Supreme Court clarifies the scope of Section 59 of the Companies Act, 2013 in share rectification cases: IFB Agro Industries vs. SICGIL India (2023) INSC 12

Date of the Judgment: January 4, 2023
Citation: (2023) INSC 12
Judges: A.S. Bopanna, J. and Pamidighantam Sri Narasimha, J.
Can a company approach the National Company Law Tribunal (NCLT) to rectify its register of members for violations of SEBI regulations? The Supreme Court of India recently addressed this question, clarifying the scope of the NCLT’s rectificatory jurisdiction under Section 59 of the Companies Act, 2013. The Court held that the NCLT’s power to rectify the register is summary in nature and cannot be used to adjudicate complex issues that fall under the purview of the Securities and Exchange Board of India (SEBI).

Case Background

The case involves IFB Agro Industries Limited (the Appellant), a listed company, and SICGIL India Limited along with its directors and relatives (the Respondents). The Appellant alleged that the Respondents, after a failed business tie-up proposal in August 2003, started acquiring the Appellant’s shares from the open market. By January 18, 2004, the Respondents collectively held just under 5% of the Appellant’s total paid-up share capital.

On January 19, 2004, Respondent No. 1 acquired additional shares, causing the Respondents’ total shareholding to exceed 5%, triggering disclosure requirements under Regulation 7(1) of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997. The Respondents sent an intimation to the Appellant on January 20, 2004, which was received on January 22, 2004. The Appellant claimed that the disclosure was not in the prescribed format.

Subsequently, on May 27, 2004, Respondent No. 1’s individual shareholding crossed 5%, triggering disclosure requirements under Regulation 13 of the SEBI (Prohibition of Insider Trading) Regulations, 1992. Respondent No. 1 admitted to failing to make this disclosure within the prescribed time. The Appellant claimed it discovered this on June 4, 2004, after an internal investigation.

Timeline

Course of Proceedings

The Appellant filed a petition before the Company Law Board (CLB) under Section 111A of the Companies Act, 1956, seeking rectification of the register of members by deleting the names of the Respondents for holding shares in excess of 5%. During the pendency of the petition, the Companies Act, 2013 came into force, and the matter was transferred to the National Company Law Tribunal (NCLT).

The NCLT allowed the petition, holding that the Respondents violated the SEBI (PIT) Regulations and the SEBI (SAST) Regulations. The NCLT directed the Appellant to buy back the shares held by the Respondents in excess of 5%. The Respondents appealed to the National Company Law Appellate Tribunal (NCLAT), which set aside the NCLT’s order, stating that the NCLT exceeded its jurisdiction.

Legal Framework

The core legal issue revolves around Section 59 of the Companies Act, 2013, which replaced Section 111A of the Companies Act, 1956. Section 59 deals with the rectification of the register of members. It states:

“59. (1) If the name of any person is, without sufficient cause, entered in the register of members of a company, or after having been entered in the register, is, without sufficient cause, omitted therefrom, or if a default is made, or unnecessary delay takes place in entering in the register, the fact of any person having become or ceased to be a member, the person aggrieved, or any member of the company, or the company may appeal in such form as may be prescribed, to the Tribunal, or to a competent court outside India, specified by the Central Government by notification, in respect of foreign members or debenture holders residing outside India, for rectification of the register.”

The judgment also discusses the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997, particularly Regulation 7(1), which mandates disclosure when an acquirer’s shareholding crosses 5%. It also discusses the SEBI (Prohibition of Insider Trading) Regulations, 1992, specifically Regulation 13, which requires disclosure when an individual’s shareholding exceeds 5%.

Arguments

Appellant’s Submissions:

• The Respondents did not provide timely intimation in the prescribed format when their shareholding crossed the 5% threshold, violating Regulation 7(1) of the SEBI (SAST) Regulations.

• Respondents 1-6, as “connected persons” under Regulation 2(c) of the SEBI (PIT) Regulations, were “acting in concert” under Regulation 2(e) of the SEBI (SAST) Regulations, thus violating Regulations 13 and 14 of the SEBI (PIT) Regulations.

