Supreme Court clarifies the scope of Section 59 of the Companies Act, 2013 in share transfer disputes: IFB Agro vs. SICGIL India (2023)

Date of the Judgment: January 4, 2023

Citation: 2023 INSC 9

Judges: A.S. Bopanna, J., Pamidighantam Sri Narasimha, J.

Can the National Company Law Tribunal (NCLT) use its power to rectify the register of members under Section 59 of the Companies Act, 2013, to resolve disputes involving violations of SEBI regulations? The Supreme Court of India addressed this question in a case concerning a dispute over share acquisitions and disclosure norms. The Court clarified that the NCLT’s rectificatory jurisdiction is summary in nature and not meant for cases with contested facts. It also held that regulatory bodies like the Securities and Exchange Board of India (SEBI) are the appropriate forums for adjudicating violations of their regulations.

The judgment was authored by Justice Pamidighantam Sri Narasimha, with Justice A.S. Bopanna concurring.

Case Background

The case involves IFB Agro Industries Limited (the Appellant), a listed company, and SICGIL India Limited along with its managing director and close relatives (the Respondents). In August 2003, the Respondents proposed a business tie-up with the Appellant, which was rejected. Following this, the Respondents began acquiring shares of the Appellant from the open market. By January 18, 2004, they collectively held just under 5% of the Appellant’s total paid-up share capital.

On January 19, 2004, Respondent No. 1 acquired 600 equity shares of the Appellant, causing the Respondents’ aggregate shareholding to exceed 5%, triggering disclosure requirements under Regulation 7(1) of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997 (SEBI (SAST) Regulations). The Respondents sent an intimation to the Appellant on January 20, 2004, which was received on January 22, 2004. The Appellant claimed the disclosure was not in the prescribed format.

On May 27, 2004, Respondent No. 1 acquired additional shares, exceeding 5% of the Appellant’s total paid-up share capital individually, triggering disclosure requirements under Regulation 13 of the SEBI (Prohibition of Insider Trading) Regulations, 1992 (SEBI (PIT) Regulations). Respondent No. 1 admitted to failing to make this disclosure on time. The Appellant claims it discovered this acquisition on June 4, 2004, after an internal investigation.

Timeline:

Course of Proceedings

On July 19, 2004, the Appellant filed a petition before the Company Law Board (CLB) under Section 111A of the Companies Act, 1956, seeking rectification of its register by deleting the names of the Respondents as owners of shares exceeding the 5% threshold. The CLB was later replaced by the National Company Law Tribunal (NCLT) due to the enactment of the Companies Act, 2013, and the matter was transferred to the NCLT.

The NCLT, on July 5, 2017, ruled in favor of the Appellant, stating that the Respondents had violated SEBI regulations. It directed the Appellant to buy back the shares held by the Respondents in excess of 5% of the shareholding. The NCLT also stated that its order would not preclude SEBI from deciding on any violations of its regulations.

The Respondents appealed to the National Company Law Appellate Tribunal (NCLAT), which on December 6, 2018, set aside the NCLT’s order, stating that the NCLT had exceeded its jurisdiction. The Appellant then appealed to the Supreme Court.

Legal Framework

The case revolves around the interpretation of Section 59 of the Companies Act, 2013, which replaced Section 111A of the Companies Act, 1956. Both these sections deal with the rectification of the register of members of a company. Section 59(1) of the Companies Act, 2013, states:

“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 Supreme Court also examined the Securities and Exchange Board of India Act, 1992, and the regulations framed under it, specifically the SEBI (SAST) Regulations, 1997, and the SEBI (PIT) Regulations, 1992. Regulation 7(1) of the SEBI (SAST) Regulations requires disclosure when an acquirer’s shareholding exceeds 5%. Regulation 13 of the SEBI (PIT) Regulations mandates disclosure when an individual’s shareholding exceeds 5%.

Arguments

Appellant’s Arguments:

• 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, being “connected persons,” were “acting in concert,” 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 for rectification of the register.

