M/S Apollo Tyres Ltd. vs Sebi

Order Reserved On: 19.12.2016 Date of Decision : 30.12.2016

Misc. Application No. 172 of 2014 And Appeal No. 322 of 2014

M/s Apollo Tyres Ltd. 7 Institutional Area, Sector-32, Gurgaon- 122 001, Haryana, India ...Appellant

Versus

Securities and Exchange Board of India, SEBI Bhavan, Plot No. C-4A, G-Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400 051 ...Respondent

Mr. Janak Dwarkadas, Senior Advocate with Ms. Ankita Singhania and Mr. Manu Nair, Advocates i/b Shardul Amarchand Mangaldas & Co. for the Appellant.

Mr. Kumar Desai, Advocate with Mr. Saurabh Bachhawat and Mr. Vivek Rana, Advocates i/b K. Ashar & Co. for the Respondent.

Mr. Pradeep Sancheti, Senior Advocate with Mrs. Poonam Gadkari and Ms. Priyanka Pai, Advocates i/b Juris Matrix for the Interveners.

CORAM: Justice J.P. Devadhar, Presiding Officer Dr. C.K.G. Nair, Member

Per: Justice J.P. Devadhar

1.

This appeal is filed to challenge the order passed by the

Adjudicating Officer ("AO" for short) of Securities and Exchange Board

of India ("SEBI" for short) on July 09, 2014. By the said order penalty

of ` 1 crore is imposed on appellant under Section 15HB of the Securities 2

and Exchange Board of India Act, 1992 ("SEBI Act" for short) for failure

to comply with SEBI (Buy Back of Securities) Regulations, 1998 ("Buy

Back Regulations" for short), penalty of ` 2 lac for failure to comply with

Regulation 5A of Buy Back Regulations and ` 1 lac for failure to comply

with Regulation 19(7) of the Buy Back Regulations. Thus, total penalty

of ` 1.03 crore is imposed on the appellant under Section 15HB of the

SEBI Act for failure to comply with the Buy Back Regulations.

2. In the aforesaid appeal, Misc. Application No. 172 of 2014 is filed

by 8 family members of Shri. Harshad Mehta ("applicants" for short)

who are all notified entities in terms of Section 9 of the Special Court

(Trial of Offences Relating to Transactions in Securities) Act, 1992

("Special Court Act" for short). By the said Misc. Application, the

applicants seek an order for being impleaded as party respondents to the

appeal. Alternatively the applicants seek an order permitting them to

intervene in the appeal. Grievance of the applicants is that the complaint

filed by the applicants has led to the passing of the impugned order,

however, the impugned order is passed without giving an opportunity of

hearing to the applicants, even though the applicants were entitled to be

heard pursuant to two orders passed by the Apex Court. It is the case of

the appellants that all the facts set out in the complaint have not been

considered in the impugned order.

3. Facts relating to the present appeal are as follows:-

a) Controlling block of shares, that is, more than 5% of

the equity shares capital of the appellant company 3

held by Shri. Harshad Mehta and his family members

were attached by notification dated 06.06.1992.

b) While the Special Court was considering a scheme for

sale of shares of the appellant company held by the

notified parties, appellant company intervened in the

said proceedings and offered to buy back the shares of

the appellant company held by the notified parties

under Section 77A of the Companies Act, 1956.

c) The Special Court by its order dated 17.08.2000 inter

alia held that once the highest offer price is

ascertained, the management of the company shall be

given an option to buy the controlling block of shares

of the appellant company held by the notified persons

subject to the conditions set out therein. One of the

conditions imposed by the Special Court was that the

purchaser(s) shall comply with all regulations

including the Takeover Regulations of SEBI.

d) Challenging the order of the Special Court, the

appellant company filed an appeal before the Apex

Court and the Apex Court by its order dated

23.08.2001 inter alia directed that it will be open to

the Special Court to decide whether to have sale of

controlling block of shares either by inviting bids for

purchase of controlling block as such or by selling 4

said shares according to the norms fixed for the sale

of bulk shares or by the norms fixed in respect of

routine shares. It was further directed that if the

Special Court thinks that it is best to adopt the norms

laid down by it for sale of controlling block of shares,

then, when the highest offer is received, the Special

Court, inter alia shall give an opportunity to the

management of the appellant company to buy the

shares or give an opportunity to the appellant

company to buy back the shares under Section 77(A)

of the 1956 Act.

e) On 01.04.2003 the custodian, by a public notice

invited bids from individuals as also from corporates

and other entities for sale of 54.88 lac shares of the

appellant company held by the notified entities.

f) On 24.04.2003 an enabling resolution was passed by

the Board of Directors ("BoD" for short) of the

appellant company authorizing its official to appear

before the Special Court and negotiate for sale as and

when the occasion arises.

