9911796707🚨 Important Update for Our Users
We are transitioning to our new and improved portal - www.taxtmi.com - for a better experience.
Follow us:
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2025 (6) TMI 1100 - HC - SEBIDivestment process being adopted by the Trust and in case the Trust is unable to meet the MPS compliance - scheme of amalgamation and demerger sanctioned by the Company Court which included a clause deeming the Minimum Public Shareholding (MPS) requirement under rule 19A of the Securities Contracts (Regulation) Rules 1957 (SCRR) - HELD THAT - The object and purpose of rule 19A of the SCRRA is primarily to ensure transparency in corporate management and shareholding. The MPS requirement is aimed at ensuring that the listed companies have a minimum amount of shares among the public at large to prevent any attempt at improprieties in the management and administration of public companies. It appears from the records that SEBI had notified the requirement of compliance of MPS to at least 105 companies including the DPSC Ltd. some of which have applied and several are being dealt with in accordance with law. The appellant company is no exception. This Court has noted that the Single Bench which sanctioned the scheme on April 17 2013 later on realized that it might have been misled in so far as compliance of the MPS requirement in the scheme proposed by the appellant in its former avatar. It is essentially for this purpose and to ensure compliance of the terms and conditions of sanction of the scheme that sufficient leverage over a period of nearly six years was given to the appellant and/or Power Trust to ensure 25% of the shareholding of the former M/s. DPSC Ltd. to be disinvested to the public at large. This Court having carefully considered the orders passed by the Single Bench is of the view that the attempts at compliance with such disinvestment to satisfy the MPS requirement under rule 19A (supra) have not been bona fide. The Court s mind is not free from doubt that the appellant and the Power Trust may have tried to frustrate the process of compliance of rule 19A(supra) by presenting repeated fait accompli to this Court. This Court is of the view that the impugned judgment and order calls for no interference.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Court in this matter include:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Compliance with MPS Requirement under Rule 19A through the Scheme of Amalgamation and Transfer to Trust The legal framework governing this issue is rule 19A of the Securities Contracts (Regulation) Rules, 1957, which mandates that all publicly listed companies maintain at least 25% of their shareholding with the general public. The scheme sanctioned under sections 391/392 of the Companies Act, 1956, involved transferring a substantial portion of shares (about 40%) to a trust (Power Trust), with the scheme clause 3.3.3 stipulating that the trust's shareholding would be deemed to satisfy the MPS requirement by constituting members of the public. The Court interpreted the scheme's clause 3.3.3 critically, noting that the trust, being an irrevocable entity managing the investment division independently, was purported to represent the public shareholders. However, the Court found this characterization flawed, as the trust could not, in substance, be equated with the public at large for the purpose of MPS compliance. SEBI's communications and subsequent actions revealed that the scheme was an attempt to bypass the statutory mandate of rule 19A. The Court noted that the Company Court, which sanctioned the scheme, later realized it had been misled regarding compliance with rule 19A, as the trust did not constitute public shareholders in the intended sense. The Court applied the law to the facts by examining the nature of the trust and its shareholding, concluding that the transfer to the trust did not satisfy the MPS requirement. The trust's inability to disinvest sufficient shares to the public over an extended period (only about 6% disinvested despite multiple extensions) further demonstrated non-compliance. Competing arguments by the appellant and the Power Trust, which presumably relied on the scheme's sanction and the trust's status, were rejected in light of the statutory purpose of rule 19A to ensure transparency and prevent management improprieties. The Court concluded that the scheme's attempt to satisfy MPS through a trust was not bona fide and amounted to circumventing the law. Issue 2: SEBI's Authority and Actions Against the Company, Promoters, and Directors for Non-Compliance with MPS The Securities and Exchange Board of India (SEBI) sought leave from the Court to take necessary action against the company, its promoter group, and directors under securities laws for failure to meet the MPS requirements. SEBI's application included prayers for permission to enforce compliance beyond the divestment process adopted by the trust. The Court recognized SEBI's regulatory mandate to ensure compliance with securities laws and noted that SEBI had notified over 105 companies, including the appellant, to comply with rule 19A. The Court acknowledged that SEBI was not initially notified of the scheme proceedings but later intervened upon realizing the scheme's inadequacies. The