thereby, creating penal consequences. This should not be permitted and is hardly acceptable when we apply the principle of good governance and regulation. Thus on the enforcement of Takeover Regulations 2011, it is clear that Regulation 10 will apply on an acquirer who crosses the threshold of 15%, which under the Takeover Regulations 2011, has been increased to 25%. Further, Regulation 10 would apply both when an individual acquirer or an acquirer in concert with others acquires shares or voting rights beyond the threshold level and such an acquirer would have to comply with the applicable regulation. Takeover Regulations 1997 and Takeover Regulations 2011, therefore, postulate different preconditions and thresholds. Reliance placed upon the Takeover Regulatory Advisory Committee Report would show that there was a rethought and re-examination of Regulation 10 pursuant to which Regulation 3(3) was enacted and made a part of the regulatory mechanism under the Takeover Regulations 2011. The use of the word may in Regulation 44 and the wording of Sections 11(1), 11B and 11(2)(h) reflect that the Board has been conferred a discretion, which in turn also means and should be interpreted as imposing a duty, an aspect which we will elucidate in the subsequent paragraphs. Use of the word may over the years is normally construed as permissive and not imperative. The words may or shall by their very etymological foundation denote discretion and mandatory nature of an act respectively. This Court has, therefore, held that the courts should not readily interpret the word may as shall unless such interpretation is necessary to avoid absurdity, inconvenient consequences or as mandated by the intent of the legislature which is gathered from the other parts of the statute. Significantly, in the present case, the investors of the target company have not raised any objection. The impugned order passed by the Whole Time Member does not refer to any market manipulation or fluctuation in share price, which was detrimental to the interests of the investors. It is not the case of the Board that any windfall gains or profits have been made by the respondents on account of violation of Regulation 11(1) of Takeover Regulations 1997. The order passed by the Whole Time Member, in fact, does not take into account the impact of the order on the securities market in case the investors/shareholders in the target company as on 16th June 2007 are given an option to sell their shares on or after 31st December 2012, possibity of distruption on the functioning market place, detrimental impact on the market place/investor confidence, qualitative impact of the retroactive directions on the law s santity predicated on predicibilty and legal stability, as well as undermining of the people s faith and trust on the Board as the protector of law. The directions, therefore, cannot be sustained. There is, as noticed and held below, some merit in the contention of the Board that the Appellate Tribunal could not have imposed penalty under Section 15-H when proceedings under the said Section had not been invoked by the Board and there is no order passed by the adjudicating authority imposing penalty under Section 15-H of the Act. However, the effect of the argument raised by the Board would be that the order passed by the Whole Time Member under Regulation 44 giving directions would be quashed and set aside. The respondents would have, therefore, escaped without having to pay any penalty for violation of Regulation 11(1) of the Takeover Regulations 1997. It is in this factual background we have to decide the present appeals. As noticed above, the respondents have not filed appeals or cross objections challenging the penalty imposed by the Appellate Tribunal for violation of Regulation 11(1) of the Takeover Regulations 1997. Power of the Appellate Tribunal under section 15T of the Act - Board has contended that the Appellate Tribunal, in the exercise of power under Section 15-T and while considering appeals against proceedings under Section 11 and 11B of the Act and Regulation 44 of the Takeover Regulation, 1997, could not have converted the directions of the Board with monetary penalty under Section 15-H - HELD THAT - In the context of the present appeal, it is to be noted that in the case of Sunil Krishna Khaitan, an order in the form of directions under Regulation 44 of the Takeover Regulations 1997 was issued. It was this order which was made subject matter of challenge before the Appellate Tribunal.Thus we do not accept the contention of the Board that the Appellate Tribunal while exercising appellate power could not have set aside and quashed the directions given in the appeal. At the sametime, in Sunil Krishna Khaitan s case proceedings under Section 15-H for levy of penalty were not initiated and no order of penalty under 15-H was passed by the adjudicating authority. The Appellate Tribunal, therefore, was not hearing an appeal against imposition of penalty under Section 15-H of the Act. Further, an order under Section 15-H of the Act is passed by an adjudicating authority which, while imposing penalty, is required to take into consideration the factors mentioned in Section 15-J. As referred to Regulation 45 which in sub-regulation (6) refers to different types of penalties which can be imposed on a person violating any of the provisions of the Regulations. The Appellate Tribunal does not have the power for the first time to initiate and thereupon, impose penalty for non-compliance of the provisions of the Regulations under Chapter VI-A of the Act while deciding an appeal against directions issued under Regulation 44 of the Takeover Regulations, 1997. That power is vested with the authority specified in the Act or the Regulations. The Appellate Tribunal is an appellate forum and not the authority empowered to initiate penalty proceedings under Section 15-H or suo moto issue directions under Section 11, 11B or 11(4)(d) of the Act. It can uphold or set aside the direction issued, or modify and substitute the direction issued under Regulation 44 of the Takeover Regulations 1997 read with Sections 11, 11B and 11(4)(d) of the Act. Similarly, Appellate Tribunal can uphold, set aside, modify and even substitute the order of penalty under Chapter VI-A of the Act. The power to initiate and levy penalty in terms of Section 15-I is vested with an officer to be appointed by the Board, not below the rank of Divisional Commissioner, to act as an adjudicating officer. The adjudicating officer is required to hold an inquiry in the prescribed manner after giving the person a reasonable opportunity of being heard for the purpose of imposing any penalty. Powers are vested with the adjudicating officer to summon and enforce attendance of any person acquainted with the facts and circumstances of the case to give evidence or to produce any document. The Appellate Tribunal in the case of Sunil Krishna Khaitan, could not have substituted the penalty imposed by the Board under Regulation 44 with that of penalty under Section 15-H. An appropriate view, in our opinion, would be that when the Appellate Tribunal holds that the order passed by the Whole Time member on violation of Regulations 10, 11 and 12 is sustainable, but the directions given in the order under Regulation 44 are not sustainable, it should leave it open to the Board to initiate proceedings and pass an order under Chapter VI-A of the Act. As held above, in the absence of any cross-appeal or cross-objection by the respondent in Sunil Krishna Khaitan s case we are not interfering with the order imposing penalty of Rs.25,00,000/- for the violation of Regulation 11(1) of the Takeover Regulations 1997. The said direction has attained finality. At the same time, we are inclined to direct that the Board would give quietus to the matter and should not initiate proceedings under Chapter VI-A of the Act. Civil Appeals preferred by the Board are dismissed with the clarification as to the power of the Appellate Tribunal under Section 15-T of Chapter VI-A of the Act, which is confined to examination of correctness and legality of the order under challenge.