g) As the offers received pursuant to the public notice

were not acceptable to the Special Court, the appellant

company and its management were given an option to

buy back or buy the shares. The appellant company 5

and its management expressed their willingness to

purchase the shares at ` 85/- per share. The Special

Court called upon the appellant company and its

promoters to increase the offer price and the appellant

company and its promoters agreed to purchase shares

at ` 90/- per share which was agreed to and accepted

by the Special Court by its order dated 30.04.2003.

h) Accordingly, on 09.05.2003 the BoD of the appellant

company resolved to buy-back 36,90,000 shares of

` 10/- each of the appellant company at ` 90/- per

share aggregating to ` 33.21 crore belonging to

Harshad Mehta Group and thereafter cancelled the

said shares bought back from the custodian. On the

same day, that is, on 09.05.2003 letters were

addressed to the Registrar of Companies and the

Stock Exchanges stating therein that the appellant

company has decided to buy-back 36.90 lac shares of

the appellant company at ` 90/- per share and that the

buy-back being under the Special Court Act, the

provisions of which override the provisions of other

Acts viz the Companies Act 1956, the appellant

company may follow the provisions of Section 77A of

the Companies Act, 1956 and the Buy Back

Regulations as far as practicable.

6

i) On 10.05.2003 appellant company addressed a letter

to SEBI enclosing a copy of BoD resolution dated

09.05.2003 as contemplated under Regulation 5A of

Buy Back Regulations.

j) On 12.05.2003 appellant company addressed a letter

to the Central Depository Services (India) Ltd.

("CDSL" for short) requesting for extinguishment of

36,90,000 shares of the appellant company bought

back by the appellant company. On 12.05.2003 return

under Form 4C as contemplated under Section

77A(10) of the Companies Act, 1956 was filed before

the Registrar of Companies disclosing the particulars

of buy-back.

k) On 13.05.2003 a public notice was issued by the

appellant company intimating the general public that

pursuant to the orders of the Court, appellant company

has bought back 36,90,000 equity shares of ` 10/-

each at ` 90/- per share and as a consequence, the paid

up share capital, post buy-back, stands reduced from

36.31 crore to 32.52 crore.

l) On 15.05.2003 CDSL confirmed the reduction in

share capital of the appellant company in view of

extinguishment of shares. Accordingly, on

15.05.2003 the appellant company updated its 7

'Register of Securities Bought Back' as contemplated

under Section 77A(9) of the Companies Act, 1956.

m) On 19.05.2003 appellant company sent a letter to the

concerned Stock Exchanges enclosing a copy of the

letter received from CDSL confirming reduction in

share capital due to extinguishment of shares acquired

under buy-back.

n) On 09.09.2011 applicants filed a complaint before

SEBI alleging that the appellant company and its

promoters violated Section 77A of the Companies

Act, 1956 and the Buy Back Regulations while

buying back 36.90 lac shares of the appellant

company which was approved by the Special Court

vide orders dated 30.04.2003 and 02.05.2003.

o) On 08.11.2011 the Apex Court allowed the appeal

filed by the applicants against the decision of the

Special Court dated 30.04.2003 as modified on

02.05.2003 on ground that the Special Court had

failed to comply with the principles of natural justice.

However, bearing in mind the fact that sale of

54,88,850 shares was approved by the Special Court

and all procedural modalities were stated to have been

carried out in the year 2003, the Apex Court did not

disturb the shares bought back by the appellant and set 8

aside the order of the Special Court in relation to

4.95% of the shares acquired by the promoters of the

company pursuant to the orders of the Special Court.

Thus, 36.90 lac shares of the appellant company

acquired by the appellant company under the buy-

back option attained finality.

p) On 24.01.2014 SEBI issued a show cause notice to

the appellant alleging that buy-back of 36.90 lac

shares was in violation of Section 77A of the

Companies Act, 1956 read with the provisions

contained in the Buy Back Regulations. It was also

alleged that the appellant has violated regulation 5A

and 19(7) of the Buy Back Regulations.

q) Appellant filed its reply to the show cause notice

denying the allegations made in the show cause

notice.

r) By the impugned order dated 09.07.2014 the AO has

imposed penalty of ` 1.03 crore on the appellant

under Section 15HB of SEBI Act for violating the

provisions contained in the Buy Back Regulations.

Challenging the order of the AO dated 09.07.2014

present appeal is filed.

9

4. Mr. Dwarkadas, learned Senior Advocate appearing on behalf of

the appellant submitted that under Section 77A(2)(f) of the Companies

Act, 1956 inserted by the Companies (Amendment) Act, 1999, buy-back

of its own shares by a company is permitted inter alia subject to

compliance of Buy Back Regulations. In the present case, the buy-back

of its own shares by the appellant was not by any of the modes prescribed

in regulation 4(1) of the Buy Back Regulations. In fact the appellant had

brought back its shares outside the SEBI Buy Back Regulations and

under a 'scheme' formulated by the Special Court vide its order dated

17.08.2000 which was approved by the Apex Court vide order dated

23.08.2001. Thus, the appellant had brought back its shares from the

custodian through a bidding process conducted by the Special Court in

the Court itself. The Buy Back Regulations operate in the normal course

when a company wishes to buy-back its shares, however, in the present

case, the buy-back is a Court initiated and sanctioned buy-back which

process was not initiated by the appellant and hence the buy-back was not

within the scope of Buy Back Regulations.

