Securities and Exchange Board of India vs Sunil Krishna Khaitan and Others

Securities and Exchange Board of India Act, 1992 (SEBI Act) – S. 15T – Power of Appellate Tribunal - 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.

Words and Phrases – Acquirer – discussed and explained. Doctrines/Principles – Principle of doubtful penalisation. Dismissing the appeals by the Board, the Court

HELD: (Interpretation of Regulation 10 of the Takeover Regulations)

1.1 Regulation 10 states that no ‘acquirer’ shall acquire voting rights, which taken together with the shares or voting rights held by him or by a ‘person acting in concert’ would entitle the ‘acquirer’ to exercise 15% or more of the voting rights in the company, unless such ‘acquirer’ makes public announcement to acquire shares in accordance with the regulations. The word ‘acquirer’ used in Regulation 10 takes its meaning from the definition clause (b) to Regulation 2(1), which refers to the shareholder as an individual and also ‘person acting in concert’ with the him, which expression has been very widely defined vide clause (e) to Regulation 2(1) of the Takeover Regulations 1997. The Appellate Tribunal has, therefore, rightly held that the word ‘acquirer’, which is a term of art,25 should not be restricted to shares or voting rights of the individual shareholder as the term as defined includes the ‘person acting in concert’ with the shareholder. The shareholding/voting rights of the ‘acquirer’, that is the individual shareholder together with the ‘person acting in concert’ decides whether the ‘acquirer’ is required to make a public offer/announcement in terms of Regulation 10, which applies when the voting rights of the ‘acquirer’ before acquisition were less than 15 %, but on fresh acquisition exceed 15% of the voting rights in the company. Regulation 10 does not apply when the collective voting rights of the individual shareholder and the ‘person acting in concert’, taken together is 15% or more on the date when fresh shares or voting rights are acquired. The bracketed portion of Regulation 10, namely “taken together with shares or voting rights, if any, held by him or by persons acting in concert with him” affirms and endorses this interpretation. [Para 44][1017-F-H; 1018-A-C]

1.2 In the context of Regulation 10, this Court does not think that the draftsmen had committed a mistake or had forgotten the definition clauses while wording Regulation 10, wherein they have consciously used the expression ‘acquirer’, after having defined the same, instead of the word a ‘person’, which word has been used in Regulations 6 and 8 of the Takeover Regulations 1997. To accept the interpretation given by the Board, we would have to stretch the language of Regulation 10 and not read it as it reads, by assuming that the intent is to apply Regulation 10 in two situations (i) when the acquirer as a single entity, without taking into consideration the shareholding or voting rights of the person(s) acting in concert; as well as (ii) when the single entity together with the person(s) acting in concert, acquire voting rights, and in either case to cross the stipulation of 15% of the voting rights. But this would require us to ignore or rewrite the word ‘acquirer’ which as defined includes the ‘person(s) acting in concert’. It defeats the object and purpose behind the ‘term of art’ definition. Regulation 10 applies to the ‘acquirer’ acquiring voting rights, with reference to the existing holding as a person and in concert with other persons, because the acquisition is to be “taken together with shares or voting rights held by the acquirer himself or by person acting in concert with him”. The combined holding of the person and the ‘person acting in concert’ determines application of Regulation 10. If an ‘acquirer’ already holds more than 15 % shares or voting rights in concert with other persons, such holding is not be fragmented to calculate the shares or voting rights of the ‘acquirer’ in his personal capacity under Regulation 10.[Para 46][1018-G; 1019-A-E]

1.3 Regulation 10 does not apply when the ‘acquirer’ already holds more than 15% shares or voting rights in the target company. The ‘acquirer’, for the purpose of the said Regulation, not only means the individual person but also the ‘person acting in concert’ with the individual person. In such cases, Regulation 11(1) may apply when the ‘acquirer’ who hold between 15% to 55% of shares or voting rights, post the acquisition of the additional shares or voting rights is entitled to exercise more than 5% of the voting rights. It is accepted by the Board that they had read the expression ‘acquirer’ in Regulation 10 to mean and include the shareholder along with ‘person acting in concert’. Meaning thereby, there would not be any violation of Regulation

