Directors' restraint orders overturned as preferential share allotment to assignees meets minimum public shareholding requirements under Rule 19(A)

Securities Appellate Tribunal, Mumbai allowed appeals against restraint orders imposed on directors for non-compliance with minimum public shareholding requirements. The tribunal held that preferential allotment of shares to assignee companies to settle loan obligations was legally permissible and these shareholdings could not be clubbed with promoter group holdings. The tribunal found that the company had correctly classified assignee companies' shareholdings as public shareholdings, achieving the mandatory 25% minimum public shareholding under Rule 19(A) of SCRR. Additionally, proceedings against directors were deemed improper as the company itself was not made a party to the proceedings, violating established legal principles requiring action against the company before proceeding against its directors.

---

---

Issues Involved:
1. Restraint from accessing the securities market.
2. Investigation into the acquisition of shares through preferential allotment.
3. Allegations of collusion to avoid Minimum Public Shareholding (MPS) requirements.
4. Validity and genuineness of the assignment of loans and subsequent share allotment.
5. Compliance with Section 21 of SCRA and Rule 19(A) of SCRR.
6. Liability of the company and its directors for non-compliance with MPS requirements.

Issue-wise Detailed Analysis:

1. Restraint from accessing the securities market:
The appellants were restrained from accessing the securities market for two years and prohibited from buying, selling, or dealing in securities. Additionally, they were barred from associating with any listed company or SEBI registered intermediary in any capacity for two years.

2. Investigation into the acquisition of shares through preferential allotment:
SEBI conducted an investigation into the acquisition of shares of Falcon Tyres Limited and Dunlop India Limited by certain entities through preferential allotment. A show cause notice was issued to Falcon Tyres Limited, Pawan Kumar Ruia, Sunil Bhansali, S. Ravi, Mohan Lall Chauhan, and Damodar Prasad Dani.

3. Allegations of collusion to avoid Minimum Public Shareholding (MPS) requirements:
The show cause notice alleged that the scheme of loan assignment and subsequent conversion into equity shares was done in collusion with group companies and preferential allottees to avoid MPS requirements under Clause 40A of the Listing Agreement and Rule 19(A) of the SCRR.

4. Validity and genuineness of the assignment of loans and subsequent share allotment:
The WTM concluded that the preferential allotment was not genuine, as the assignee companies had no business activity and their net worth was insufficient. The assignment was without collateral securities, indicating a fraudulent device to circumvent MPS requirements.

5. Compliance with Section 21 of SCRA and Rule 19(A) of SCRR:
Section 21 of the SCRA mandates compliance with listing agreement conditions. Rule 19(A) of the SCRR requires a listed company to maintain a public shareholding of at least 25%. The WTM found that Falcon and Dunlop did not achieve the required MPS by the stipulated deadline.

6. Liability of the company and its directors for non-compliance with MPS requirements:
The Tribunal found that the loan given by Manali to Falcon was a genuine transaction, and the subsequent assignment and preferential allotment were permissible in law. The three assignee companies were not promoter group companies, and their shareholdings should be considered public shareholdings. The WTM erred in clubbing the shareholdings of the assignee companies with the promoter group.

The appellant Mohan Lall Chauhan, an Independent Director, was penalized for non-compliance with MPS requirements. However, the Tribunal noted that the obligation to comply with MPS requirements lies with the company. Since Dunlop was not made a party to the proceedings, no action could be taken against its director without first initiating proceedings against the company.

Conclusion:
The Tribunal quashed the impugned order against the appellants, allowing the appeals with no order as to costs. The Tribunal emphasized that the company must first be found in violation before proceeding against its directors.

---