APPLICABILITY OF CORPORATE GOVERNANCE PROVISIONS TO A LISTED COMPANY

In REMSONS INDUSTRIES LIMITED VERSUS NATIONAL STOCK EXCHANGE OF INDIA LIMITED, SECURITIES AND EXCHANGE BOARD OF INDIA AND REMSONS INDUSTRIES LIMITED VERSUS BSE LIMITED, SECURITIES AND EXCHANGE BOARD OF INDIA - 2025 (1) TMI 16 - SECURITIES APPELLATE TRIBUNAL, MUMBAI (‘NSE’ for short) issued a notice, vide email 11.01.2022 to the appellant, which is is engaged in the manufacturing of auto products,  for getting clarifications in regard to related party transactions under Regulation 23(9) of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘LODR’ for reference) for the quarter ending 30.09.2021.

Regulation 23(9) of LODR provides that the listed entity shall submit to the stock exchanges disclosures of related party transactions in the format as specified by the Board from time to time, and publish the same on its website.  A ‘high value debt listed entity’ shall submit such disclosures along with its standalone financial results for the half year.  The listed entity shall make such disclosures every 6 months within 15 days from the date of publication of its standalone and consolidated financial results.  The listed entity shall make such disclosures every 6 months on the date of publication of its standalone and consolidated financial results with effect from 01.04.2023. 

The appellant replied to the notice that Regulation 23 of LODR is not applicable to the appellant, since the appellant is exempted under Regulation 15(2) of LODR.   However, the Adjudicating Authority confirmed that the appellant contravened the provisions relating to Corporate Governance.  The appellant was also imposed penalty by the Authority.  Being aggrieved with the above said orders, the appellant filed two appeals before the Securities Appellate Tribunal (‘SAT’ for short)

The appellant submitted the following before the SAT-

• As on 31.03.2021, the paid-up equity share capital of the appellant was Rs.5.71 crores and Company’s net worth was Rs.31.36 crores.
• A listed entity having paid-up equity share capital not exceeding Rs.10 crores and net worth not exceeding Rs.25 crores, is exempt from compliance of corporate governance provisions as per Regulation 15 of LODR.
• The appellant has paid the penalty amount of Rs.12,04,200/- under protest.
•  The paid-up share capital is less than Rs.10 crores. Therefore, appellant is entitled for exemption under Regulation 15 of LODR Regulations.

The respondent submitted the following before SAT-

• One of the two conditions, namely, the net worth of the appellant admittedly exceeds Rs.25 crores. Therefore, appellant is not entitled for any exemption.
• The compliance with the corporate governance provisions must be strictly construed because they shall have far-reaching consequence in the securities market. 
• A plain reading of Regulation 15(2)(a) makes it clear that in order to seek exemption from compliance with corporate governance a listed entity has to satisfy both the conditions, namely, that –

• the share capital must not exceed Rs.10 crores; and
• the net worth should not exceed Rs.25 crores.

The respondent relied on the judgment in DURRANI ABDULLAH KHAN VERSUS THE STATE OF MAHARASHTRA, THROUGH ITS SECRETARY; MAHARASHTRA STATE BOARD OF WAKF, THROUGH ITS CHIEF EXECUTIVE OFFICER; AJMATULLA RAHIMATULLA QURESHI - 2017 (5) TMI 1831 - BOMBAY HIGH COURT.   In the said case the Bombay High Court held – ‘the word ‘and’ is normally conjunctive and word ‘or’ is normally disjunctive. The word ‘and’ is required to be given its literal meaning. It is only if the use of word ‘and’ conjunctively produces unintelligible or absurd result, then the Court has the power to read the word ‘or’ as ‘and’ and vice versa to give effect to the intention of the legislature. The interpretation has to depend on the text and the context. The words normally are be read in their ordinary, natural and grammatical meaning. The word ‘or’ as ‘and’ and ‘and’ as ‘or’ in a statute are read unless the same is obliged to do so. Reading of the word ‘or’ as ‘and’ and ‘and’ as 'or' is not to be resorted to unless some other part of the same statute or the clear intention of it requires to be done

The SAT considered the submissions of the parties and perused the documents on record.  The SAT observed that the appellant is a listed entity.   The net worth of the appellant as on 31.3.2021 was Rs.31.36 crores as certified by the independent Chartered Accountant.  The paid-up share capital of the appellant is Rs.5.71 crores.  The SAT also analysed the case law in ‘Durrani Abdullah Khan’ (supra) relied on the by the respondent.  The SAT observed that if the use of word ‘and’ conjunctively unintelligible result, the Court has the power to read the word ‘or’ as ‘and’ and vice-a-versa to give effect to the intension of the legislature.

The SAT held that it is settled law that if the enacting portion of a Section is not clear, a proviso appended to it may give an indication as to its true meaning.  In order to get the exemption from compliance with corporate governance provisions, the entity has to satisfy both conditions, namely, that the equity share capital should not exceed Rs.10 crores and net worth not exceed Rs.25 crores.  A plain reading of the proviso makes it clear that the exemption shall continue to remain applicable till the equity share capital or the net worth of the entity reduces below the specified threshold. 

The SAT held that when the Regulations become applicable to a listed entity, they shall continue to remain applicable till either the equity share capital falls below 10 Crores or net worth reduces to less than 25 crores. the intent of the legislature becomes clear that the Regulations shall be applicable upon happening of both contingencies and remain as such, till one of the conditions reduces below the specified threshold.

The SAT was of the view that the paid-up equity share capital is less than Rs.10 crores, the corporate governance provisions do not apply to the appellant. The SAT further held that the penalty is unsustainable. The SAT directed the respondent to refund the penalty amount paid by the appellant under protest.