Supreme Court clarifies the scope of Regulation 10 of SEBI Takeover Regulations, 1997: SEBI vs. Sunil Krishna Khaitan & Ors (2022) INSC 608 (11 July 2022)

LEGAL ISSUE: Interpretation of Regulation 10 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, and the powers of the Securities and Exchange Board of India (SEBI) under Regulations 44 and 45 of the same regulations.

CASE TYPE: Securities Law, Takeover Regulations

Case Name: Securities and Exchange Board of India vs. Sunil Krishna Khaitan and Others & Securities and Exchange Board of India vs. Smt. Madhuri S. Pitti and Others

Judgment Date: 11 July 2022

Date of the Judgment: 11 July 2022

Citation: (2022) INSC 608

Judges: Sanjiv Khanna, J. and Bela M. Trivedi, J.

Can an individual acquirer within a promoter group be required to make a public announcement under Regulation 10 of the SEBI Takeover Regulations, 1997, if their individual shareholding exceeds 15%, even if the group’s collective holding was already above that threshold? The Supreme Court addressed this question, clarifying the interpretation of “acquirer” and “persons acting in concert” under the regulations. The court also examined the powers of the Securities Appellate Tribunal (SAT) to modify SEBI’s orders.

The Supreme Court of India, in a judgment delivered by Justices Sanjiv Khanna and Bela M. Trivedi, dismissed the appeals filed by the Securities and Exchange Board of India (SEBI). The court clarified the interpretation of Regulation 10 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, and addressed the powers of the Securities Appellate Tribunal (SAT).

Case Background

The case involves two separate appeals by SEBI. The first appeal, concerning Sunil Krishna Khaitan and others, relates to the acquisition of shares in Khaitan Electrical Limited (KEL). The second appeal involves Madhuri S. Pitti and others, pertaining to acquisitions in Pitti Laminations Ltd. (PLL).

In the KEL case, the promoter group, including Sunil Krishna Khaitan and Khaitan Lefin Limited (KLL), were issued warrants convertible into equity shares. On March 12, 2007, KLL acquired 13,00,000 shares, increasing its individual shareholding from 10.52% to 17.16%. The collective shareholding of the promoter group also increased from 25.83% to 34.21%. SEBI issued a show-cause notice alleging violations of Regulations 10 and 11(1) of the Takeover Regulations, 1997, for failure to make a public announcement.

In the PLL case, Akshay S. Pitti (R23) converted warrants into equity shares on April 26, 2006, and April 11, 2007, increasing his individual shareholding. Subsequently, a preferential allotment of shares to Madhuri Pitti (R21) and Pitti Electrical Equipment Pvt. Ltd (R22) increased the total shareholding of the promoter group. SEBI directed the respondents to revise their offer, including the acquisitions made by R23 in 2006 and 2007.

Timeline

Course of Proceedings

The Whole Time Member of SEBI ruled that the respondents in the KEL case violated Regulations 10 and 11(1) of the Takeover Regulations, 1997, and directed them to make a public announcement to acquire shares of KEL. The Securities Appellate Tribunal (SAT) partly allowed the appeal, holding that Regulation 10 was not violated, but Regulation 11(1) was. However, SAT set aside the direction for a public announcement due to the delay in issuing the show-cause notice and imposed a monetary penalty of Rs. 25,00,000/-.

In the PLL case, SAT allowed the appeal against SEBI’s direction to revise the offer, stating that SEBI could not issue such directions through a letter. SAT also relied on its earlier decision in the Sunil Khaitan case, holding that shareholdings of all members of a group acting in concert must be reckoned as a whole to determine if the limit under Regulation 10 has been crossed.

Legal Framework

The judgment interprets several key provisions of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997:

