2023 (1) TMI 1491 - AT - SEBI

Show-cause notice for SAST quashed due to delay and laches; Section 15J penalty for PIT disclosure failure upheld

The AT held that show-cause notice for alleged SAST violations was issued after an inordinate delay and, given laches and prior SC dismissal of SEBI's ... Acquisition of shares - imposition of penalty - inordinate delay in issuance of the show cause notice (laches) - appellants to be paid jointly and severally with other noticees for violation of Regulation 11 read with Regulation 14(1) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeover) Regulations, 1997 (SAST Regulations) - relationship between the appellants and other noticees and are therefore deemed to be persons acting in concert (PACs) - HELD THAT:- We find that there is an undue delay in the issuance of the show cause notice. The transaction in question is of the year 2009 and 2011. The show cause notice was issued on 18th September, 2017 after eight years from the date of the first transaction. The AO while considering the delay in paragraph 21 of the impugned order observed that “much time has passed after the alleged violation for issuance of the show cause notice in the matter”, however proceeded to decide the matter by simply holding that the noticees have not suffered any prejudice. In our opinion, the word “prejudice” has been loosely used to get away from the laches. SEBI carried this matter to the Supreme Court in Civil appeal [2019 (11) TMI 1416 - SC ORDER] which was dismissed by judgment dated November 15, 2019. Thus, the order passed by this Tribunal became binding upon SEBI which they have chosen to ignore completely. Thus, the impugned order of the AO insofar as it relates to the appellant cannot be sustained and is quashed. The appeal is allowed. Misc. application accordingly disposed of. Imposing a penalty of Rs.4 lakhs for violation of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 - Admittedly the appellant failed to make the disclosures of the above two transactions to the Company as well as to the stock exchange under Regulation 13(4) of the PIT Regulations read with Regulation 12(2) of the PIT Regulations and was consequently liable for penalty. For the same transactions, proceedings were also initiated by the WTM and, by an order dated 22nd June, 2021, the WTM found that the appellant had violated the PIT Regulation and, accordingly issued directions under 11 and 11B of the SEBI Act. That order has not been challenged and has become final and, consequently, the finding given by the WTM has become binding upon the appellants. In view of the aforesaid, we do not find any error in the order of the AO in the violation committed under the PIT Regulations. We also find that the AO has taken the factors contemplated under Section 15J based on which the penalty has been imposed which we do not find to be arbitrary or excessive. The appeal fails and is dismissed. Misc. application is accordingly disposed of. ISSUES PRESENTED AND CONSIDERED 1. Whether the acquisition of shares in question falls within the exemption for inter se transfer among promoters under Regulation 3(1)(e) of the SAST Regulations and therefore does not attract the obligation to make a public announcement under Regulation 11(1). 2. Whether the finding that the noticees (including the appellants) were persons acting in concert (PACs) for the purpose of Regulation 11(1) is sustainable on the material on record. 3. Whether the inordinate delay in issuance of the show cause notice (laches) bars initiation/completion of adjudication proceedings and the imposition of penalty. 4. Whether the appellant's conduct in conversion of warrants and subsequent transfer triggered disclosure obligations under Regulation 13(4) of the PIT Regulations and whether the penalty imposed under the PIT Regulations is excessive or arbitrary. ISSUE-WISE DETAILED ANALYSIS Issue 1: Applicability of Regulation 3(1)(e) exemption for inter se transfers among promoters (legal framework) Legal framework: Regulation 3(1)(e) exempts regulations 10, 11 and 12 where inter se transfers occur among promoters, relatives, qualifying promoters, or where conditions (such as three years' prior holding) are satisfied. Regulation 11(1) imposes obligation to make a public announcement where an acquirer together with PACs acquires additional shares exceeding 5% (subject to exceptions). Precedent treatment: Tribunal examined the scheme and observed that transfers among promoters fall within the stated exemption; authorities emphasise that where the transferor and transferee are both promoters, Regulation 11 does not apply to that inter se transfer. Interpretation and reasoning: The AO's chart showed that the transferor and transferee in the July 2009 transaction were both promoters. Applying Regulation 3(1)(e), that specific acquisition by the promoter transferee from a promoter transferor cannot be counted for calculating increase in shareholding for triggering Regulation 11(1). The Tribunal therefore held that the impugned order cannot be sustained insofar as that promoter-sourced acquisition is concerned. Ratio vs. Obiter: Ratio - where an acquisition is an inter se transfer among promoters falling squarely within Regulation 3(1)(e), such acquisition is excluded from computation under Regulation 11(1). Obiter - ancillary observations about the charting of promoter relationships. Conclusion: The July 2009 transfer between promoters is exempt under Regulation 3(1)(e) and cannot be included for determining the 5% threshold under Regulation 11(1); the AO's order cannot be sustained on that ground as to the particular appellant involved in that