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2019 (4) TMI 1358 - AT - SEBIMinimum Public Shareholding MPS requirement - scope of amendment in SCRR Rules Securities Contracts (Regulation) Act in 2010 - Scheme of Arrangement and Amalgamation seeked by which the MPS requirements would be achieved SEBI approached the Calcutta High Court for modification of the Scheme of Amalgamation - SEBI to restrain the Directors for noncompliance of the MPS requirement - Whole Time Member held that the DPSC and its Directors had not complied with the MPS requirement HELD THAT - After the amendment in SCRR Rules in 2010, promoters in a public listed Company cannot hold more than 75% shares of that Company. The requirement of law was for greater public participation in a listed Company and, therefore, atleast 25% of the shares in a listed Company was required to be held by the public. The amendment stipulated that those Companies with public shareholding of less than 25% was required to achieve the same within a period of 3 years from the date of commencement of the first amendment that is by 3rd June, 2013. In order to achieve this target, the Company came out with a Scheme of Arrangement and Amalgamation under Sections 390, 391 and 394 of the Companies Act, 1956 by which the MPS requirements would be achieved. The Scheme was initially sanctioned but was subsequently modified on the intervention of SEBI by the Calcutta High Court. Transfer of shares by IPCL to the Trust was not sufficient compliance of the MPS requirement under Rule 19 and 19A of the SCRR Rules. The Calcutta High Court accordingly directed that in order to achieve the 25% minimum public shareholding in the amalgamated Company 32,63,16,563 shares were required to be sold by the Trust to the public through a public offer. We find from a perusal of the orders of the Calcutta High Court that a specific direction was issued to the Trust to divest its shares by making a public offer. No direction whatsoever was given to the Company or its Directors. Contention of the respondent that if the MPS requirement was not achieved through this public offer pursuant to the direction of the Calcutta High Court it was still open to the Company and its Directors to ensure compliance of the requirement of law by adopting any of the methods as prescribed by SEBI vide its circulars cannot be accepted as it would run counter to the Scheme of Arrangement and Amalgamation as sanctioned by the Calcutta High Court. It would also violate the directions given by the Calcutta High Court. Whole Time Member has misinterpreted the orders of the Calcutta High Court and has committed an error in holding that the DPSC and its Directors had not complied with the MPS requirement and that there was a failure on the part of DPSC and its Director to comply with the directions of the Calcutta High Court. The directions of the Calcutta High Court was only against the Trust and not against the Company and its Directors. Non-compliance of the MPS requirement cannot at this stage result in issuance of a restraint order. Once SEBI approached the Calcutta High Court for modification of the Scheme of Amalgamation it was no longer available to SEBI to restrain the Directors for non-compliance of the MPS requirement. We are further of the view that since the Calcutta High Court had directed the Trust to divest its shares in order to achieve the MPS requirement under Rule 19 and 19A of the SCRR Rules it was no longer open to adopt any other method as per the circulars without taking leave from the Calcutta High Court. The impugned ex-parte interim order dated 4th June, 2013 passed by the Whole Time Member and the confirmatory order dated July 25, 2017 cannot be sustained and are quashed. In the light of the aforesaid it is not necessary for this Tribunal to dwell into the contention as to whether the appellant being a Non Executive Director was otherwise responsible for the affairs of the Company or not. The appeals are allowed.
Issues Involved:
1. Compliance with Minimum Public Shareholding (MPS) requirements. 2. Validity of the Scheme of Arrangement and Amalgamation. 3. SEBI's ex-parte interim order and subsequent confirmatory order. 4. Responsibility of the Directors for non-compliance. Detailed Analysis: 1. Compliance with Minimum Public Shareholding (MPS) Requirements: The core issue revolves around the compliance with the Minimum Public Shareholding (MPS) requirement as per Rule 19 and Rule 19A of the Securities Contracts (Regulation) Rules, 1957 (SCRR). The amended rules mandated that all listed companies must maintain a public shareholding of at least 25%. Companies with less than 25% public shareholding were required to achieve this threshold by June 03, 2013. The amendments aimed to ensure greater public participation in listed companies. 2. Validity of the Scheme of Arrangement and Amalgamation: To comply with the MPS requirements, a Scheme of Arrangement and Amalgamation was proposed and sanctioned by the Calcutta High Court. The scheme involved transferring shares held by the promoter entity, IPCL, to an independent trust ("Power Trust"), and subsequently amalgamating IPCL into DPSC. The scheme was designed to reduce IPCL's shareholding from 93% to below 75% and classify the trust's shareholding as public. However, SEBI contended that the shares held by the trust should be considered promoter shareholding, not public shareholding, and sought modification of the High Court's order. 3. SEBI's Ex-parte Interim Order and Subsequent Confirmatory Order: Despite the sanctioned scheme, SEBI issued an ex-parte interim order on June 4, 2013, against the company and its directors, freezing the voting rights and corporate benefits of the promoter's shares, restraining the promoters and directors from dealing in shares, and barring them from holding new director positions in any listed company. SEBI later confirmed this order on July 25, 2017, arguing that the company and its directors had failed to ensure compliance with the MPS requirements. 4. Responsibility of the Directors for Non-compliance: The Whole Time Member (WTM) of SEBI held that the directors of DPSC were responsible for ensuring compliance with the regulatory guidelines. The WTM stated, "the Noticees, being the directors of the Company (DPSC) ought to have ensured that the functioning of the Company (DPSC) was in full compliance with the applicable laws including the provisions of Securities Contracts (Regulation) Rules, 1957." However, the Tribunal found that the Calcutta High Court's orders directed the trust, not the company or its directors, to divest shares to the public. Tribunal's Findings: The Tribunal concluded that the WTM misinterpreted the Calcutta High Court's orders and erroneously held the company and its directors responsible for non-compliance. The Tribunal emphasized that any deviation from the sanctioned scheme required further directions from the Calcutta High Court. The Tribunal stated, "We are of the opinion that the Whole Time Member has misinterpreted the orders of the Calcutta High Court and has committed an error in holding that the DPSC and its Directors had not complied with the MPS requirement." Conclusion: The Tribunal quashed the ex-parte interim order dated June 4, 2013, and the confirmatory order dated July 25, 2017, stating that SEBI should have sought further directions from the Calcutta High Court rather than restraining the directors. The Tribunal allowed the appeals and concluded that it was unnecessary to determine whether the appellant, being a Non-Executive Director, was responsible for the company's affairs. The appeals were allowed with no order as to costs.
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