2013 (12) TMI 519 - AT - Companies Law

SEBI Upheld Decision on Warrant Forfeiture & Shareholding Limits

Bombay Rayon Fashions Ltd. & Others Versus Securities and Exchange Board of India

Bombay Rayon Fashions Ltd. & Others Versus Securities and Exchange Board of India - TMI Issues Involved:1. Request for relaxation under Regulation 109(c) of the ICDR Regulations, 2009.2. Compliance with Regulation 3(2) of the SAST Regulations, 2011.3. Forfeiture of consideration paid for warrants under Regulation 77(4) of the ICDR Regulations, 2009.4. Alleged violation of minimum public shareholding requirement under the Securities Contracts (Regulations) Rules, 1957.5. Joint appeal by issuer company and acquirer.Issue-wise Detailed Analysis:1. Request for Relaxation under Regulation 109(c) of the ICDR Regulations, 2009:The appellants sought relaxation from the Securities and Exchange Board of India (SEBI) under Regulation 109(c) of the ICDR Regulations, 2009, arguing that the strict enforcement of Regulations 75 and 77 was beyond their control due to the implementation of the SAST Regulations, 2011. They requested an extension of the 18-month period for converting warrants into equity shares and a refund of the 25% upfront payment made for the warrants. SEBI rejected this request, stating that the non-compliance was not due to factors beyond the appellants' control and that granting such relaxation would be against the interest of minority investors and detrimental to the securities market.2. Compliance with Regulation 3(2) of the SAST Regulations, 2011:The appellants argued that converting the remaining 7.5 million warrants into equity shares would breach the maximum permissible non-public shareholding limit of 75%, as their shareholding would increase to 93.51%. SEBI maintained that no acquirer is entitled to acquire shares exceeding 75% of the issuer company's shareholding, as mandated by the SAST Regulations, 2011. The Tribunal noted that the appellants should have sought clarification or exemption from SEBI immediately after the SAST Regulations, 2011 were gazetted or came into force, but they failed to do so.3. Forfeiture of Consideration Paid for Warrants under Regulation 77(4) of the ICDR Regulations, 2009:Regulation 77(4) mandates the forfeiture of the consideration paid for warrants if the holder does not exercise the option to convert them into equity shares within the specified period. SEBI argued that the issuer company (Appellant No. 1) should retain the forfeited amount in the interest of public shareholders. The Tribunal upheld this view, stating that the appellants had multiple opportunities to convert the warrants but failed to act within the stipulated timeframe.4. Alleged Violation of Minimum Public Shareholding Requirement under the Securities Contracts (Regulations) Rules, 1957:The appellants' shareholding had increased to 93.15%, breaching the minimum public shareholding requirement of 25% as prescribed by the Securities Contracts (Regulations) Rules, 1957. SEBI emphasized that the appellants' proposed acquisition of shares would violate this requirement. The Tribunal agreed that the appellants were aware of the implications of the new SAST Regulations, 2011, and should have taken appropriate steps to comply with the rules.5. Joint Appeal by Issuer Company and Acquirer:SEBI contended that the appeal was improperly filed jointly by the issuer company (Appellant No. 1) and the acquirer (Appellant No. 2), as only the warrant holder (Appellant No. 2) is entitled to seek relaxation under Regulation 109(c) of the ICDR Regulations, 2009. The Tribunal concurred, noting that the issuer company had no role in the exercise of conversion of warrants by the acquirer.Conclusion:The Tribunal dismissed the appeal, affirming SEBI's decision to reject the request for relaxation and uphold the forfeiture of the consideration paid for the warrants. The Tribunal found no legal infirmity in SEBI's decision and emphasized that the appellants had failed to demonstrate any factors beyond their control that prevented the conversion of the warrants. The decision was considered well-reasoned and in the interest of protecting minority investors and maintaining the integrity of the securities market.