• The Securities and Exchange Board of India Act, 1992, should be read in addition to, and not in derogation of, the Companies Act. Therefore, the Appellant was entitled to approach the Tribunal under Section 111A of the 1956 Act (now Section 59 of the 2013 Act) for rectification of the register.

Respondents’ Submissions:

• Filing a petition under Section 111A is an abuse of process.

• There was no violation of the SEBI (SAST) Regulations as the Respondents had given timely intimation in the prescribed format.

• The Section 111A petition did not allege any violation of the SEBI (SAST) Regulations, and no attempt was made to amend it.

• The SEBI (PIT) Regulations are not applicable to Respondent Nos. 2-6 as their individual shareholding never crossed 5%. Only Respondent No. 1’s shareholding crossed 5%, which was an inadvertent failure to disclose.

• The SEBI (PIT) Regulations do not apply to Respondent Nos. 2-6 as there is no concept of “persons acting in concert” under these regulations.

• Under Section 111A(3), the Tribunal has no power to annul the transfer or direct the buy-back of the shares.

Issues Framed by the Supreme Court

1. What is the scope and ambit of Section 111A of the 1956 Act, as amended by Section 59 of the 2013 Act, to rectify the register of members?
2. Which is the appropriate forum for adjudication and determination of violations and consequent actions under the SEBI (SAST) Regulations 1997 and the SEBI (PIT) Regulations 1992?

Treatment of the Issue by the Court

Authorities

Cases Relied Upon by the Court:

• Ammonia Supplies Corporation (P) Ltd. v. Modern Plastic Containers Pvt. Ltd. & Ors. [ (1998) 7 SCC 105 ] – Supreme Court of India: This case established that the rectificatory jurisdiction of the Company Law Board (CLB) under Section 155 of the Companies Act, 1956 is summary in nature and not intended for cases with contested facts.
• Mannalal Khetan & Ors. v. Kedar Nath Khetan & Ors. [(1977) 2 SCC 424] – Supreme Court of India: This case was cited by the appellant to support their contention that the SEBI Act should be read in addition to, and not in derogation of, the Companies Act.
• Chairman, SEBI v. Shriram Mutual Fund & Another [(2006) 5 SCC 361] – Supreme Court of India: This case was cited by the appellant to support their contention that the SEBI Act should be read in addition to, and not in derogation of, the Companies Act.
• Standard Chartered Bank v. Andhra Bank Financial Services Ltd. & Ors. [(2006) 6 SCC 94] – Supreme Court of India: This case reiterated that the power of rectification remains summary in nature, even with the insertion of Section 111A of the Companies Act, 1956.
• Jai Mahal Hotels (P) Ltd. v. Devraj Singh & Ors. [(2016) 1 SCC 423] – Supreme Court of India: This case reaffirmed that the power of rectification is summary and that seriously disputed questions should be relegated to a more appropriate forum.
• Kesha Appliances (P) Ltd. & Ors. v. Royal Holdings Services Ltd.& Ors. [(2006) 1 Bom CR 545] – High Court of Bombay: This case held that cases arising out of breach of Take Over Regulations fall under the exclusive domain of SEBI.
• Zandu Pharmaceutical Works Ltd. v. Devkumarvaidya & Ors. [(2009) 89 CLA 65] – Company Law Board: This case held that the CLB cannot exercise rectificatory jurisdiction in cases of violation of SEBI regulations unless SEBI first decides if there has been a violation.

Legal Provisions Considered by the Court:

• Section 59 of the Companies Act, 2013: Pertains to the rectification of the register of members.
• Section 111A of the Companies Act, 1956: (now replaced by Section 59 of the 2013 Act) Also deals with rectification of the register of members.
• Regulation 7(1) of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997: Mandates disclosure when an acquirer’s shareholding crosses 5%.
• Regulation 13 of the SEBI (Prohibition of Insider Trading) Regulations, 1992: Requires disclosure when an individual’s shareholding exceeds 5%.