• Regulation 2(1)(b): Defines “acquirer” as any person who, directly or indirectly, acquires or agrees to acquire shares or voting rights in the target company, either by themselves or with any person acting in concert.
• Regulation 2(1)(e): Defines “person acting in concert” as those who cooperate to acquire shares or voting rights in a target company, including companies under the same management, directors, and other related entities.
• Regulation 6: Mandates disclosure of shareholdings by persons holding more than 5% shares or voting rights, promoters, and persons having control over a company.
• Regulation 7: Requires acquirers to disclose their shareholding when it exceeds specified thresholds (5%, 10%, 14%, 54%, or 74%).
• Regulation 8: Stipulates continuous disclosure requirements for persons holding more than 15% shares or voting rights.
• Regulation 10: States that no acquirer shall acquire shares or voting rights which, taken together with shares or voting rights held by them or persons acting in concert, entitle them to exercise 15% or more of the voting rights in a company, unless a public announcement is made.
• Regulation 11(1): Prohibits an acquirer who, together with persons acting in concert, holds 15% or more but less than 55% of the shares or voting rights, from acquiring additional shares or voting rights entitling them to exercise more than 5% of the voting rights in any financial year, unless a public announcement is made.
• Regulation 44: Empowers the Board to issue directions in the interest of the securities market or for the protection of investors, including directing a public offer, disinvestment of shares, or other measures.
• Regulation 45: Specifies penalties for non-compliance with the regulations, including monetary penalties, criminal prosecution, and directions under the Act.

The court also referred to Sections 11, 11B, 15H, and 15I of the Securities and Exchange Board of India Act, 1992, which grant SEBI powers to protect investors, issue directions, impose penalties, and adjudicate violations.

Arguments

Appellant (SEBI) Arguments:

• SEBI contended that on March 12, 2007, KLL’s individual shareholding in KEL increased from 10.52% to 17.16%, and the promoter group’s collective shareholding increased from 25.83% to 34.21%, thus violating both Regulations 10 and 11(1) of the Takeover Regulations 1997.
• Similarly, in the PLL case, SEBI argued that R23’s shareholding increased on April 26, 2006, and April 11, 2007, without a public announcement.
• The objective of the Takeover Regulations, 1997, is to inform shareholders of substantial changes in ownership and provide an exit opportunity through an open offer.
• Regulations 10, 11, and 12 operate in distinct fields, and the Appellate Tribunal’s interpretation is contrary to the objective of Regulation 10, which is to ensure an exit option for shareholders when any person or group crosses the 15% threshold.
• Regulation 3(3) of the Takeover Regulations 2011 clarifies that an individual within a group crossing the threshold must make a public offer, even if the group’s aggregate shareholding remains unchanged.
• The Board has powers under the Act to issue directions, impose penalties, and prosecute defaulters, and the Appellate Tribunal should not have interfered with the directions for an open offer.
• Delay in issuing a show-cause notice does not exonerate defaulters.

Respondents Arguments:

• The respondents contended that the term “acquirer” under Regulation 10 should be interpreted to include the individual shareholder along with persons acting in concert.
• They argued that if the collective shareholding of the group was already above 15%, there was no individual violation of Regulation 10.
• They also argued that the Board’s interpretation of Regulation 10 was inconsistent with its previous stance and that there was a significant delay in issuing the show-cause notice.
• The respondents contended that the directions for a public offer at a belated stage were unwarranted and that a monetary penalty was sufficient.

Innovativeness of the argument: The respondents innovatively argued that the term “acquirer” should be interpreted to include both the individual shareholder and persons acting in concert, which was different from SEBI’s interpretation.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues:

1. What is the correct interpretation of Regulation 10 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, particularly regarding the definition of “acquirer” and “persons acting in concert”?
2. Whether the Securities Appellate Tribunal (SAT) was correct in setting aside the directions of the Whole Time Member of SEBI for a public announcement and open offer, and instead imposing a monetary penalty?
3. What is the scope and extent of the power of the Securities Appellate Tribunal under Section 15T of the Securities and Exchange Board of India Act, 1992?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court held that the Appellate Tribunal was correct in its interpretation of Regulation 10. The court agreed that the term “acquirer” includes both the individual shareholder and persons acting in concert. Therefore, if the collective shareholding of the group was already above 15%, there was no individual violation of Regulation 10.

However, the court clarified that while the Appellate Tribunal had the power to modify or set aside directions issued under Regulation 44, it could not impose a penalty under Section 15H when no such proceedings were initiated by SEBI.

How each authority was viewed by the Court?

• Swedish Match AB and Another v. Securities & Exchange Board of India and Another [(2004) 11 SCC 641]: The court distinguished this case, clarifying that it related to Regulation 11(1), not Regulation 10 and that a stray sentence in the judgment cannot be considered as ratio.
• Other authorities were used to support the court’s reasoning on various legal points, such as the interpretation of penal statutes, legitimate expectation, and the powers of the Appellate Tribunal.

What weighed in the mind of the Court?

