INTRODUCTION
In its judgment given on October 30, 2014, in the case of Golden Tobacco Ltd & GHCL Ltd v. SEBI , the Securities Appellate Tribunal (“SAT”) has held that the format annexed to clause 35 of the Listing Agreement which requires the listed company to disclose to the stock exchange details of shares of promoter / promoter group that are “otherwise encumbered” by the promoter / promoter group was unjustified and travels beyond the scope of that clause as mentioned under the listing agreement.
SAT noted that under clause 35 of the listing agreement, what the promoter / promoter group was required to disclose is only details of shares which are pledged / revoked/ invoked and there was no obligation cast upon promoter / promoter group that are otherwise encumbered. Therefore, making it mandatory (under the format annexed to clause 35) for the companies to disclose to the stock exchange the details of shares that are otherwise encumbered by the promoter / promoter group was unjustified.
FACTS OF THE CASE (IN BRIEF)
In 2010, SEBI issued a show cause notice to the appellant company (which was a listed company) alleging that the appellant company failed to disclose to the stock exchange under clause 35 of the amended Listing Agreement that by an arbitration order, nine promoter entities of the appellant company had been restrained from selling, transferring or creating third party interest in any manner in the shares of appellant Company held by the said promoters.
According to SEBI aforesaid restraint order passed in respect of shares of appellant held by nine promoters constituted encumbrance on the shares, which the appellant ought to have disclosed to the Stock Exchange under clause 35 of the Listing Agreement.
SEBI accordingly imposed an aggregate penalty of Rs. 1 crore and 1.25 cores on the two appellant companies.
RELEVANT LAW
As per SEBI circulars dated February 3, 2009, promoter/promoter group, on the one hand, are required to furnish to the listed company the details of shares of the listed company held by the promoter/ promoter group which are pledged/revoked/invoked, and on the other hand, as per the format prescribed under clause 35 of the Listing Agreement, the listed company is required to in turn disclose to the Stock Exchange not only details of the shares that are pledged by the promoter/ promoter group but also disclose details of the shares that are “otherwise encumbered” by the promoter/promoter group.
CONTENTIONS OF THE APPELLANT
Appellant company contended that the obligation to make disclosure arose under clause 35 only when the shares were pledged by promoter or promoter group. Even SEBI circular dated February 3, 2009 required the Stock Exchanges to amend clause 35 of the Listing Agreement to include details of shares pledged by the promoters and promoter group as per the format enclosed therein. As the circular refer to disclosing details of shares pledged by promoters/ promoter group, the expression ‘shares pledged or otherwise encumbered’ in the format appended to the circular dated February 3, 2009 must be restricted to encumbrance arising as a result of pledge created in consonance with the provisions of regulation 58 of SEBI (Depositories and Participants) Regulations.
SEBI circular merely advised the Stock Exchanges to amend clause 35 of the Listing Agreement and in the absence of any proof that the Stock Exchanges have in fact amended clause 35 of the Listing Agreement, SEBI was not justified in holding that the appellant is guilty of violating amended clause 35 of the Listing Agreement.
Appellant company particularly relied on Adjudication Order dated September 28, 2011 passed in the case of Dewan Housing Finance Corporation Ltd. wherein it is held that the words ‘shares pledged or otherwise encumbered’ in the format appended to clause 35 of the Listing Agreement covers only pledge of shares.
SEBI’S CONTENTIONS
SEBI in its circular dated February 3, 2009 has specifically recorded that the format for reporting the shareholding pattern is required to be changed and that the details of shares pledged by promoters and promoter entities shall have to be reported as per the amended format appended to the said circular. Thus, the SEBI circular dated February 3, 2009, requires every listed Company to disclose the shareholding pattern of the promoter/promoter group as per the format which includes obligation to make disclosure not only of shares pledged but also shares which are “otherwise encumbered” by the promoters or promoter group.
Since the format annexed to the SEBI circular dated February 3, 2009 duly published by the Stock Exchanges forms part of the circular and the said format specifically requires the listed Companies to disclose details of ‘shares pledged or otherwise encumbered’ by promoter/promoter group, appellants are not justified in contending that there is any conflict between the circular and the format annexed thereto and appellants were not justified in contending that they are required to make disclosures only if the shares were pledged by the promoter/ promoter group.
The expression ‘otherwise encumbered’ is a very wide expression and would include within its sweep all kinds of encumbrances including the encumbrance created on account of the restrain order passed by the arbitrator in the pending arbitration proceedings between the promoters and some third party.
