Jk Paper Limited vs Sebi

This appeal has been filed aggrieved by the

communication / order of the General Manager of the Securities

and Exchange Board of India („SEBI‟ for short) dated February

3, 2020 whereby SEBI rejected the application of the appellant

for exemption / relaxation of Regulation 3(11), 26(2) read with

Regulation 31(2)(b)(ii) of the SEBI (Share Based Employee

Benefits) Regulations, 2014 („SBEB Regulations, 2014‟ for

short), sought by the appellant under Regulation 29 of the SBEB

Regulations, 2014.

2. The main contention raised in the appeal is that without

considering the relevant details submitted by the appellant and

without assigning any reasons the application of the appellant

seeking exemption / relaxation has been rejected. Therefore, in

the process the rights of the appellant have been adversely

affected as a non-speaking order has been issued by a regulatory

authority.

3. Basic, relevant facts relating to the appeal are as follows: -

The appellant company formed an Employee Welfare Trust,

namely, "JK Paper Employees Welfare Trust" on January 15,

2004. About 97% of the assets of the Trust are the shares of the

appellant Company, which is [presently] about 4.73% of the

latter‟s share capital. On October 28, 2014 SBEB Regulations, 3

2014 were notified by SEBI. Thereafter, vide a series of

communications to SEBI the appellant had been taking the plea

that the said SBEB Regulations, 2014 were not applicable to the

appellant as the Trust set up by it does not deal in securities

directly or indirectly for the benefits of the employees of the

appellant. The limited dealings it had done were only in terms

of receiving certain shares of the appellant company at its early

days and in selling part of it to refund the loans it availed. In any

case, be it as it may: SEBI on December 29, 2015 asked the

appellant company to seek guidance on the applicability of the

SBEB Regulations under the Informal Guidance Scheme. On

May 7, 2018 appellant submitted an application under the said

Informal Guidance Scheme and vide letter dated June 29, 2018

SEBI provided a guidance stating that the SBEB Regulations,

2014 would apply to the said Trust and the Employee Welfare

Scheme that the said Trust is running. On October 24, 2019 the

appellant submitted an application to SEBI for exemption /

relaxation from the strict compliance with Regulations 3(11),

26(2) read with Regulation 31(2)(b)(ii) of the SBEB

Regulations, 2014. On February 3, 2020 SEBI rejected the

appellant‟s application and issued the impugned communication

/ order. This communication was received by the appellant on 4

February 10, 2020 and aggrieved by the same the present appeal

has been filed.

4. Since the basic contention of the appellant is whether a

non-speaking order could be issued on the issue of exemption /

relaxation as provided under the regulations, and that too when

the rights of the appellant are gravely affected by the said Order,

we proceed to specifically address the said question in terms of

the relevant regulations and in the facts of this matter.

5. Since the issue relates to interpretation of certain

provisions in the SBEB Regulations, 2014, for convenience, we

reproduce those provisions as below: -

"3(11) The total number of shares under secondary acquisition held by the trust shall at no time exceed the below mentioned prescribed limits as a percentage of the paid up equity capital as at the end of the financial year immediately prior to the year in which the shareholder approval is obtained for such secondary acquisition:

Sr. Particulars Limit No. A for the schemes enumerated in 5% Part A, Part B or Part C of Chapter III of these regulations B for the schemes enumerated in 2% Part D, or Part E of Chapter E of Chapter III of these regulations C for all the schemes in aggregate 5%

Explanation 1.- The above limits shall automatically include within their ambit the expanded capital of the 5

company where such expansion has taken place on account of corporate action including issue of bonus shares, split or rights issue.

Explanation 2.- If a company has multiple trusts and schemes, the aforesaid ceiling limit shall be applicable for all such trusts and schemes taken together at the company level and not at the level of individual trust or scheme.

Explanation 3.- The above ceiling limit will not be applicable where shares are allotted to the trust by way of new issue or gift from promoter or promoter group or other shareholders.

Explanation 4.- In the event that the options, shares or SAR granted under any of the schemes exceeds the number of shares that the trust may acquire through secondary acquisition, then such shortfall of shares shall be made up by the company through new issue of shares to the trust in accordance with the provisions of new issue of shares under the applicable laws.

26 (2). At no point in time. the shares of the company or shares of its listed holding company shall exceed ten per cent of the book value or market value or/air value of the total assets of' the scheme, whichever is lower, as appearing in its latest balance sheet for the purposes of GEBS."

29. (1) The Board may suo motu or on an application made by a company, for reasons recorded in writing, grant relaxation from strict compliance with any of these regulations subject to such conditions as the Board deems fit to impose in the interests of investors in securities and the securities market.

(2) A company making an application under sub- regulation (1), shall pay a non-refundable fee of rupees one lakh by way of a banker's cheque or demand draft payable at Mumbai in favour of the Board."

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31. (1) Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 are hereby repealed.

(2) Notwithstanding such repeal, -

(a) ........