The Supreme Court’s decision was influenced by several factors:

• Interpretation of “Acquirer”: The Court emphasized that the term “acquirer” in Regulation 10 includes both the individual shareholder and persons acting in concert. This interpretation ensures that the regulations are not circumvented by complex ownership structures.
• Consistency and Predictability: The court stressed the importance of consistency in regulatory actions, noting that SEBI had previously interpreted Regulation 10 in the same way as the Appellate Tribunal.
• Principle of Doubtful Penalisation: The court applied the principle that penal statutes should be construed in favor of the subject, especially when there are two possible interpretations.
• Reasonable Exercise of Discretion: The court highlighted that while SEBI has broad powers, these must be exercised reasonably and in line with the objectives of the regulations, considering the interest of the securities market and the protection of investors.
• Delay and Laches: The court noted the inordinate delay in issuing the show-cause notices and the lack of explanation for the same. This delay weighed against the imposition of a public offer at a belated stage.
• Powers of the Appellate Tribunal: The court clarified that while the Appellate Tribunal has broad powers to modify or set aside orders, it cannot impose a penalty under Section 15H without prior proceedings.

Ratio Decidendi

The Supreme Court’s ratio decidendi (the reason for the decision) can be summarized as follows:

1. Interpretation of Regulation 10: The term “acquirer” in Regulation 10 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, includes both the individual shareholder and persons acting in concert. Thus, if the collective shareholding of a group acting in concert is already above 15%, an individual member of that group crossing the 15% threshold does not trigger the obligation to make a public announcement under Regulation 10.
2. Powers of the Securities Appellate Tribunal (SAT): The SAT has the power to modify or set aside directions issued by SEBI under Regulation 44, but it cannot impose penalties under Section 15H of the SEBI Act without prior proceedings.
3. Reasonable Exercise of Regulatory Power: While SEBI has broad powers to protect investors and regulate the securities market, these powers must be exercised reasonably, consistently, and within a reasonable timeframe. Inordinate delays in issuing show-cause notices can undermine the fairness and effectiveness of regulatory actions.

Obiter Dicta

The obiter dicta (statements made in passing) in the judgment include:

• The court emphasized the importance of consistency in the interpretation of regulations by SEBI.
• The court reiterated that penal statutes should be construed in favor of the subject, especially when there are two possible interpretations.
• The court highlighted that while SEBI has broad powers, these must be exercised reasonably and in line with the objectives of the regulations.
• The court also noted that delay in issuing a show-cause notice does not exonerate defaulters but it can be a factor in deciding whether a direction for open offer is sustainable at a belated stage.

Impact of the Judgment

The Supreme Court’s judgment has several significant impacts:

• Clarity on Regulation 10: The judgment provides much-needed clarity on the interpretation of Regulation 10, specifically regarding the term “acquirer” and “persons acting in concert.” This clarification ensures that the regulations are applied consistently and fairly.
• Limitations on SEBI’s Powers: The judgment places limitations on SEBI’s powers, particularly regarding the imposition of penalties by the SAT. It clarifies that the SAT cannot impose penalties under Section 15H without prior proceedings.
• Emphasis on Consistency and Fairness: The judgment emphasizes the importance of consistency, fairness, and reasonableness in regulatory actions. It underscores that regulatory powers must be exercised in a manner that is consistent with the objectives of the regulations and the principles of natural justice.
• Protection of Investors: By clarifying the scope of Regulation 10 and the powers of the SAT, the judgment ultimately contributes to the protection of investors by ensuring that regulatory actions are fair, consistent, and predictable.
• Impact on Future Cases: This judgment will serve as a precedent for future cases involving similar issues under the SEBI Takeover Regulations, 1997. It will guide the interpretation of the regulations and the exercise of regulatory powers.

Flowchart

Conclusion

The Supreme Court’s judgment in SEBI vs. Sunil Krishna Khaitan & Ors is a landmark decision that clarifies the interpretation of Regulation 10 of the SEBI Takeover Regulations, 1997. The court’s interpretation of “acquirer” and “persons acting in concert” provides much-needed clarity and ensures that the regulations are applied consistently and fairly. The judgment also emphasizes the importance of consistency, fairness, and reasonableness in regulatory actions and sets limitations on SEBI’s powers, particularly regarding the imposition of penalties by the SAT. This decision will have a lasting impact on the interpretation and application of the SEBI Takeover Regulations and will serve as a guide for future cases involving similar issues.