SECURITIES AND EXCHANGE BOARD OF INDIA versus SUNIL KRISHNA KHAITAN AND OTHERS (11/07/2022) — Supreme Court headnote

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Summary

Promoters of two listed companies converted warrants in 2006-07, raising one member's individual stake above 15% while the promoter group already held more than 15%. Five years later SEBI held this breached Regulation 10 of the Takeover Regulations, 1997 (and in one case Regulation 11(1)) and under Regulation 44 directed a public announcement with 10% interest from 2007. The Securities Appellate Tribunal held Regulation 10 was not breached, found a technical breach of Regulation 11(1) in one case, set aside the open-offer direction as iniquitous after such delay and substituted a penalty of Rs 25 lakh. The Supreme Court dismissed SEBI's appeals. 'Acquirer' is a term of art including persons acting in concert, so Regulation 10 is not triggered when the acquirer together with such persons already holds 15% or more;

Issues

Whether Regulation 10 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 is triggered when an individual member of a promoter group crosses 15% although the acquirer together with persons acting in concert already held 15% or more.
Whether Regulation 3(3) of the Takeover Regulations, 2011, which makes an individual's crossing of the threshold an independent trigger, is clarificatory and retrospective.
Whether SEBI may depart from its own long-standing interpretation to impose penal consequences on past transactions, and how the principles of consistency, legitimate expectation and doubtful penalisation apply to a regulator.
Whether the Board's power to issue directions under Regulation 44 is mandatory or discretionary, and whether directions for a belated open offer with interest for a technical breach of Regulation 11(1) after five to eight years were sustainable.
Whether the Securities Appellate Tribunal, under Section 15-T of the SEBI Act, 1992, may set aside Regulation 44 directions and substitute a monetary penalty under Section 15-H when no penalty proceedings were initiated by the adjudicating officer.
Within what time SEBI must initiate proceedings where no limitation is prescribed.

Provisions considered

Regulation 10 read with Regulations 2(1)(b) and 2(1)(e), SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997'Acquirer' is defined to include persons acting in concert, and the bracketed words 'taken together with shares or voting rights held by him or by persons acting in concert with him' confirm that the combined holding determines the trigger. Regulation 10 therefore applies only where the acquirer's holding, so computed, crosses 15% on fresh acquisition; an existing holding in concert above 15% is not fragmented to test an individual. The term of art consciously chosen must be read in its defined sense. (¶¶ 40, 41, 44, 45, 46, 48, 49)
Regulation 11(1), SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997Differently worded from Regulation 10, it applies where an acquirer holding between 15% and 55% with persons acting in concert acquires more than 5% additional voting rights in a financial year; the Tribunal's finding of a technical violation on 12.03.2007 was not challenged by the respondents and was proceeded upon. (¶¶ 47, 48, 64)
Regulations 44 and 45, SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997'May' in Regulation 44 confers a wide but discretionary power to be exercised in the interest of the securities market and for protection of investors, read conjunctively; it is not a strict-liability provision like Section 15-H and directions are not automatic on every breach of Regulations 10, 11 or 12. Regulation 45(6) lists multiple remedies without mandating Regulation 44 directions. The Whole Time Member's direction for an open offer at 2007 prices with 10% interest, issued in December 2012, ignored the delay, the absence of market manipulation, windfall gain or investor complaint, and the disruptive, retroactive effect. (¶¶ 68, 69, 70, 71, 72, 73, 75, 76, 79, 83)
Sections 11, 11B, 15-H, 15-I, 15-J and 15-T, Securities and Exchange Board of India Act, 1992The Tribunal hearing a first appeal under Section 15-T has plenary power to confirm, modify or set aside the order appealed and may substitute a Regulation 44 direction, but it cannot for the first time initiate and impose a penalty under Section 15-H, which is vested in an adjudicating officer under Section 15-I having regard to Section 15-J; when it finds a violation proved but the directions unsustainable it should leave the Board free to proceed under Chapter VI-A. (¶¶ 85, 87, 88, 89, 90, 91)
Regulation 3(3), SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011Makes an individual's crossing of the threshold an open-offer trigger irrespective of the aggregate holding with persons acting in concert; its language is not clarificatory or declaratory, delegated legislation cannot operate retrospectively without express authority, SEBI itself conceded it was prospective, and the Advisory Committee report shows a rethink rather than a restatement. (¶¶ 27, 61, 62, 63)
Article 14, Constitution of IndiaRegularity, predictability and certainty are hallmarks of good regulation underpinning the rule of law; a regulator may change its practice only for greater public interest, and a change that is irrational or imposes retroactive penal consequences offends fairness and the doctrine of legitimate expectation. (¶¶ 52, 53, 54, 60)