ISSUE
Whether a listed Company under the format annexed to clause 35 of the Listing Agreement is required to disclose to the Stock Exchange, details of ‘otherwise encumbered’ shares of that listed Company held by the promoter/ promoter group, even though there is no obligation cast upon the promoter/ promoter group to make such disclosures to the listed Company?
SAT’S JUDGMENT
What is to be disclosed by the promoter/promoter group to the listed Company is only details of shares that are pledged/revoked/invoked and there is no obligation cast upon promoter/ promoter group to disclose shares that are otherwise encumbered.
If promoter/promoter group are not obliged to give to the listed Company details of shares that are otherwise encumbered under any provision framed by SEBI, then, making it mandatory for the listed Companies to disclose to the Stock Exchanges the details of shares that are ‘other encumbered’ by the promoter/promoter group would be wholly unjustified and contrary to the policy decision taken by SEBI.
Neither clause 35 of the Listing Agreement nor any other clause in the Listing Agreement requires the promoter/promoter group to disclose to the Company the shares that are ‘otherwise encumbered’. Thus, the format annexed to clause 35 of the Listing Agreement, which mandates the listed Company to disclose to the Stock Exchanges details of shares ‘otherwise encumbered’ by the promoter/promoter group, without making the promoter/ promoter group liable to make such disclosure to the listed Company, goes beyond the scope of clause 35 of the Listing Agreement and contrary to the policy decision of SEBI.
SEBI has created an anomalous situation, because, promoter/ promoter group who have details of shares that are ‘otherwise encumbered’ are not obliged to disclose the same to the listed Company, whereas, listed Companies to whom such details are not furnished by the promoter/ promoter group are made to disclose such details to the Stock Exchanges.
Since the promoter/promoter group were obliged to disclose to the listed Companies only shares that are pledged/revoked/invoked, it was totally improper on part of SEBI to cast an obligation on the listed Companies to disclose to the Stock Exchanges details of shares which are encumbered otherwise than by way of pledge, even though such details are not made available to the listed Companies by the promoter/promoter group.
SAT, in its concluding remarks, also held that when an Adjudicating Officer of SEBI (in the case of Dewan Housing Finance Corporation Ltd) had already held that the words ‘shares pledged or otherwise encumbered’ would cover particulars relating to pledged shares only, the Adjudicating Officer in the present case was not justified in taking a contrary view that too without assigning any reasons. Such a conduct on part of the Adjudicating Officer was highly objectionable and it hoped that the officers of SEBI shall henceforth ensure that no orders are passed by them which are mutually contradictory to each other.
SAT accordingly set aside the order of SEBI which imposed penalty on the appellant companies.
ANALYSIS AND COMMENTS
The judgment of SAT is of course a welcome move for listed companies.
SAT has very correctly held that when on one hand the promoters are not required to disclose to the company the details of shares “otherwise encumbered” under clause 35 even in its amended form, then on the other hand it was not right on SEBI to put an obligation on the Company to disclose such encumbrances to the stock exchange under the format prescribed under the said clause.
While SAT condemned the actions of SEBI in this regard, did not give any consequent directions to SEBI to revise the format to bring in with conformity with this decision such that the disclosure to stock exchange is limited only to the pledge of shares and not any other encumbrances.
Hence, though by implication of this SAT’s judgment, the order of SEBI in the case of Dewan Housing Finance holds good; in absence of any clear directions given by SAT to SEBI for amending the format under clause 35, the companies will practically continue to make such disclosures of other encumbrances too even when they are not required to do so in light of this judgment of SAT. Also, (and to our knowledge), the judgment has not yet been appealed before the honourable Supreme Court of India.
The ruling of SAT is not only important from disclosures point of view, but the same also confirms the interpretation that a format prescribed under a statute cannot travel beyond the legal provision of the statute under which it has been prescribed. Hence, the ruling although may not be of great authoritative value, it may still be relied upon in cases where the requirements prescribed under a format are beyond the requirements stipulated the relevant legal provisions of the statute.
About Bulwark Solicitors
Bulwark Solicitors is a law firm pioneered by Solicitor Chirag Sancheti and Advocate Deep Shridharani. The firm has expertise in the areas of both Litigation and non-Litigation. Under the non-litigation Law practice, the firm practices in the areas of Corporate Law, Intellectual Property Law, Bankruptcy & Insolvency Law, Competition Law, Real Estate and Conveyancing and DTAA Advisory. Further, under Corporate Law area, we practice Company Law, Securities Law, Mergers and Amalgamations, Private Equity and Venture Capital Investment Transactions, Legal Due Diligence and Foreign Exchange Management Law.