Reporting of Promoters’ shareholding under various SEBI regulations seems to be a chore that is best done away quickly. Most of it is routine since Promoters shareholding often remains static. Even where there are changes, the milestones of reporting are seemingly well defined. Nevertheless, issues often crop up and SEBI initiates proceedings for non-compliance. The penalties for noncompliance are, as is well known, substantial and hence an area of concern. SEBI’s consistent stand, based on certain Court decisions including that of the Supreme Court, is that non-compliance of reporting does not require mens rea to be proved and once there is a simple failure to comply, levy of penalty logically follows.
The law relating to reporting of shareholding is complicated as it is spread out over several overlapping and at times contradictory regulations or having differing requirements. For example, reporting is required under the Takeover Regulations, the Insider Trading Regulations, the Listing Agreement, etc. The timing, the persons who have to report, the information to be disclosed and the prescribed form for reporting, etc. tend to differ.
For concerns that are understandable, the definition of terms under certain regulations is fairly broad and/or are defined in a broad way prescribing other parameters under different regulations. For example, the Takeover Regulations define acquirer in a fairly broad way and the acquisitions by an acquirer mandate reporting under certain circumstances. Under the Insider Trading Regulations, however, the reporting is by a slightly different group of people and at different times.
The point is that though the reporting may be made under one set of Regulations or even by one or more persons, it may not be strictly in conformity with the provisions of other regulations. This is despite the fact that the information that is required to be placed in the public domain is duly placed, though not exactly in the manner required by law. In such a case, the issue of penalty may arise. Similarly, even though such information may be duly reported by one person, the question may remain whether non-furnishing by another person of the same information tantamounts to a violation.
A recent decision of the Securities Appellate Tribunal [O. P. Gulati v. SEBI, (2012) 111 SCL 454] highlights such a concern even though the decision is in favour of the promoters. It shows the vagaries not only of law but of practice of SEBI. Hence, there is need to take a pragmatic approach to avoid needless proceedings and litigation.
The facts as provided in the decision can be quickly summarised as follows. The promoters of a listed company consisting of husband/wife had acquired certain shares beyond the minimum percentage and thus an obligation to report arose. It may be mentioned that the acquisition was over a long period of time. It was accepted that in the initial several years, there was no requirement to report and the issue before the Tribunal was only acquisition during the later years and hence this discussion focusses on the reporting for the later years.
Regulation 7(1A) of the Takeover Regulations (‘the Regulations’) requires that if an acquirer acquires 2% or more shares, he shall report the same in the prescribed manner and within the prescribed time. The acquirer admittedly had acquired more than 2% shares and this acquisition was not reported in the prescribed manner. SEBI initiated proceedings against the acquirer and persons acting in concert which as stated above consisted of the husband and wife. The interesting point was that though the husband and wife were acting in concert, only the husband had acquired the shares while the wife had not acquired even a single share. SEBI initiated proceedings against both of them based on the finding that the prescribed reporting was not made and levied a penalty of Rs.1 lakh on each of them.
The acquirers appealed to the SAT essentially making two sets of contentions. As regards nonreporting by the husband, it was contended that it was inadvertent and a technical error and deserves condonation. However, as regards the wife, the issue raised was that though the wife was a person acting in concert with the acquirer, since she had not acquired any shares, there was no requirement of reporting by her.
The SAT rejected the argument stating that inadvertent/technical errors in reporting do not deserve to be condoned and upheld the penalty of Rs.1 lakh on the husband. As regards the wife, SAT noted that:
(1) the husband and wife fell within the definition of acquirer,
(2) the wife had not acquired any shares, and
(3) the reporting requirement was on the acquirer.
Hence, it was held that as there was no rationale in double reporting, particularly by a person who did not acquire any shares. The levy of penalty on the wife was not warranted and reversed.
It is worth considering the observations of the SAT before further comments and conclusions can be made.
“The appellant-acquirers had contended that:
(1) disclosures were made with bona fide intention though late
(2) there was no suppression of fact
(3) there was no intention to violate
(4) default, if any, was purely technical in nature, and
(5) deserves to be accepted as a bona fide inadvertent mistake.”
Against this contention, SEBI “supported the orders passed by the adjudicating officer stating that any acquirer, whether he has acquired the shares or voting rights of the company or not, if he falls within the definition of the acquirer under Regulation 2(b) of the takeover code or is a ‘person acting in concert’ within the meaning of Regulation 2(e), is required to file a declaration under Regulation 7(1A) of the takeover code. Indra Gulati, being wife of O. P. Gulati and also a promoter of the company, falls within the definition of ‘person acting in concert’ and hence an ‘acquirer’ within the meaning of Regulation 2(b) of the takeover code”.
Whilst annulling the penalty on the wife, SAT observed:
‘A person who may fall within the definition of acquirer under the takeover code but has not acquired the shares and is not a person acting in concert with the person acquiring the shares is not obliged to make disclosure under Regulation 7(1A) of the takeover code. In a given case, suppose there are 20 persons in a target company who may fall within the definition of ‘acquirer’ under the takeover code and say only two of them have purchased or sold shares aggregating two per cent or more of the share capital of the target company and these two persons are not acting in concert with any of the other eighteen persons. If the argument of learned counsel for the respondent Board is accepted, then all the twenty persons who fall within the definition of ‘acquirer’ are required to make disclosure to the company as well as to the concerned stock exchanges. Such additional disclosure by eighteen persons who have neither purchased nor sold shares, nor are persons acting in concert with the two acquirers, serves no purpose.
The fact that Indra Gulati did not acquire any share of the target company during the period in question is not in dispute. The adjudicating officer has not recorded any finding that there was any understanding or agreement, direct or indirect between O. P. Gulati and Indra Gulati to acquire the shares of the target company. In the absence of any such finding or material on record, we are of the view that the adjudicating officer erred in holding Indra Gulati guilty of violating Regulation 7(1A) of the takeover code.”
The following conclusions can be drawn from the above decision:
Firstly, the concern over multiple reporting under various regulations of information that is essentially the same though required of different people, at different stages and of different nature is justified. It is presumably settled by the observation that such multiple reporting does not serve a point except that SEBI may be obliged to initiate action. One hopes that this decision helps in a case where a person has reported under one regulation but inadvertently failed to report under another regulation would not be burdened with dual consequences.
Secondly, this decision gives some clarity on the issue that often comes up, viz., when there are numerous persons in a Promoter Group, who should report and whether all should report or whether reporting is required by only those who acquire. The above decision should be the basis for arguing that if the lead promoter reports the information required, on behalf of all those who have acquired multiple reporting is not required.
Thirdly, this case highlights the point that unlike other laws, SEBI has powers to levy huge penalties for seemingly routine and unintended non-compliances. The author believes that whilst using this power SEBI should have a pragmatic approach.