10 if the ‘acquirer’, which would include the ‘person acting in concert’, acquires new shares or voting rights when he individually or along with the ‘person in concert’, already hold more than 15% shares in the target company. This interpretation was accepted and even communicated by the Board to third parties. Adjudicating Officer(s) have accepted this interpretation and dropped penalty proceedings, which orders have attained finality and accepted by the Board. [Paras 48 and 50][1019-G-H; 1020-G; 1021-A]

1.4 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 10.[Para 51][1022-F-G]

1.5 Contention of the Board that there is no estoppel against law is well known, but the said principle is not applicable for several reasons. First, the interpretation accepted by the Appellate Tribunal is not only plausible but more acceptable than the interpretation propounded by the Board. Secondly, the Board, which has the power to enact the Regulations, interpret and apply them, adjudicate and also pass a penalty order in case of violation for good and substantial reasons had interpreted regulations in the same manner in earlier instances as interpreted by the Appellate Tribunal. Thirdly, the adjudication orders in the present case were passed well after the Takeover Regulations 1997 were repealed with the enactment and enforcement of the Takeover Regulations 2011. In the present case, therefore, we are dealing with a legacy issue. 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.[Para 60][1029-B-E]

1.6 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. It is a general rule of law of interpretation that unless explicitly mentioned, a law cannot be presumed to be retrospective. Further, in the absence of express statutory authorisation, delegated legislation in the form of rules or regulations, cannot operate retrospectively. Certainly, Regulation 3(3) in the Takeover Regulations 2011 clarified and possibly removed the shortcoming of the 1997 Regulations.[Para 62 and 63][1030-C-F; 1031-E]

Regulation 11 and the penalty under Regulations 44 and

45 of the Takeover Regulations 1997

2.1 The impugned order dismisses the appeal preferred by the respondents and thereby affirms the order holding the respondents guilty of violation of Regulation 11(1) of the Takeover Regulations 1997. The respondents have not filed appeals or cross objections challenging the said finding of the Appellate Tribunal. Hence, we are not required to and would not comment on the findings recorded by the Appellate Tribunal on violation of Regulation 11(1) of the Takeover Regulations 1997. We proceed on the basis that the respondents are guilty and have failed to make public announcement within stipulated timeline as per the Takeover Regulations 1997. The contention of the Board is that the Appellate Tribunal should not have modified the direction given by the Whole Time Member obligating public announcement with the monetary penalty of Rs. 25,00,000/-. [Para 64 and 65][1032-A-D]

2.2 Discretion is an effective and an important tool which the legislature confers and vests with the executive for effective and good governance, administration, and in the present case – regulation, of the securities market which has complex commercial and economic facets. Therefore, the law provides an option to the Board and the authorities to adopt one or the other alternatives. However, this does not mean that the Board or the authorities enjoy unfettered and unchecked discretionary jurisdiction to act according to private or personal opinion in a vague and fanciful manner. Discretion, when of wide amplitude, and when it can have civil and penal consequences, must be exercised in a legal and regular manner. In the context of Regulations 44 and 45, it implies that the Board has the power to make a choice between different courses of action or inaction. This choice is not unfettered but is always held subject to implied limitations inherent in every statute, limitations set by the common law and the constitutional mandate of rule of law. Regulation 44 differs from Section 15-H, which is somewhat a strict liability provision that applies if a person fails to comply with the clauses

(i) to (iv). The phase ‘profits made out of such failure’ in Section 15-H indicates that while imposing quantum of penalty the authority should consider the profit made by the acquirer on account of failure to comply with the requirements mentioned in clauses (i) to (iv) of Section 15-H. Reliance placed by the Board on the judgments which relate to and arise from the orders passed by the adjudicating officer under Chapter VI-A of the Act are of no relevance, as Regulation 44 is a discretionary power and not mandatory in nature. Not only this, the directions under Regulation 44 are required to beissued considering relevant factors, including, interest of the securities market and protection of the investors in mind. Regulation 44 is not a strict liablity provision. [Para 71, 72, 73 and 75][1037-F-H; 1038-A]

2.3 We entirely agree with the reasoning given by the Appellate Tribunal for setting aside the directions given in the penultimate paragraph of the orders passed by the Whole Time Member. As noticed above, the violation alleged in Appeal No.