Judgment

The Supreme Court held that the NCLT’s power under Section 59 of the Companies Act, 2013, is a summary power meant for rectifying clear errors in the register of members, not for adjudicating complex disputes involving violations of SEBI regulations. The Court emphasized that regulatory bodies like SEBI have the expertise and statutory mandate to handle such matters.

The Court also held that the transactions that allegedly violate the SEBI (PIT) Regulations and the SEBI (SAST) Regulations need to be scrutinized by SEBI itself.

The Court stated that the power of rectification is limited to correcting errors and not for adjudicating on disputed claims. The Court held that the word “sufficient cause” cannot be interpreted in a manner which would enlarge the scope of the provision.

The Court observed that the SEBI Act, Rules, Regulations and Circulars are constantly evolving to enforce order in the securities market and promote its healthy growth while protecting investor wealth.

The Court stated that the SEBI has the power to impose penalties for violations and also restitute the parties. The adjudicatory power also includes the power to settle administrative and civil proceedings under Section 15JB of the SEBI Act.

The Court noted that the SEBI has ex-ante powers to predict a possible violation and take preventive measures.

The Court observed that the SEBI (PIT) Regulations provides for the method of detecting the violation, the methods of investigation, the manner of appointment of the investigating authority, the timeline within which the report is to be submitted, the opportunity for an insider to respond to the report as well as the final decision to be taken by the SEBI.

The Court stated that the SEBI (SAST) Regulations is a comprehensive scheme providing for inquiry, investigation, submission of report by the investigating officer, procedural safeguards in favor of the acquirer, and finally, the restitutionary order/directions to be passed by the Board.

The Court observed that the transaction complained of must suffer scrutiny by the regulator, and it is only for the regulator to determine a violation of the provisions of the SEBI Act and the Regulations.

The Court stated that when Constitutional Courts are called upon to interpret provisions affecting the exercise of powers and jurisdictions of regulatory bodies, it is the duty of such Courts to ensure that transactions falling within the province of the regulators are necessarily subjected to their scrutiny and regulation.

The Court agreed with the conclusion of the Appellate Tribunal that the NCLT exceeded its jurisdiction, but disagreed with the reasoning adopted by the Appellate Tribunal.

The Court dismissed the appeal.

How each authority was viewed by the Court?

The Supreme Court heavily relied on Ammonia Supplies Corporation (P) Ltd. v. Modern Plastic Containers Pvt. Ltd. & Ors. [(1998) 7 SCC 105]* to establish that the rectificatory jurisdiction is summary in nature and is not meant for cases with contested facts. The Court also relied on Standard Chartered Bank v. Andhra Bank Financial Services Ltd. & Ors. [(2006) 6 SCC 94]* and Jai Mahal Hotels (P) Ltd. v. Devraj Singh & Ors. [(2016) 1 SCC 423]* to reiterate that the power of rectification remains summary even after the insertion of Section 111A. The Court also relied on Kesha Appliances (P) Ltd. & Ors. v. Royal Holdings Services Ltd.& Ors. [(2006) 1 Bom CR 545]* and Zandu Pharmaceutical Works Ltd. v. Devkumarvaidya & Ors. [(2009) 89 CLA 65]* to support the view that SEBI has exclusive jurisdiction over violations of its regulations.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to maintain the integrity of the regulatory framework established for the securities market. The Court emphasized that regulatory bodies like SEBI are best equipped to handle violations of their regulations due to their expertise and statutory mandate. The Court also highlighted the importance of ensuring that regulatory bodies have real-time control over their respective sectors to fulfill their purpose. The Court also took into consideration the fact that the power of rectification is summary in nature and cannot be used to adjudicate on disputed claims.

Logical Reasoning

The Court considered alternative interpretations of Section 59 of the Companies Act, 2013, but rejected them, emphasizing that the section’s purpose is to rectify simple errors, not to adjudicate complex disputes. The Court also considered the argument that the SEBI Act should be read in addition to the Companies Act, but clarified that this does not mean that the NCLT has parallel jurisdiction with SEBI. The Court ultimately decided that the NCLT’s jurisdiction is limited and that SEBI is the appropriate forum for adjudicating violations of its regulations.