transfer. Issue 2: Validity of PACs finding (legal framework) Legal framework: Regulation 2(1)(e)(1) defines 'person acting in concert' as persons sharing a common objective/purpose of substantial acquisition of shares or gaining control, pursuant to an agreement or understanding (formal or informal). Sub-clause (2) contains deeming categories but is qualified by 'unless the contrary is established.' Precedent treatment: Higher court authorities (Supreme Court and High Court precedents) have been applied to recapitulate that the essence of a PAC relationship is a shared common objective of substantial acquisition/gaining control; mere interconnections or family/managerial relationships do not automatically establish PAC status absent meeting of minds or common intent. Interpretation and reasoning: The Tribunal found the AO's sole basis - interconnectivity among noticees - insufficient. The legal test requires evidence of a shared common objective or understanding to acquire substantial shares or control. The Tribunal emphasized that PAC status is fact-specific and not permanent; the presumption in sub-clause (2) can be rebutted by contrary facts. The AO's finding was termed patently erroneous as it ignored the requirement of shared intention and relied on mere relationships. Ratio vs. Obiter: Ratio - PAC status must be established by evidence of shared objective/meeting of minds for acquisition/control; mere interconnections do not suffice. Obiter - commentary on non-permanence of PAC relationships and examples noted in authorities. Conclusion: The AO's blanket conclusion that the inter-connected noticees were PACs without establishing a common objective of acquisition/control was unsustainable; the PAC finding is set aside insofar as it rests solely on interconnections without evidentiary proof of a shared objective. Issue 3: Delay/laches in issuance of show cause notice (legal framework) Legal framework: No statutory limitation for issuance of show cause notice in the Act/Regulations, but administrative powers must be exercised within a reasonable time; courts/tribunals assess reasonableness based on facts, nature of default, prejudice, third-party rights created, and whether information was available earlier. Precedent treatment: Tribunal relied on its earlier decisions and principles reiterated by higher courts that inordinate delay may render adjudication unsustainable where powers are not exercised within reasonable time; prior Tribunal orders quashing proceedings on laches were cited as binding precedents which were not followed by the AO/SEBI in the instant matter. Interpretation and reasoning: There was an eight-year gap between the first transaction (2009) and the show cause notice (2017). The AO acknowledged delay but dismissed its consequence by stating noticees suffered no prejudice - a finding the Tribunal found to be a superficial treatment of laches. The Tribunal noted prior holdings that delay alone (especially where information was available earlier) can merit quashing of proceedings. The Tribunal also pointed out that a prior Tribunal order on delay had become binding and was overlooked. Ratio vs. Obiter: Ratio - inordinate delay in initiating adjudication may vitiate proceedings and justify quashing of show cause notice/penalty when power is not exercised within reasonable time. Obiter - critique of the AO's treatment of 'prejudice' and observations on the respondent's disregard of prior binding Tribunal order. Conclusion: The inordinate delay rendered the impugned adjudication unsustainable against the appellant; the AO's order was quashed on this ground insofar as it related to the appellant. Issue 4: Liability and quantum under PIT Regulations for failure to disclose conversion and transfer (legal framework) Legal framework: Regulation 13(4) (read with Regulation 12(2)) of the PIT Regulations requires disclosure by persons on conversion/allotment and transfers where thresholds (25,000 shares and 1% of total share capital) are crossed; Section 15J factors guide penalty assessment under the SEBI Act. Precedent treatment: The Tribunal recognised that prior adjudication/WTM finding in related proceedings, which became final, is binding on the appellants and admissible for the adjudicator to treat as conclusive on violation. Interpretation and reasoning: The appellant admitted the conversion/allotment and subsequent transfer exceeded the prescribed thresholds and failed to make statutory disclosures to the company and stock exchange. The AO applied Section 15J factors in assessing penalty. The Tribunal found no arbitrariness or excessiveness in the penalty assessment and noted the binding effect of the prior WTM order on the same facts. Ratio vs. Obiter: Ratio - failure to make mandatory disclosures under PIT Regulations where thresholds are crossed attracts liability; prior final findings in related regulatory proceedings bind subsequent adjudication. Obiter - remarks on the adequacy of penalty assessment factors. Conclusion: The appellant was liable for violation of the PIT Regulations; the penalty imposed was not found to be arbitrary or excessive and the appeal against that penalty was dismissed. Cross-references 1. Issues 1 and 2 are interrelated: the exemption under Regulation 3(1)(e) (Issue 1) defeats inclusion of specific promoter-to-promoter transfers from computation, while the PACs analysis (Issue 2) addresses whether other acquisitions could be aggregated for triggering Regulation 11(1). 2. Issue 3 (delay) independently supports quashing of the adjudication relating to SAST violations against the appellant, even where substantive errors on PACs and exemption also exist.