2023 (8) TMI 202 - SECURITIES APPELLATE TRIBUNAL MUMBAI

Violation of Regulation 11(1) of the SAST Regulations - Non issue of open offer as warrants were converted into shares - SAST Regulations retrospective or prospective application - AO held that the promoters of Reliance and persons acting in concert acquired the shares and voting rights on 7th January, 2000 which is the date of acquisition and on which date the obligation to make a public announcement for an open offer under Regulation 11(1) was triggered, and that the acquisition of 6.83% of the shares was in excess of the ceiling of 5% prescribed under Regulation 11(1) of the SAST Regulations and, therefore, it triggered the obligation to make an open offer - penalty under Section 15H of the SEBI Act imposed - whether the promoters were liable to make a public announcement under Regulation 3(2) of the 2011 SAST Regulations. ?

HELD THAT:- Tribunal erred in concluding that the appellants were required to make an open offer in terms of Regulation 3(2) of the SAST Regulations as it failed to consider the definition of the term ‘shares’ as contemplated in the SAST Regulations as well as in the 2011 SAST Regulations. The Tribunal only followed the decision in Sohel Malik [2008 (10) TMI 730 - SECURITIES APPELLATE TRIBUNAL, MUMBAI] and Eight Master Capital Fund [2009 (7) TMI 1386 - SECURITIES APPELLATE TRIBUNAL, MUMBAI] which as we have pointed out is distinguishable on facts as well as on law. In any case, it was not a case involving warrants. Further, in our view, the obligation cast on the appellants to make an open offer which was triggered under the SAST Regulations had to be made under the 2011 SAST Regulations since the SAST Regulations had been repealed.

Bombay High Court in M. Sreenivasalu Reddy and Ors. vs. Kishore R. Chabbaria & Ors. [1999 (4) TMI 570 - HIGH COURT OF BOMBAY] is squarely applicable in the instant appeal as held that a person who has acquired securities convertible into equity shares carrying voting rights prior to the coming into force of the 1994 SAST Regulations is not an ‘acquirer’ under the 1994 SAST Regulations and that the conversion of such securities into shares carrying voting rights is not an acquisition triggering a public announcement under the 1994 SAST Regulations.

Thus we hold:

(i) in terms of Regulation 11(1) read with Regulations 2(1)(b) and 2(1)(k) and 14(1) and (2) of the SAST Regulations an obligation to make a public announcement for an open offer is triggered at the time of acquisition of such convertible securities.

(ii) The contention of the respondent that under Regulation 11(1) read with Regulation 14(2) an obligation to make an public announcement for an open offer is triggered under the SAST Regulations at the time of conversion of warrants into equity shares carrying voting rights is rejected.

(iii) Only a person who acquires such convertible securities after coming into effect the SAST Regulations will be an ‘acquirer’ within the meaning of Regulation 2(1)(b) of the SAST Regulations and only such acquisition will be ‘an acquisition’ governed by the SAST Regulations. Further, a person who has acquired convertible securities before SAST Regulations coming into force will not be an ‘acquirer’ for the purpose of the SAST Regulations in as much as there is no acquisition under the SAST Regulations. The right to obtain shares was vested in the appellants in 1994 when detachable warrants were issued. Such vested rights cannot be rendered nugatory on the enactment of the SAST Regulations.

(iv) We further hold that the appellants who acquired the warrants on 12th January, 1994 were not “acquirer” within the meaning of Regulation 2(1)(b) of the SAST Regulations and that there is no acquisition by them under the SAST Regulations and, consequently, the provision of the SAST Regulations cannot be applied to the warrants allotted to them on 12^th January, 1994. The detachable warrants that was acquired prior to the coming into force of the SAST Regulations were not governed by any of the provisions of the SAST Regulations.

Thus, taking into account the scope, purpose and objective of the SAST Regulations, we are of the opinion that since the acquisition took place on 12th January, 1994 much before the enforcement of the SAST Regulations, we are of the opinion that the appellants are not acquirers under the SAST Regulations.

Whether the SAST Regulations had a retrospective application or a retroactive application with regard to the warrants that was acquired in January, 1994? - As held that the obligation to make a public announcement under Regulation 11(1) is triggered at the time of acquisition of the warrants and not at the time of conversion of such warrants into equity shares with voting rights. If the appellants are directed to make a public announcement in respect of the equity shares of the Company allotted to the persons acting in concert in January, 2000 by conversion of warrants held by them then it will be a retrospective application of the SAST Regulations. Admittedly, the SAST Regulations is not retrospective in their application and there is nothing in the Regulations suggesting its application prior to its enforcement i.e. prior to 20th February, 1997. In our view, “retrospective application” or “retroactive application” of the SAST Regulations is not relevant.

The Companies Act gave the warrant holders the right to receive shares carrying voting rights upon conversion of warrants without any obligation attached to such warrants. The obligation to make an open offer is a substantive obligation under the SAST Regulations and if the legislature decided to impose an obligation on warrants and other convertible instruments outstanding at the time of enactment of the SAST Regulations it could have done so by inserting a specific provision for the same. Admittedly, there is no such provision under the SAST Regulations dealing with warrants and other convertible instruments outstanding at the time to enactment of these Regulations.

Period of limitation:- As we are of the opinion that there has been an inordinate delay in the issuance of the show cause notice. Even though there is no period of limitation prescribed in the Act and the Regulations for issuance of a show cause notice and for completion of the adjudication proceedings, nonetheless, the authorities are required to exercise its powers within a reasonable period. In AO, SEBI vs Bhavesh Pabari, [2019 (3) TMI 197 - SUPREME COURT] the Supreme Court held that an authority is required to exercise its powers within a reasonable period.

Admittedly, it took 11 years from the date of the commission of the alleged violation in January, 2000 to issue a show cause notice.

It took SEBI 9 long years to decide the consent application. The impugned order has come after 21 years of the alleged violation. We find that the delay has caused serious prejudice to the appellant. There is an inordinate delay in the initiation of the proceedings but also in the disposal of the proceedings. The impugned order, thus, is liable to be set aside also on this ground.

Penalty of Rs. 25 crores has been imposed u/s 15H of the SEBI Act which came into existence with effect from 8th September, 2015 - As the provision 15H existing as on January, 2000, would apply which at that point was a maximum penalty of Rs. 5 lakh, Thus, in our opinion, a penalty of Rs. 25 crores could not have been imposed and even assuming that the violation had occurred, a maximum penalty of Rs.5 lakhs could be imposed.

We find that the appellant has not violated Regulation 11(1) of the SAST Regulations. The imposition of penalty upon the appellant is without any authority of law. Consequently, the impugned order cannot be sustained and is quashed. The appeal is allowed. All the misc. applications are accordingly disposed of.

We have been informed that the penalty amount pursuant to the impugned order was deposited by the appellants under protest. Since we have set aside the impugned order, the respondent is directed to refund the amount of Rs. 25 crore within four weeks from today. In the circumstances of the case, parties shall bear their own costs.