Whither Informal Guidance Scheme? – Whether An Obituary Is Due !

Background

When the scheme for informal
guidance was released by SEBI in 2003, it was expected that this will become a
form of advance ruling. More importantly, it would add to the interpretation of
Securities Laws. It would also serve as guidance for future transactions as
parties would know SEBI’s view on a particular issue. To be clear, Informal
Guidance was not at all meant to be the final view of SEBI. However, I submit
the expectations that this will help clarify the law, have been belied. A
recent decision of the Securities Appellate Tribunal (Arbutus Consultancy
LLP vs. SEBI, dated 5^th April 2017) has raised questions on the
reliance one could place on the informal guidance.

What is the Scheme for Informal
Guidance?

Often parties undertake
transactions that have implications under the Securities Laws. The consequences
of violation of Securities Laws are severe and could result in SEBI taking
adverse action – for example – penalty, prosecution and debarring those
involved from approaching or dealing in the financial market. Ignorance of law,
as the proverb goes, is no excuse. However, needless to say, a clear
interpretation from the regulator itself should bring clarity and resolve
doubts.

Hence, when SEBI introduced the
Informal Guidance Scheme in 2003, it was seen as a market friendly initiative.
It allowed several categories of persons associated with the securities markets
to approach SEBI to get interpretation on almost any aspect of Securities Laws.

This was expected to avoid
litigation and enhance compliance. The queries and their replies were
specifically intended to be published for public knowledge with the intent of
having universal applicability where facts and issues
were same.

Informal Guidance is of two types.
One is a no-action letter. When a party proposes to undertake a
particular transaction in a particular manner, it may want to know how would
SEBI treat it under a specific provision of Securities Laws. A good example of
this is the subject matter of the SAT decision. The issue is : whether
exemption to inter promoter transfers from requirement of open offer under the
Takeover Regulations would be available on a particular set of facts. The
applicant is required to submit to SEBI the facts and also state the specific
provision on which it requires clarification. SEBI may then, take a view that
such exemption would be available and it would not take any action if the
applicant carries out the transaction exactly as per the proposal placed before
SEBI.

The other is an interpretative
letter. In this case, SEBI is asked to give an interpretation on
a particular provision in the context of a certain set of facts and
transaction.

SEBI gives limited protection to
the person who has received such guidance. It is provided that, in case of
no-action letters, the concerned department of SEBI would (or would not)
recommend any action under the Securities Laws if the transaction is carried
out in the manner put forth. However, in the letter it is clarified that such
guidance “constitutes the view of the Department but will not be binding on the
Board, though the Board may generally act in accordance with the view”.

Interestingly, SEBI will not
respond to a request for Informal Guidance “where a no-action or interpretive
letter has already been issued by any other Department on a substantially
similar question involving substantially similar facts as that to which the
request relates”. This, in my submissions, creates an impression that SEBI may
follow such interpretation in similar cases and hence a fresh informal guidance
is not needed.

Facts of the matter before SAT

In the case before SAT, there was
a complex restructuring transaction that involved inter-se transfers amongst
the promoters of a listed company. In ordinary course, any acquisition of
shares in a listed company would have implications under the SEBI Takeover
Regulations 2011 – for example – if the acquisition is beyond the specified
percentage, it may attract an open offer. However, exemption from open offer is
given for restructuring where the transfer is within the promoters. However,
such exemption is given provided certain conditions are met. One of such
conditions is that the transferor and transferee promoters should have been
disclosed as promoters in the filings with the stock exchange for the preceding
three years. In the present case, to simplify as the listed company was
recently listed, there was a peculiar situation. The transferor and transferee
both were promoters for more than 3 years. However, since the listing had taken
place less than two years back, the condition of three years were not complied
with. Hence, the inter se transfer apparently did not qualify for exemption
from open offer. The acquirer did make an open offer because of certain latter
transactions but at a lesser price based on latter transactions. However, since
the earlier transactions were treated as not exempt, the open offer price
computed by SEBI was higher than offered by the acquirer, hence, SEBI ordered
the acquirer to pay such higher price plus interest.

Before SAT, the acquirer pursued
the argument on merits that the three years post-listing disclosure was not a
strict condition and in reality the promoters were promoters for more than
three years. However, this was an interesting issue as in an earlier `Informal
Guidance’, the view propagated by the acquirer was approved. The informal
guidance had held that if the parties were promoters for more than three years
including in the period before listing, the requirement that there should still
be such three years of disclosure as promoters post listing need not be
complied with.

