2025 (11) TMI 690 - AT - SEBI

Appeals dismissed for deliberate August 2023 subscription breach; Regulation 43B relief denied due to controllable non-compliance

AT dismissed the appeals and refused relief under Regulation 43B. The tribunal held appellants knowingly failed to comply with the August 2023 Circular, ... Applications filed under Regulation 43B of the SEBI (FPI) Regulations, 2019 - convertible warrants - Seeking relaxation from the provisions of August 2023 Circular to make payment of remaining 75% amount for warrants already allotted, to exercise conversion of such warrants, to receive and sell the shares - Non-compliance with timelines and disclosure requirements with the August 2023 Circular, divested their investment in Indian companies during the said extended period and paid financial disincentive of 5% of sale proceeds to SEBI - whether appellant’s application filed under Regulation 43B of the SEBI (Foreign Portfolio Investors) Regulations, 2019 merits consideration? HELD THAT:- As rightly noted by the SEBI in the impugned order, appellants had an option to re-align their investment by January 29, 2024 or make granular disclosure by March 2024. Admittedly, they chose not to make granular disclosure and re-align their portfolios. However, at the same time they also chose to subscribe to the warrants of private respondent companies. Regulation 43B provides for exemption from strict enforcement of any of the provisions of the Regulations. The Regulation also makes it clear that such exemption shall be in the interest of investors, the securities market and its development. The exemption can be granted if the Board is satisfied that non-compliance was caused due to factors beyond the control of the entity or the requirement is procedural or technical in nature. It is abundantly clear from the record that, the appellants had full knowledge of the August 2023 circular by October 23, 2023 and considering their conscious decision not to disclose granular details, decided to liquidate investments in securities of Indian companies. However, appellants still subscribed for the warrants of private respondent Companies from and after October 30, 2023 in flagrant violation of the Circular. The contention urged in their 43B application that the purchase of warrants were made while the FPI registration was active is noted only to be rejected because such big investors cannot be heard to canvas that they were not conscious of the consequences flowing out of the circular either for want of knowledge or proper legal advice. The sum and substance of their contention in the application under Regulation 43B is that if exemption is not granted, the warrants would be written off in terms of SEBI circular dated June 5, 2024 and they would suffer financial loss. In our considered opinion, firstly, the August 2023 circular has been issued in view of the concern that entities with large Indian Equity Portfolio could potentially disrupt the orderly functioning of the Indian securities market by using the FPI route. Secondly, the exemption could be considered only if the Board is satisfied that the non-compliance was beyond the control of the entity. There is nothing in the Regulation 43B application which suggests that there was any cause beyond appellants’ control to make the payment of remaining 75%. Further, subscription of warrants is in violation of the Circular, with full knowledge. In the impugned order, SEBI has, rightly held that the appellants could have avoided subscribing to the warrants either (a) after August 2023 circular was issued; or (b) after receipt of specific email by the DDP on October 31,2023; or (c) after receipt of show cause notice in November 2023; (d) after receipt of emails by the DDP on February 02, 13, and 23, 2024; and till specific clarity on exemption was received. It is also very relevant to note that on October 23, 2024, the appellants for the first time, indicated to the DDP that they had purchased the warrants and thus, did not act diligently. Therefore, in our considered opinion, appellants’ applications under Regulation 43B do not merit any consideration. Appeals fail and they are accordingly dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether applications made under Regulation 43B of the SEBI (Foreign Portfolio Investors) Regulations, 2019 (seeking relaxation to permit payment of remaining 75% consideration for convertible warrants and consequent conversion/sale of shares) merit exercise of the Board's discretion. 2. Whether the appellants' subscription to convertible warrants after issuance of SEBI's August 24, 2023 circular (mandating granular 'full look through' disclosures) constituted conduct that disentitles them to relief under Regulation 43B. 3. Whether the appellants' non-compliance with timelines and disclosure requirements was 'caused due to factors beyond the control of the entity' or was merely 'procedural or technical in nature' as contemplated by Regulation 43B. 4. Whether permitting the relief sought would be in the interests of investors, the securities market and its development (the statutory threshold for grant of relaxation under Regulation 43B). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Whether Regulation 43B relief merits exercise of discretion Legal framework: Regulation 43B empowers the Board to grant, for reasons recorded in writing, relaxation from strict enforcement of any provision of the FPI Regulations if satisfied that (a) non-compliance was caused due to factors beyond the control of the entity; or (b) the requirement is procedural or technical in nature, and subject to conditions the Board deems fit in the interests of investors and the securities market. Precedent Treatment: No controlling precedent was held to mandate relief; the Tribunal applied the statutory test-focused, fact-sensitive balancing exercise required by Regulation 43B. Interpretation and reasoning: The Court emphasises the dual threshold in Regulation 43B - causation beyond control or procedural/technical nature - coupled with a mandatory public interest filter (interests of investors and market development). The Tribunal analysed temporal facts (circular effective date, SOP notices, DDP emails and dates of warrant subscriptions) to conclude appellants had full knowledge of the regulatory