Summary

Issues Involved:
1. Interpretation of Regulation 10 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.
2. Power and exercise of the power by the SEBI Board under Regulations 44 and 45 of the Takeover Regulations, 1997.
3. Power and jurisdiction of the Securities Appellate Tribunal under Section 15T of the SEBI Act, 1992.

Issue-wise Detailed Analysis:

1. Interpretation of Regulation 10 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997:

The primary question of law was the interpretation of Regulation 10. The judgment clarified that Regulation 10 applies when an "acquirer" (which includes any person acting in concert with the acquirer) acquires shares or voting rights that, together with shares or voting rights already held, entitle them to exercise 15% or more of the voting rights in a company. The term "acquirer" is broad and includes persons acting in concert, ensuring transparency and preventing circumvention of the regulations. The Appellate Tribunal's interpretation that Regulation 10 does not apply if the collective shareholding is already above 15% was upheld. The Supreme Court agreed that the term "acquirer" should not be restricted to individual shareholders but also include persons acting in concert, and Regulation 10 does not apply when the collective voting rights are already 15% or more.

2. Power and Exercise of the Power by the SEBI Board under Regulations 44 and 45 of the Takeover Regulations, 1997:

Regulation 44 allows SEBI to issue directions in the interest of the securities market or for the protection of investors, including making public announcements to acquire shares. However, the use of the word "may" indicates discretion, not a mandatory requirement. The Board must consider the interest of the securities market and investor protection when issuing such directions. The judgment emphasized that discretion should be exercised fairly and reasonably, considering the facts and circumstances of each case. The directions issued by SEBI in the Sunil Krishna Khaitan case were set aside by the Appellate Tribunal due to the inordinate delay and the lack of good grounds for such directions. The Supreme Court agreed that the directions were not automatic and should be justified and warranted based on the circumstances.

3. Power and Jurisdiction of the Securities Appellate Tribunal under Section 15T of the SEBI Act, 1992:

The Appellate Tribunal has the power to confirm, modify, or set aside the orders appealed against. It can exercise its jurisdiction to ensure the correctness and legality of the orders. However, in the Sunil Krishna Khaitan case, the Appellate Tribunal substituted the directions of SEBI with a monetary penalty, which was beyond its jurisdiction as the penalty proceedings under Section 15-H were not initiated by SEBI. The Supreme Court held that the Appellate Tribunal should not have imposed a penalty under Section 15-H without an order from the adjudicating authority. The appropriate course would have been to leave it open for SEBI to initiate penalty proceedings under Chapter VI-A of the Act. The Supreme Court clarified that the Appellate Tribunal could not initiate and impose penalties but could modify or set aside the directions issued by SEBI.

Conclusion:

The Supreme Court dismissed the appeals by SEBI, upholding the Appellate Tribunal's interpretation of Regulation 10 and setting aside the directions issued by SEBI under Regulation 44. The judgment clarified the scope and exercise of powers by SEBI and the Appellate Tribunal, emphasizing the need for fair and reasonable exercise of discretion and adherence to legal principles.