Respondents’ Arguments:

• 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 a 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 it inadvertently failed to disclose.
• The SEBI (PIT) Regulations are not applicable to Respondent Nos. 2-6 as there is no concept of ‘persons acting in concert’ under the said Regulations.
• Under Section 111A (3), the Tribunal has no power to annul the transfer or to direct the buy-back of the shares.

Innovativeness of the argument: The Appellant argued that the SEBI Act should be read in addition to the Companies Act, allowing them to seek rectification under Section 111A/59. This was a novel approach to combine the provisions of both the Acts.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

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

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

Authorities

The Supreme Court considered the following authorities:

Cases:

• Ammonia Supplies Corporation (P) Ltd. v. Modern Plastic Containers Pvt. Ltd. & Ors. [(1998) 7 SCC 105] (Supreme Court of India): This case was relied upon to establish that the rectificatory jurisdiction under Section 155 of the Companies Act, 1956 (similar to Section 59 of the 2013 Act) is summary in nature and not intended to be exercised where there are contested facts and disputed questions.
• Mannalal Khetan & Ors. v. Kedar Nath Khetan & Ors. [(1977) 2 SCC 424] (Supreme Court of India): Cited by the Appellant to argue 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): Cited by the Appellant to support the argument 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 was cited to reiterate that the power of rectification remains summary in nature, and if seriously disputed questions arise, the Company Court should relegate the parties to a more appropriate forum.
• Jai Mahal Hotels (P) Ltd. v. Devraj Singh & Ors. [(2016) 1 SCC 423] (Supreme Court of India): This case was cited to reiterate that the power of rectification remains summary in nature, and if seriously disputed questions arise, the Company Court should relegate the parties 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 was cited to support the view that cases arising from a breach of Take Over Regulations fall within the exclusive domain of SEBI.
• Zandu Pharmaceutical Works Ltd. v. Devkumarvaidya & Ors. [(2009) 89 CLA 65] (Company Law Board): This case was cited to support the view that in case of violation of SEBI Regulations, the CLB cannot exercise rectificatory jurisdiction unless SEBI first decides if there has been a violation.

Statutes and Regulations:

• Section 59 of the Companies Act, 2013: This provision deals with the rectification of the register of members.
• Section 111A of the Companies Act, 1956: This provision, now replaced by Section 59 of the 2013 Act, also dealt with the rectification of the register of members.
• Securities and Exchange Board of India Act, 1992: This Act establishes SEBI and outlines its powers and functions.
• SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997: Specifically, Regulation 7(1), which mandates disclosure when an acquirer’s shareholding exceeds 5%.
• SEBI (Prohibition of Insider Trading) Regulations, 1992: Specifically, Regulation 13, which mandates disclosure when an individual’s shareholding exceeds 5%.

Judgment

The Supreme Court held that the NCLT’s power to rectify the register of members under Section 59 of the Companies Act, 2013, is a summary power, meant only for straightforward cases of errors or omissions in the register. It is not meant to resolve complex disputes involving contested facts or violations of other laws, such as SEBI regulations.

The Court also held that regulatory bodies like SEBI have been established to oversee specific sectors and their regulations, and they are the appropriate forums for adjudicating violations of their regulations. The NCLT cannot exercise parallel jurisdiction with SEBI in such matters.

How each authority was viewed by the Court?

• Ammonia Supplies Corporation (P) Ltd. v. Modern Plastic Containers Pvt. Ltd. & Ors. [(1998) 7 SCC 105]*: The Court followed this case to reiterate that the rectificatory jurisdiction is summary in nature and not for disputed questions.
• Mannalal Khetan & Ors. v. Kedar Nath Khetan & Ors. [(1977) 2 SCC 424]* and Chairman, SEBI v. Shriram Mutual Fund & Another [(2006) 5 SCC 361]*: While these cases were cited by the Appellant, the Court did not use them to support the argument that the Tribunal has jurisdiction to decide on SEBI violations. Instead, the Court emphasized the exclusive jurisdiction of SEBI in such matters.
• 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]*: The Court followed these cases to reiterate that the power of rectification is summary and not for disputed questions.
• 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]*: The Court used these cases to support the view that SEBI has exclusive jurisdiction in cases of breach of Take Over Regulations, and the CLB/Tribunal cannot exercise rectificatory jurisdiction unless SEBI first decides if there has been a violation.