23 of 2013 in the case of Sunil Krishna Khaitan relates to the years 2006-2007. The order issuing the directions was passed on 31st December 2012, nearly eight years after the alleged violation. The direction given is that the shareholders should be given an option to sell the shares held by them on 16th June 2007 by directing the respondents to make a public announcement to acquire the shares. Direction has also been given to pay interest @ 10% per annum from 16th June 2007 till shares have been accepted in the open offer. The dividend paid, if any, would be adjusted. We are not stating that this direction can never be issued, but the exercise of discretion to issue the said directions has to be predicated and based upon good grounds and reasons. The directions of this nature are not automatic and are to be issued only when they are warranted and justified. The incongruities and absurdities of the directions issued have been highlighted and noticed in the order passed by the Appellate Tribunal. [Para 79][1044-B-D]

Power of the Appellate Tribunal under section 15T of the Act

3.1 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. In the present 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.[Paras 88 and 89][1050-D-G]

3.2 The Appellate Tribunal does not have the power for the first time to initiate and thereupon, impose penalty for noncompliance 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. [Para 90][1051-A-D]

3.3 Thus, the Appellate Tribunal in appeal no.23 of 2013 could not have substituted the penalty imposed by the Board under Regulation 44 with that of penalty under Section 15-H. An appropriate view 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.[Para 91][1052-B-D] Commissioner of Income Tax, (Central) -I, New Delhi v. Vatika Township Private Ltd. (2015) 1 SCC 1 : [2014]

12 SCR 1037 – followed.

Punjab Communications Ltd. v. Union of India and Others (1999) 4 SCC 727 : [1999] 2 SCR 1033;

Tolaram Relumal and Another v. State of Bombay [1955]

1 SCR 158; Bipinchandra Parshottamdas Patel (Vakil) v. State of Gujarat and Others (2003) 4 SCC 642 : [2003] 3 SCR 533; Swedish Match AB and Another v. Securities & Exchange Board of India and Another (2004) 11 SCC 641 : [2004] 3 Suppl. SCR 745; Official Liquidator v. Dharti Dhan (P) Ltd. (1977) 2 SCC 166 : [1977] 2 SCR 964; Dinesh Chandra Pandey v. High Court of Madhya Pradesh and Another (2010) 11 SCC

500 : [2010] 8 SCR 37; Clariant International Ltd. and Another v. Securities and Exchange Board of India (2004) 8 SCC 524 : [2004] 3 Suppl. SCR 843; Banglore Medical Trust v. B.S. Muddappa and Others (1991) 4 SCC 54 : [1991] 3 SCR 102; Adjudicating Officer, Securities and Exchange Board of India v. Bhavesh Pabari (2019) 5 SCC 90; State of Gujarat v. Patil Raghav Natha and Others (1969) 2 SCC 187 : [1970]

1 SCR 335; State of Punjab and Others v. Bhatinda District Coop. Milk Producers Union Ltd. (2007) 11 SCC 363 : [2007] 11 SCR 14; Commissioner of Income Tax, U.P., Lucknow v. Kanpur Coal Syndicate, Kanpur AIR 1965 SC 325 : [1964] SCR 85; Commissioner of Income Tax, M.P., Bhopal v. Nirbheram Dalura (1997)

10 SCC 373– relied on.

Sanjiv Coke Manufacturing Company v. M/s. Bharat Coking Coal Limited and Another (1983) 1 SCC 147 : [1983] 1 SCR 1000; Prakash Gupta v. Securities & Exchange Board of India 2021 SCC OnLine SC 485; Zile Singh v. State of Haryana and Others (2004) 8 SCC

1 : [2004] 5 Suppl. SCR 272; Chairman, SEBI v. Shriram Mutual Funds and Another (2006) 5 SCC 361 : [2006]

2 Suppl. SCR 833; Securities and Exchange Board of India v. Saikala Associates Limited (2009) 7 SCC 432 : [2009] 6 SCR 798; – referred to.