2018 (12) TMI 1374 - AT - Companies Law

Appellate authority overturns Tribunal ruling, citing jurisdictional error regarding share annulment and transfer.

The appellate authority set aside the Tribunal's judgment, finding that the Tribunal exceeded its jurisdiction by annulling shares and directing their ... Tribunal's jurisdiction to direct the Respondents (Appellants) to sell its shares to the company and the Company to buy back the shares of the Respondents (Appellants) - Held that:- From sub-section (4) of Section 59, it is clear that where the transfer of securities is in contravention of any of the provisions of the ‘Securities Contracts (Regulation) Act, 1956’, the ‘Securities and Exchange Board of India Act, 1992’ or the ‘Companies Act, 2013’ or any other law for the time being in force, the Tribunal can direct the company or a depository to set right the contravention and rectify its register or records concerned. The Tribunal has failed to notice that the petition having filed under Section 111A of the Companies Act, 1956, on transfer was required to deal with the Petitioner in terms of sub-section (4) of Section 59 of the Companies Act, 2013. For the said reason, we hold that the Tribunal exceeded its jurisdiction by annulling the shares and by directing the Respondents (Appellants) to transfer the shares to the Company. If there is contravention of any of the provisions of the Securities Contracts (Regulation) Act, 1956, the ‘Securities and Exchange Board of India Act, 1992’ or the Companies Act, 2013 or any other law for the time being in force, the Tribunal could have directed the company or a depository to set right the contravention and rectify its register or records concerned. The impugned judgment dated 5th July, 2017 cannot be upheld and the same is accordingly set aside. Issues Involved:1. Jurisdiction of the Tribunal under Section 111A of the Companies Act, 1956.2. Alleged illegal acquisition of shares in violation of SEBI regulations.3. Compliance with disclosure requirements under SEBI regulations.4. Tribunal’s authority to direct the buyback of shares.Issue-wise Detailed Analysis:1. Jurisdiction of the Tribunal under Section 111A of the Companies Act, 1956:The core issue was whether the Tribunal had the jurisdiction to direct the Respondents to sell their shares to the company and for the company to buy back those shares. The Tribunal referred to Section 111A of the Companies Act, 1956, which allows rectification of the register on transfer if the transfer contravenes SEBI regulations. However, the Tribunal was found to have exceeded its jurisdiction by annulling the shares and directing the Respondents to transfer the shares to the Company. The appellate authority clarified that the Tribunal could only direct the company or a depository to rectify its register or records, not to pass a penal order.2. Alleged Illegal Acquisition of Shares in Violation of SEBI Regulations:The Petitioner alleged that the Respondents had acquired shares in violation of Regulation 13 of the SEBI (Prohibition of Insider Trading) Regulations, 1992. The Tribunal initially found that the acquisition of shares by the Respondents was in violation of these regulations and barred the Respondents from exercising their rights over the shares acquired in excess of 5%.3. Compliance with Disclosure Requirements under SEBI Regulations:The Petitioner claimed that the Respondents failed to make mandatory disclosures as required under SEBI regulations. Specifically, the Respondents were accused of not making the continual disclosure under Regulation 13(1), (3), and (6) of the SEBI (Prohibition of Insider Trading) Regulations, 1992, and Regulation 7 of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997 and 2011. The Respondents admitted to a delay in disclosure but argued that it was not a case of non-disclosure but a delayed one due to an inadvertent mistake.4. Tribunal’s Authority to Direct the Buyback of Shares:The Tribunal ordered the buyback of shares held by the Respondents in excess of 5% of the shareholding in the Petitioner Company. This order was challenged on the grounds that the Tribunal did not have the authority to annul the transfer of shares or direct their buyback. The appellate authority concluded that the Tribunal could only rectify the register or records and not pass orders for the buyback of shares.Conclusion:The appellate authority set aside the Tribunal’s impugned judgment dated 5th July 2017, holding that the Tribunal exceeded its jurisdiction by annulling the shares and directing their transfer to the Company. The appeal was allowed, and it was clarified that the Tribunal should have dealt with the matter in terms of Section 59 of the Companies Act, 2013, after the transfer of the application under Section 111A of the Companies Act, 1956. There was no order as to costs.