(b) all listed companies having existing schemes to which these regulations apply are required to comply with these regulations in their entirety within one year of the same coming into effect, subject to the following exceptions:

(i) ........

(ii) trusts holding shares, for the purposes of implementing GEBS or RBS, which exceed ten per cent of the total value of the total assets of the trust(s) as provided under these regulations, shall have a period of five years to bring down its holding in shares to such limits"

6. Similarly, we reproduce the text of the impugned

communication / order dated February 3, 2020 as below since

the contention is that the said communication does not give the

reasons for rejecting the application of the appellant.

"Dear Sir/Madam,

This has reference to your letter dated Oct 24, 2019 and subsequent correspondences whereby, exemption has been sought from the strict enforcement of the Regulation 26(2) r/w Regulation 31(2)(b)(ii) of SEBI (Share Based Employee Benefit) Regulations, 2014 ("SBEB Regulations").

The SBEB Regulations prescribe a time frame of five years for compliance with Regulation 26(2) read with Regulation 31(2)(b)(ii) of SBEB Regulations. The 7

five-year period ended on October 27, 2019. Through the informal guidance letter dated June 29, 2018, it has been notified that the schemes implemented by the Trust for the benefit of employees falls squarely within the purview of SBEB Regulations. Pursuant to the above, it is observed that no demonstrable effort has been made to comply with the regulations.

Given the above, the request for exemption from the strict enforcement of the Regulation 26(2) r/w Regulation 31(2)(b)(ii) of SBEB Regulations is thus found unsustainable and therefore it is being rejected. Also, SEBI may take action, as deemed fit, against the concerned entities for non-compliance with SBEB Regulations."

7. The learned senior counsel Shri Janak Dwarkadas

appearing for the appellant vehemently argued that the

respondent SEBI has passed direction to the appellant without

assigning any reasons whatsoever only on the ground that the

five-year window for compliance of SBEB Regulations has

expired. Relying heavily on Institute of Chartered Accountants

of India vs L.K. Ratna & Ors. (1986) 4 SCC 537 the learned

senior counsel strongly contended that "in fairness and justice,

the member is entitled to know why he has been found guilty.

The case can be so serious that it can attract the harsh penalties

provided by the Act. Moreover, the member has been given a

right of appeal to the High Court under Section 22-A of the Act.

To exercise his right of appeal effectively he must know the

basis on which the Council has found him guilty. We have 8

already pointed out that a finding by the Council is the first

determinative finding on the guilt of the member.... The Council

must, therefore, state the reasons for its finding." Accordingly,

the learned senior counsel submitted that neither the appellant

knows the reason for rejecting the application nor this Tribunal

knows the reason so as to effectively address the issue of

whether the rejection has been done following the applicable

law and the due process. Therefore, while a provision for appeal

has been provided to the appellant, effectively the appeal

process has been vitiated. Apart from emphasizing the fact that

no reasons have been given the learned senior counsel

contended that an opportunity is hearing is also required as L.K.

Ratna (supra) is fully applicable to the matter. The learned

senior counsel also contended that the order relied on by the

respondent, Nirma Industries Limited & Anr. Vs. Securities

and Exchange Board of India (Civil Appeal No. 6082 of 2008

dated May 9, 2013) is not applicable to the present matter since

the basic facts in Nirma relate to takeover regulations and the

ruling is in that context and the relevant Takeover Regulation

specifically states that no reasons need to be given. In short, the

learned senior counsel submitted that before passing a quasi-

judicial order affecting the rights and privileges of a party, the

party is entitled to have a personal hearing and the reasons for 9

rejecting its application have to be clearly stated in the order

thus passed by a regulatory authority not only for the appellant

to know the reasons but also for her to effectively exercise her

right to appeal against the said decision.

8. On the other hand, Shri Shyam Mehta, learned senior

counsel representing SEBI contended that the impugned

communication / order dated February 3, 2020 has to be read

with the communication providing informal guidance dated

June 29, 2018 wherein detailed reasons were given why the

SBEB Regulations, 2014 were applicable to the appellant.

Moreover, in the impugned order itself it is stated that the

appellant had a five-year window to comply with the regulations

which has not been utilized and it is over on 27 October, 2019.

Further, the appellant took its own time even in seeking

informal guidance. Despite being asked to do so on 29th

December 2015, the appellant exercised it only on 27th May

2018. Even after the informal guidance was received on 28

June, 2018 the appellant applied for relaxation on 24 October,

2019, just three days before expiry of the five-year window for

compliance. Therefore, it was contended that the appellant is

belatedly taking shelter under an assumed limitation of the

impugned order that it does not contain reasons for rejection 10

while the appellant has all along known the full applicability of

the SBEB Regulations and the need for compliance on or before

October 27, 2019.