The Court’s decision is that the NCLT’s jurisdiction under Section 59 of the Companies Act, 2013, is limited to rectifying clear errors in the register of members and does not extend to adjudicating complex disputes involving violations of SEBI regulations. The Court held that SEBI has exclusive jurisdiction over violations of its regulations.

The reasons for the decision are as follows:

• The rectificatory jurisdiction under Section 59 is summary in nature.
• The NCLT is not equipped to handle complex disputes involving violations of SEBI regulations.
• SEBI has the expertise and statutory mandate to handle such matters.
• Regulatory bodies like SEBI must have real-time control over their respective sectors.
• The SEBI Act, Rules, Regulations and Circulars are constantly evolving to enforce order in the securities market and promote its healthy growth while protecting investor wealth.
• The SEBI has the power to impose penalties for violations and also restitute the parties.
• The SEBI has ex-ante powers to predict a possible violation and take preventive measures.
• The SEBI (PIT) Regulations and the SEBI (SAST) Regulations provide for the method of detecting the violation, the methods of investigation, the manner of appointment of the investigating authority, the timeline within which the report is to be submitted, the opportunity for an insider to respond to the report as well as the final decision to be taken by the SEBI.

The Court quoted the following from the judgment in Ammonia Supplies Corporation (P) Ltd. v. Modern Plastic Containers Pvt. Ltd. & Ors. [(1998) 7 SCC 105]*:

“In case any claim is based on some seriously disputed civil rights or title, denial of any transaction or any other basic facts which may be the foundation to claim a right to be a member and if the court feels such claim does not constitute to be a rectification but instead seeking adjudication of basic pillar some such facts falling outside the rectification, its discretion to send a party to seek his relief before the civil court first for the adjudication of such facts, it cannot be said such right of the court to have been taken away merely on account of the deletion of the aforesaid proviso.”

“The word “rectification” itself connotes some error which has crept in requiring correction. Error would only mean everything as required under the law has been done yet by some mistake the name is either omitted or wrongly recorded in the Register of the company.”

“Without sufficient cause entered or omitted to be entered means done or omitted to do in contradiction of the Act and the Rules or what ought to have been done under the Act and the Rules but not done.”

There was no majority or minority opinion in this case.

The Court’s decision has significant implications for future cases, as it clarifies the boundaries of the NCLT’s jurisdiction and reinforces the importance of regulatory bodies in their respective sectors. The decision also ensures that complex disputes involving violations of SEBI regulations are handled by the appropriate forum.

The Court did not introduce any new doctrines or legal principles.

Key Takeaways

• The rectificatory jurisdiction of the NCLT under Section 59 of the Companies Act, 2013, is limited to correcting clear errors in the register of members.
• The NCLT cannot adjudicate complex disputes involving violations of SEBI regulations.
• SEBI has exclusive jurisdiction over violations of its regulations.
• Companies must approach SEBI for any violations of SEBI (PIT) Regulations and SEBI (SAST) Regulations.
• Regulatory bodies have real-time control over their respective sectors.

Directions

No specific directions were given by the Supreme Court in this case.

Development of Law

The ratio decidendi of this case is that the rectificatory jurisdiction of the NCLT under Section 59 of the Companies Act, 2013, is summary in nature and does not extend to adjudicating complex disputes involving violations of SEBI regulations. This case reinforces the principle that regulatory bodies have exclusive jurisdiction over violations of their regulations. This case clarifies the limitations on the powers of the NCLT, and reinforces the importance of regulatory bodies in their respective sectors.

Conclusion

The Supreme Court dismissed the appeal, holding that the NCLT exceeded its jurisdiction by entertaining a petition for rectification of the register of members based on violations of SEBI regulations. The Court clarified that such matters fall under the exclusive purview of SEBI and that the NCLT’s rectificatory jurisdiction is limited to correcting simple errors, not adjudicating complex disputes.