Court's reasoning emphasized the importance of transparency and public shareholding in listed companies to prevent managerial improprieties. It held that SEBI's intervention was justified and necessary given the failure of the trust and the company to comply with MPS despite extended timelines and opportunities. The Court applied the law by granting SEBI leave to take action against the company and its connected entities, thereby affirming SEBI's authority to enforce compliance and impose sanctions where statutory requirements are flouted. Competing arguments questioning SEBI's jurisdiction or the propriety of its orders were dismissed, especially in light of the Securities Appellate Tribunal's direction that SEBI must approach the High Court for coercive measures against directors. The Court concluded that SEBI's actions were lawful and necessary to uphold the regulatory framework. Issue 3: Jurisdiction of the Company Court and High Court Regarding Enforcement of MPS Compliance Post-Scheme Sanction The Company Court had sanctioned the scheme in 2013, including clause 3.3.3, which was later found to be misleading in terms of MPS compliance. The question arose whether the Company Court or the High Court could modify or recall the scheme or take enforcement action to ensure compliance. The Court noted that the Company Court had permitted disinvestment by the trust over several years to meet MPS but that the process was inadequate and delayed. The High Court, on the other hand, was approached by SEBI for enforcement and corrective measures. The Court observed that the Securities Appellate Tribunal had held that SEBI must approach the High Court for coercive measures against directors, indicating the High Court's jurisdiction in such matters. The Court reasoned that the High Court had the jurisdiction and responsibility to ensure that statutory requirements under securities laws were not circumvented by schemes sanctioned under company law. The Court's intervention was thus proper and necessary to uphold the law. No competing arguments were accepted that would limit the High Court's jurisdiction in this regard. Issue 4: Bona Fides of the Company and Power Trust in Complying with MPS Requirements The Court scrutinized the conduct of the company and the Power Trust over a period of nearly six years, during which only a fraction of the required shares were disinvested to the public. The Court expressed serious doubts about the bona fides of the appellant and the Power Trust, suggesting attempts to frustrate compliance by presenting repeated fait accompli. The Court also noted unexplained financial transactions involving the Power Trust borrowing money from NBFCs and pledging shares, which raised questions about the trust's management and intentions. The Court's findings were based on the prolonged delay, insufficient disinvestment, and opaque financial dealings, applying the principle that compliance with statutory requirements must be genuine and not a mere formality or subterfuge. Arguments by the appellant and Power Trust claiming bona fide efforts were rejected in light of the evidence and the Court's observations. Issue 5: Impact of Pledged Shares and Insolvency Proceedings on MPS Compliance The Power Trust had pledged over 32 crore shares to an NBFC, which subsequently went into corporate insolvency. The pledged shares were ordered to be sold under a receiver appointed by the Court. The Court noted that the purpose of the loan availed against the pledged shares was unexplained, and the invocation of the arbitration clause by the NBFC, along with the trust's concurrence, raised unresolved questions regarding the legality and bonafides of these transactions. While the Court did not make a definitive ruling on this aspect, it highlighted the suspicious nature of these transactions and their potential to further complicate compliance with MPS requirements. The Court implicitly indicated that such financial dealings could not be allowed to undermine the statutory objective of ensuring minimum public shareholding. 3. SIGNIFICANT HOLDINGS The Court held that: "The object and purpose of rule 19A of the SCRRA is primarily to ensure transparency in corporate management and shareholding. The MPS requirement is aimed at ensuring that the listed companies have a minimum amount of shares among the public at large to prevent any attempt at improprieties in the management and administration of public companies." It further stated: "The attempts at compliance with such disinvestment to satisfy the MPS requirement under rule 19A have not been bona fide. The Court's mind is not free from doubt that the appellant and the Power Trust may have tried to frustrate the process of compliance of rule 19A by presenting repeated fait accompli to this Court." The Court concluded that the scheme's clause deeming the trust's shareholding as public shareholding was contrary to the statutory mandate and that SEBI's authority to enforce compliance against the company, promoters, and directors was valid and necessary. The final determination was to dismiss the appellant's appeal and uphold the Single Bench's order granting SEBI leave to take action under securities laws to ensure compliance with MPS requirements. The Court vacated interim orders and declined to impose costs.
|