9. Further, emphasizing Regulations 29(1) as reproduced

below for greater clarity-

"29. (1) The Board may suo motu or on an application made by a company, for reasons recorded in writing, grant relaxation from strict compliance with any of these regulations subject to such conditions as the Board deems fit to impose in the interests of investors in securities and the securities market."

the learned senior counsel for SEBI contended that only on

providing exemption / relaxation SEBI is duty bound to furnish

the reasons for the same; not when an application for exemption

/ relaxation is rejected. This is to ensure, the learned senior

counsel contended, that such exemption / relaxation has been

granted on bona fide consideration and in terms of the

regulations which is not a requirement for rejection of an

application. He further emphasized the ratio in the matter of

Nirma (supra) as laid down by the Hon‟ble Supreme Court that

no reasons need to be given while rejecting an application for

relaxation.

10. We do not agree with the interpretation of the regulatory

provision as contended by the learned senior counsel for the 11

respondent. Regulation 29(1) makes it abundantly clear that

exemption / relaxation could be provided subject to conditions;

that would imply that even a rejection has to provide reasons as

to why no relaxation can be granted. It could also state why a

conditional exemption / relaxation / extension of time could or

could not be provided to the appellant as per the facts and

circumstances of each application. Moreover, we also note that

the appellant had been taking the view that the SBEB

Regulations, 2014 was not applicable to them because of certain

specific provisions in the Trust Deed and in terms of their own

assessment which might or might not have been correct.

Therefore, only through the informal guidance on 28 June, 2018

the appellant was clearly told that the said regulations were

indeed applicable to them and hence the application for

exemption / relaxation since it did not effectively had a five-

year window. While we agree with the contention of the

respondent that the appellant is responsible for delay in seeking

the informal guidance as well as in applying for relaxation, such

a delay cannot support issuing a non-speaking order against the

appellant. Further, though the Trust holds 97% of its assets in

the form of shares of the appellant company which needed to be

brought down to below 10%; reasons given in the informal

guidance; also cannot support the same because of the language 12

of Regulation 29(1) which provides for conditional relaxation,

including granting some more time for the appellant to comply.

Therefore, we agree with the contention of the appellant that a

non-speaking communication / order has adversely impacted

their right to appeal. And indeed, it has affected this Tribunal‟s

own capacity to assess the merit of the rejection. It is true that

the rejection order has quoted the requirement that the Trust

cannot have more than 10% of its portfolio of assets as the

shares of the appellant company and the five-year window for

compliance had elapsed. These, are known facts / conditions;

despite which the appellant sought exemption / relaxation under

the applicable regulations which needed to be addressed in the

impugned communication which is not done. Therefore, this

Tribunal is of the considered view that the rights of the

appellant has been impacted by the said order because of its

non-speaking nature and Regulation 29(1) requires an

application of mind, explaining the reasons for rejection as well

as for relaxation.

11. We would also like to reiterate at this stage that

implementation of the Right to Information Act, 2005 and the

various judgments emanating on/from the same have

emphasized the need for greater transparency as well as for 13

providing reasons, at least in brief, in even in ordinary

administrative communications issued by various authorities.

Therefore, application of such transparency requirements on the

part of quasi-judicial authorities has to be of a much higher

order.

12. In the light of the above reasons, we quash the impugned

communication / order and remit the matter to an Appropriate

Authority of SEBI. The said Authority will issue a reasoned

order afresh after considering all the relevant facts, preferably

within three months from the date of this order. However, we

make it clear that we are not expressing any opinion on the

merit of the matter and the fresh Order shall not be impacted by

any observation that may be construed to that effect.

13. Having quashed the impugned Order on the basis of its

non-speaking nature it is not necessary for us to go into the

second issue raised by the appellant as to whether invariably

personal hearing is required to be given before passing any such

directions. This question will be dealt in an appropriate matter

as and when it arises before us.

14. The appeal is allowed on above terms with no order as to

costs.

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15. The present matter was heard through video conference

due to Covid-19 pandemic. At this stage it is not possible to sign

a copy of this order nor a certified copy of this order could be

issued by the registry. In these circumstances, this order will be

digitally signed by the Presiding Officer on behalf of the bench

and all concerned parties are directed to act on the digitally

signed copy of this order. Parties will act on production of a

digitally signed copy sent by fax and/or email.

TARUN Digitally signed by TARUN AGARWAL DN: c=IN, o=PUBLIC WORKS DEPARTMENT UTTAR PRADESH, postalCode=221505, st=Uttar Pradesh, Justice Tarun Agarwala 2.5.4.20=30fcf68685192bbc53e6ff1608a83fb3881de7ac2

Presiding Officer AGARWAL ab7954d509c85ed6e0f7c41, serialNumber=095f8b286bb0b1cd07ff676611f4f5e79997 27d404aa38ca422f9d3529bdb8a3, cn=TARUN AGARWAL Date: 2020.08.11 13:26:44 +05'30'

Dr. C.K.G. Nair Member

Justice M.T. Joshi Judicial Member 11.08.2020 msb