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 specialized knowledge and enforcement mechanisms. The Court also considered the limited scope of the rectificatory jurisdiction under Section 59 of the Companies Act, emphasizing that it is meant for summary proceedings and not for resolving complex disputes.

Fact:Law Ratio

The Court’s reasoning was heavily influenced by legal considerations, focusing on the interpretation of Section 59 of the Companies Act and the jurisdictional boundaries of SEBI and the NCLT. While the factual background of the case was relevant, the Court’s decision was primarily driven by the legal principles and the need to uphold the regulatory framework.

The Court considered alternative interpretations, such as the Appellant’s argument that the SEBI Act should be read in addition to the Companies Act, but rejected it. The Court emphasized that the regulatory scheme established by SEBI should not be circumvented by seeking rectification under Section 59. The Court also considered the argument that the Tribunal has the power to decide on the issue of title, but rejected it by stating that the Tribunal’s power is limited to rectification and not for adjudication of disputed questions.

The Court’s decision was that the NCLT exceeded its jurisdiction by ordering the buy-back of shares. It emphasized that the NCLT’s jurisdiction under Section 59 is limited to rectifying errors in the register of members and does not extend to adjudicating complex disputes or enforcing SEBI regulations. The Court held that SEBI is the appropriate forum for addressing violations of its regulations.

The Court quoted from the judgment:

“The rectificatory jurisdiction under Section 59 of the 2013 Act is summary in nature and not intended to be exercised where there are contested facts and disputed questions.”

“Transactions falling within the jurisdiction of Regulatory bodies created under a statute must necessarily be subjected to their ex-ante scrutiny, enquiry and adjudication.”

“The scrutiny and examination of a transaction allegedly in violation of the SEBI (PIT) Regulations will have to be processed through the regulations and remedies provided therein.”

There was no minority opinion in this case. The judgment was unanimous, with both Justices concurring.

The reasoning of the Court was based on the interpretation of the relevant statutes and regulations, as well as the need to maintain the integrity of the regulatory framework. The Court’s analysis focused on the scope of Section 59 of the Companies Act and the jurisdiction of SEBI. The Court applied the legal principles to the facts of the case, concluding that the NCLT had exceeded its jurisdiction.

The judgment has potential implications for future cases involving disputes over share transfers and violations of SEBI regulations. It clarifies that the NCLT’s rectificatory jurisdiction is limited and that regulatory bodies like SEBI are the appropriate forums for adjudicating violations of their regulations. This may lead to a more streamlined process for resolving such disputes, with regulatory bodies playing a more central role.

The Court did not introduce any new doctrines or legal principles but reaffirmed the existing principles regarding the scope of rectificatory jurisdiction and the role of regulatory bodies. The Court’s analysis focused on the interpretation of existing laws and regulations, and its decision was based on these interpretations.

Key Takeaways

• The rectificatory jurisdiction of the National Company Law Tribunal (NCLT) under Section 59 of the Companies Act, 2013, is summary in nature and not intended for cases with contested facts or disputed questions.
• Regulatory bodies like the Securities and Exchange Board of India (SEBI) are the appropriate forums for adjudicating violations of their regulations.
• The NCLT cannot exercise parallel jurisdiction with SEBI in matters involving violations of SEBI regulations.
• Disputes involving violations of SEBI regulations must be addressed through the mechanisms provided under the SEBI Act and its regulations.
• The judgment reinforces the importance of regulatory bodies in maintaining the integrity of their respective sectors.

The decision has significant implications for future cases involving disputes over share transfers and violations of SEBI regulations. It clarifies that the NCLT’s rectificatory jurisdiction is limited and that regulatory bodies like SEBI are the appropriate forums for adjudicating violations of their regulations. This may lead to a more streamlined process for resolving such disputes, with regulatory bodies playing a more central role.

Directions

The Supreme Court dismissed the appeal, upholding the NCLAT’s decision, but clarified that the NCLT exceeded its jurisdiction.