2021 (8) TMI 1397 - AT - SEBI

Pledged shares retransfer still constitutes acquisition under SAST Regulations, Rs 10 lakh penalty upheld

Securities Appellate Tribunal, Mumbai dismissed an appeal challenging SEBI's order for violations of SAST and PIT Regulations. Appellants argued that ... Transfer in demat account constitutes transfer of beneficial ownership - manner of creating pledge under Depository Regulations - circumvention of the Takeover Code is impermissible - failure to comply with open offer and disclosure obligations under SAST Regulations - off-market transfers without contemporaneous payment constitute violation of SCRA - failure to make required disclosures under PIT Regulations - delay in initiating proceedings without demonstrable prejudice does not vitiate enforcement actionTransfer in demat account constitutes transfer of beneficial ownership - manner of creating pledge under Depository Regulations - circumvention of the Takeover Code is impermissible - failure to comply with open offer and disclosure obligations under SAST Regulations - failure to make required disclosures under PIT Regulations - The off market transfers made by the appellants amounted to transfer/acquisition of shares attracting SAST and disclosure obligations and were not merely creation of a pledge excusing compliance. - HELD THAT: - The Tribunal applied the established principle that where shares are transferred in the depository records to another person's demat account without creation of a pledge in accordance with the Depository Regulations, such transfer operates as a conveyance of beneficial ownership. Reliance was placed on earlier decisions which held that parties cannot bypass the statutory mode for creation of pledge (Regulation 58 of the Depository Regulations) or the obligations under the Takeover Code by private arrangements for subsequent retransfers. The admitted fact of transfers into other demat accounts and subsequent retransfers back to the appellants led the Tribunal to conclude that the transactions violated the SAST disclosure/open offer requirements and the disclosure obligations under the PIT Regulations; consequently the AO's conclusion that the transactions amounted to acquisitions/transfers for regulatory purposes was upheld. [Paras 9, 11, 12]Appellants' contention that transfers were only security arrangements was rejected and the finding of violation of SAST and PIT Regulations was upheld.Off-market transfers without contemporaneous payment constitute violation of SCRA - The off market transfers that were not accompanied by payment of consideration constituted a breach of the SCRA. - HELD THAT: - SEBI's finding that the off market transfers were effected without contemporaneous payment of consideration was accepted. Given that the transfers were effected in the depository system and did not follow the statutory mechanism for pledge/hypothecation, the Tribunal agreed with the AO that the transactions attracted the provisions of the SCRA concerning transfer and consideration. [Paras 3, 12]The finding of violation of the SCRA in respect of off market transfers without payment of consideration was affirmed.Delay in initiating proceedings without demonstrable prejudice does not vitiate enforcement action - The plea of delay in initiation of proceedings did not warrant quashing of the proceedings in absence of any pleaded or shown prejudice. - HELD THAT: - The appellants contended that SEBI's proceedings were initiated after an inordinate delay. The Tribunal observed that no case was made out that the delay caused any prejudice to the appellants. In such circumstances delay per se was held insufficient to set aside or quash the enforcement proceedings. [Paras 13]The plea of delay was rejected and does not vitiate SEBI's proceedings.Penalty appellate interference test - The quantum of penalty imposed by the AO was not interfered with by the Tribunal. - HELD THAT: - Having found violations on several occasions as detailed in the AO's order, the Tribunal considered the penalties imposed under the relevant provisions of the SEBI Act and SCRA and found no reason to interfere with the quantum. The Tribunal therefore affirmed the AO's assessment of penalties. [Paras 14]The penalties imposed by the AO were upheld and the appeal was dismissed.Final Conclusion: The appeal is dismissed; the Tribunal upheld the AO's findings that the admitted off market transfers amounted to transfer/acquisition attracting SAST, PIT and SCRA violations, rejected the delay plea for want of prejudice, and declined to interfere with the quantum of penalty. Issues Involved:1. Imposition of penalties under Section 15H of SEBI Act, Section 23H of SCRA, and Section 15A(b) of SEBI Act.2. Alleged failure to make an open offer as per Regulation 3(2) of SAST Regulations 2011.3. Off-market transactions and failure to pay consideration as per Section 2(i) of SCRA.4. Violations of disclosure requirements under SAST Regulations and PIT Regulations 1992 and 2015.5. Delay in launching proceedings by SEBI.Issue-wise Detailed Analysis:1. Imposition of Penalties:The appellants were penalized under Section 15H of the SEBI Act, Section 23H of the SCRA, and Section 15A(b) of the SEBI Act, amounting to Rs. 40 lakhs. The penalties were imposed due to violations related to substantial acquisition of shares, off-market transactions without consideration, and failure to disclose transactions as required by the relevant regulations.2. Failure to Make an Open Offer:The appellants, as promoters of the Company, acquired more than 5% of the paid-up share capital in the financial year 2013-14. They were required to make an open offer under Regulation 3(2) of the SAST Regulations 2011, which they failed to do. SEBI initiated proceedings against them for this failure, which was admitted by the appellants.3. Off-Market Transactions:The appellants transferred shares through off-market transactions without paying consideration, violating Section 2(i) of the SCRA. Appellant no. 1 transferred shares to noticees Mr. Piyush Kothari and Mr. Mehul Modi, and Appellant no. 2 received shares from Mr. Nelesh Devendra Vora. These transactions were not regular sell and purchase transactions but were claimed to be for financial assistance, which the appellants argued did not constitute a sale or purchase of shares.4. Violations of Disclosure Requirements:The appellants failed to disclose the transactions as required under the SAST Regulations and the PIT Regulations of 1992 and 2015. This failure to disclose was a significant factor in the proceedings and penalties imposed by SEBI.5. Delay in Launching Proceedings:The appellants argued that there was a delay of six years in launching the proceedings, which should lead to the quashing of the proceedings. However, the tribunal found that the delay did not cause any prejudice to the appellants and thus did not quash the proceedings based on this argument.Judgment:The tribunal upheld the order of the Adjudicating Officer, finding that the appellants had indeed violated the relevant provisions by transferring shares without consideration and failing to disclose the transactions. The tribunal dismissed the appeal, stating that the penalties imposed were justified given the multiple violations. The argument of delay in proceedings was also dismissed as it did not cause any prejudice to the appellants. The appeal was dismissed with no order as to costs. The order was digitally signed due to the COVID-19 pandemic, and parties were directed to act on the digitally signed copy.