However, unfortunately, this was
not all. It appeared that in a subsequent Informal Guidance on similar facts,
an opposing view was said to have been expressed. It was even argued/conceded
by SEBI itself that the earlier Informal Guidance was actually incorrect! The
question was whether the earlier Informal Guidance would be helpful to the
acquirer.

Decision of SAT

To begin with, on the
interpretation of the provision itself, SAT was not in agreement with the
acquirer. According to SAT, the requirement of the law was clear. There has to
be at least three years of post listing filing of the parties as promoters with
the stock exchanges. Only if this condition is strictly complied with that the
benefit of exemption to inter se transfers between them would be available.

Then SAT dealt with several issues
relating to Informal Guidance – for example – what is the binding nature of
informal guidance? Does it help persons who were not the original applicant,
even if the facts were similar? Does it bind SEBI? What will be the situation
if there is another contradictory guidance on similar facts? Can a party claim
that the one beneficial to it should be applied?

The acquirer also argued that the
guidance was in the nature of a circular and thus binding on SEBI.

SAT discussed the Informal
Guidance scheme. It noted that the requirement of the provision was clear and
against the view advocated by the acquirer. SAT observed that, “…a wrong
interpretation given by an official cannot be used as a shelter in interpreting
provisions of law.” In my opinion, this by itself would reduce the value of the
original guidance relied on by the acquirer. SAT in any case pointed out that
there was already a subsequent guidance holding a different view.

It reiterated that “…an interpretation
provided under the Scheme by an official of department of SEBI cannot be used
against the correct interpretation of law (in the instant matter SAST/Takeover
Regulations, 2011)”. It also relied on its earlier decision in the case of Deepak
Mehra vs. SEBI ((2010) 98 SCL 216 (SAT). The following observations of the
SAT in Deepak Mehra’s case are relevant and illuminating:-

“The
impugned communication is only an interpretative letter providing under the
scheme an interpretation of the provisions of the Takeover Code as was sought
by Bharti pending finalization of the proposal which may or may not come
through. Clause 12 of the scheme makes it clear that an interpretative letter
issued by a department of the Board constitutes the view of the department but
will not be binding on the Board, though the Board may generally act in
accordance with such a letter. Clause 13 thereof also makes it clear that a
letter giving an informal guidance by way of interpretation of any provision of
law or fact should not be construed as a conclusive decision or determination
of those questions and that such an interpretation cannot be construed as an
order of the Board under section 15T of the Act. While giving its informal
guidance to Bharti, the general manager of the Corporation Finance Department
of the Board had also made it clear that the view expressed therein is not a
decision of the Board on the questions referred to by Bharti. It is, thus,
clear that the views expressed in the impugned communication are the views of
the corporate finance division of the first respondent and they shall not bind
the said respondent. It is further clear that the first respondent has not
taken any final decision in the matter and has passed no order which could said
to be adversely affecting the rights of the appellant or any other shareholder
of Bharti. The informal guidance given by the general manager is not an
“order” which could entitle anyone to file an appeal. The word
“order” is defined in Black’s Law Dictionary (Eighth Edition) as
“1. A command, direction, or instruction. 2. A written direction or
command delivered by a Court or Judge. The word generally embraces final
decrees as well as interlocutory directions or commands.” In the case
before us, the first respondent has not issued any command or direction. An
occasion to issue a direction or pass an order may arise, if and when, the
proposal that is being discussed between the two companies is finalized. If and
when, such a direction is issued or any order passed, it shall be open to any
person who feels aggrieved by that order or direction to come in appeal before
the Tribunal.” 

Conclusion

The decision of SAT, while
confirming to some extent how the Informal Guidance Scheme is viewed, I submit,
reduces the usefulness of the Scheme.

In any case, parties ought not
rely on the `informal guidance’ even for identical transactions. Hence, parties
involved will have to seek specific guidance. It is curious that the Scheme
itself provides that SEBI may refuse giving guidance if a guidance has already
been given on a similar issue!

There can be another interesting
situation. A party may approach SEBI for an informal guidance on a set of
facts. SEBI may give an interpretation that is not acceptable to the party and
it is legally advised that SEBI’s view is not correct in law. What would happen
if the party still goes ahead with the transaction? The Informal Guidance is
surely not binding on the party but there would still be an adverse view of
SEBI on record.