Held

The definitions of 'acquirer' and 'person acting in concert' are deliberately wide to prevent camouflage; the deeming provision in Regulation 2(1)(e)(2) is rebuttable and fact-specific. Regulation 10 uses the defined term 'acquirer', unlike Regulations 6 and 8 which use 'person', and to apply it both to the individual alone and to the group would require rewriting the regulation. Regulation 10 does not apply where the acquirer with persons acting in concert already holds 15% or more; Regulation 11(1) may then apply. SEBI's fear that the interpretation lets promoters escape ignores that a concert is a fluctuating body and Regulation 10 catches an acquirer who parts ways and acts alone. (¶¶ 41, 42, 44, 46, 48, 49)
SEBI had for over ten years read Regulation 10 in the same way, communicated that view to third parties, and its adjudicating officers had dropped proceedings on that basis. A regulator that frames, administers and adjudicates its regulations tacitly promises the interpretation it adopts; consistency and predictability are essential to the rule of law, and the plea that there is no estoppel against statute fails where the Tribunal's reading is the more acceptable one, the Board itself long applied it, and the matter is a legacy issue under repealed regulations sought to be reopened with penal consequences. (¶¶ 50, 51, 52, 54, 60)
The principle of doubtful penalisation — that where two reasonable constructions are possible the one exempting the subject from penalty is preferred, extending to any statutory detriment to property or economic interests — applied, subject to context and competing public-interest factors. The stray sentence on Regulation 10 in Swedish Match was not its ratio, that case having turned on Regulation 11(1), and the Tribunal's decision in Hanumesh Realtors relying on it was per incuriam. (¶¶ 55, 56, 57, 59)
Discretion under Regulation 44 is a tool for effective regulation but must be exercised legally and regularly, with greater care the graver the penal consequence, balancing legal certainty against the object of the enactment. The Tribunal rightly set aside the open-offer direction: the promoters had disclosed every acquisition to the exchanges, the breach was technical, the preferential allotments met working-capital needs with shareholder approval, and compelling an offer at 2007 prices in 2012 for shares in a volatile market would do more harm than good. SEBI's letter directing amendment of a draft letter of offer fifteen months after filing, for alleged breaches in 2006-07, was whimsical and arbitrary. (¶¶ 71, 72, 78, 79, 80, 83)
Where no limitation is prescribed, every authority must act within a reasonable time, depending on whether the violation was concealed, the prejudice caused and third-party rights; a noticee may contend that a show-cause notice is bad for delay, and the authority must consider it objectively. Public interest lies in not spending time on stale matters, and a regulator cannot claim complete ignorance of disclosures made to the exchanges under Regulations 6, 7 and 8. (¶¶ 81, 82, 83)
The Tribunal exceeded its power in substituting a Section 15-H penalty of Rs 25 lakh when no penalty proceedings had been initiated, but since the respondents filed no cross-appeal the penalty attained finality; SEBI was directed to give quietus to the matter and not initiate Chapter VI-A proceedings. (¶¶ 84, 91, 92)

Result

SEBI's appeals dismissed; the Securities Appellate Tribunal's orders of 19.06.2013 and 31.10.2013 upheld, with the clarification that the Tribunal's power under Section 15-T is confined to examining the correctness and legality of the order under challenge and does not extend to initiating penalty under Section 15-H; the Rs 25 lakh penalty stands for want of cross-appeal and SEBI is not to initiate Chapter VI-A proceedings. No costs.