regime and its consequences. Ratio vs. Obiter: Ratio - Regulation 43B cannot be invoked where non-compliance arises from conscious business decisions made with full knowledge of the regulatory constraint; mitigation under 43B requires the non-compliance to be beyond the entity's control or purely procedural/technical and also to be compatible with market/investor interests. Conclusion: The applications did not merit Regulation 43B relief; discretion was correctly exercised to refuse relaxation. Issue 2 - Whether subscription to warrants after issuance of the August 2023 circular disentitles appellants to relief Legal framework: The August 24, 2023 circular required FPIs exceeding thresholds to provide granular disclosures on a full look-through basis by specified cut-offs (realignment by 29-Jan-2024 or disclosure by 12-Mar-2024); failure rendered registration invalid and required liquidation within 180 days (extendable subject to disincentive). Precedent Treatment: The Tribunal accepted and applied the express terms and policy rationale of the circular; reliance placed on contract/principle that a warrant vests an option to buy and conversion/payment effects purchase only upon exercise (as noted in party submissions and authorities invoked), but the crucial finding rests on temporal compliance and conscious risk-taking. Interpretation and reasoning: The Court found subscription dates for all warrants fell on/after issuance of the August circular and after appellants received SOP/DPP communications. Given that appellants knew they would either disclose or exit and yet subscribed to warrants, the Court treated such conduct as a conscious decision inconsistent with seeking equitable relaxation. The Tribunal rejected the contention that purchase while registration was active made subsequent conversion immune from the circular's operation. Ratio vs. Obiter: Ratio - post-circular acquisitions made with knowledge of impending regulatory constraints will weigh decisively against equitable relief under Regulation 43B; subscribing to instruments that require later action (conversion/payment) does not immunise the investor from the effect of contemporaneous regulatory restrictions. Conclusion: Subscription of warrants after the circular, with full knowledge of disclosure obligations and consequences, disentitles appellants from Regulation 43B relief. Issue 3 - Whether non-compliance was beyond appellants' control or merely procedural/technical Legal framework: Regulation 43B(a) requires non-compliance to be due to factors beyond the control of the entity; Regulation 43B(b) permits relief where the requirement is procedural or technical. Precedent Treatment: The Tribunal applied an objective assessment of control and the nature of non-compliance rather than accepting self-serving characterisations of 'technical' or 'procedural' breach. Interpretation and reasoning: The Tribunal found no evidence that inability to make the 75% payment or convert warrants was caused by circumstances beyond appellants' control. Communications with the DDP, SOPs and notices were on record and showed opportunity to act. The appellants' liquidation of large parts of their portfolios (and payment of disincentives) were affirmative business choices taken on knowledge of the circular; their delay in seeking exemption and late disclosure of warrant purchases further evidenced lack of uncontrollable circumstances. The Court rejected the notion that delay in DDP clarification or regulatory processes converted substantive non-compliance into mere technicality for the purposes of 43B. Ratio vs. Obiter: Ratio - non-compliance characterised by deliberate business choices and avoidable delay is not 'beyond control' nor merely 'procedural/technical' so as to attract Regulation 43B relaxation. Conclusion: The appellants' non-compliance was not caused by factors beyond their control nor was it merely procedural/technical; it resulted from conscious decisions and failure to act timely. Issue 4 - Whether granting relief would be in the interests of investors and the securities market Legal framework: Regulation 43B conditions the grant of relaxation upon satisfaction that such relief is in the interests of investors and the securities market and for the development of the securities market. Precedent Treatment: The Tribunal emphasised statutory public-interest considerations and the regulatory purpose of the August 2023 circular (to prevent misuse of the FPI route and protect market integrity). Interpretation and reasoning: The Tribunal held that the August circular sought to address systemic risks of concentrated foreign holdings and opaque beneficial ownership; allowing relaxation in cases of conscious non-compliance would undermine the regulatory objective and be discriminatory to compliant FPIs. Granting relief where appellants knowingly acted contrary to the regulatory direction would not serve investor protection or market development. Ratio vs. Obiter: Ratio - public-interest and market integrity considerations can independently bar equitable relief under Regulation 43B where grant of relaxation would frustrate the regulatory object or produce unfairness to compliant market participants. Conclusion: Relief would not be in the interests of investors or the securities market; this justified denial of the Regulation 43B applications. Ancillary Findings and Procedural Observations 1. The Tribunal analysed chronology in detail (circular date, SOP and DDP communications, subscription dates, liquidation and disincentive payments) and concluded appellants had constructive and actual knowledge of the regulatory regime before subscribing to warrants. 2. The Tribunal considered appellants' conduct (late disclosure of warrant purchases, delay in approaching SEBI for relief and late filing under Regulation 43B) as indicative of lack of diligence, undermining equitable claims. 3. On the contractual-point that warrants are options exercisable later, the Tribunal accepted that conversion occurs on exercise but held that exercise after the regulatory cut-off would be in violation of the circular and therefore did not afford a ground for Regulation 43B relief. 4. Outcome: The Tribunal dismissed the appeals and upheld the rejection of Regulation 43B applications on the grounds summarised above.