5. Counsel for the appellant further submitted that assuming without

admitting that the Buy Back Regulations were applicable, the AO ought

to have held that in the present case the appellant has in fact complied

with the said regulations to the extent possible. It is further submitted on

behalf of the appellant that the Special Court Act is a special statute of a

later date and hence would override another Special Law (SEBI Act) of

an earlier date. In any event, it is submitted, without prejudice that the

appellant had voluntarily undertaken steps to comply with the 10

requirements of Section 77A of the Companies Act, 1956/ Buy Back

Regulations to the extent possible [i.e. compliance of regulation 5A &

19(7)] and therefore the appellant cannot be held guilty of violating the

Buy Back Regulations.

6. Mr. Desai learned Counsel appearing on behalf of SEBI and

Mr. Sancheti, learned Senior Advocate appearing on behalf of the

Applicants/ Interveners in Misc. Application No. 172 of 2014 submitted

that as per the orders passed by the Apex Court, the buy-back option

given by the Special Court to the appellant and upheld by the Apex Court

was subject to compliance of Section 77A of the Companies Act,

1956/Buy Back Regulations. Assuming that it was not possible to

comply with the Buy Back Regulations, the appellant ought to have

sought relaxation under regulation 26 which the appellant failed to do

and thus it is evident that the appellant has violated Section 77A of the

Companies Act, 1956/ Buy Back Regulations and hence imposition of

penalty of ` 1 crore is justified.

7. As regards penalty of ` 2 lac and ` 1 lac for violating regulation

5A & regulation 19(7), counsel for SEBI and counsel for Intervener

submitted that in the facts of present case, it is established that the

appellant had in fact violated regulation 5A & 19(7) and hence

imposition of penalty of ` 2 lac and ` 1 lac respectively cannot be

faulted.

8. We have carefully considered rival submissions. 11

9. It is a matter of record that the buy-back proposal put up by the

appellant was accepted by the Special Court subject to compliance of

Section 77A of the Companies Act, 1956/Buy Back Regulations. Even

in the order of the Apex Court dated 08.11.2011 the dispute relating to

compliance of Section 77A of the Companies Act, 1956/Buy Back

Regulations is specifically recorded and after holding that the buy-back

was in violation of the principles of natural justice, in view of all

procedural modalities for buy-back were stated to have been carried out

in the year 2003, the Apex Court did not deem it fit to disturb the buy-

back of shares allowed to the appellant by the Special Court. Thus, the

question as to whether the buy-back of its shares by the appellant

company was in compliance of Section 77A of the Companies Act, 1956/

Buy Back Regulations or not, was a question that could be determined by

SEBI.

10. By the impugned order the AO has imposed penalty of ` 1 crore on

the appellant under Section 15HB of SEBI Act for violating the Buy

Back Regulations and has imposed penalty of ` 2 lac and ` 1 lac for

violating regulation 5A & regulation 19(7) of the Buy Back Regulations.

11. Specific case of the appellant before the AO was that since the

buy-back was initiated and sanctioned by the Special Court, the Buy

Back Regulations were not applicable and assuming that the said

regulations were applicable, then, it was applicable only to the extent of

regulation 5A and regulation 19(7) and in fact, the appellant has 12

complied with the said regulations and, therefore, the AO is not justified

in holding that the appellant has violated the Buy Back Regulations.

12. Having imposed penalty of ` 2 lac & ` 1 lac for the alleged

violation of regulation 5A & regulation 19(7) of the Buy Back

Regulations, the AO could not have imposed additional penalty of ` 1

crore by simply stating that the appellant has violated the Buy Back

Regulations. In other words, for imposing penalty of ` 1 crore, the AO

ought to have specifically stated that apart from violating regulation 5A

& regulation 19(7) which other regulation was violated by the appellant.

Although in para 20 of the impugned order the AO has referred to

regulation 3 & 4 of the Buy Back Regulations, there is no finding

recorded in the order that the appellant has violated those regulations.

Since, regulation 5A & regulation 19(7) are the only two regulations

which are identified to have been violated, for which separate penalty has

been imposed, the AO could not have imposed additional penalty of ` 1

crore by merely recording that the appellant has violated the Buy Back

Regulations.

13. In the show cause notice it was alleged that the appellant had

violated only regulation 5A & regulation 19(7). As a result, there was no

opportunity to the appellant to demonstrate that the appellant has not

violated any other provisions of the Buy Back Regulations. In the

absence of any finding that the appellant apart from violating regulation

5A & regulation 19(7) has violated any other regulation, the AO is not

justified in imposing penalty of ` 1 crore.

13

14. Argument of SEBI that if the provisions contained in the Buy Back

Regulations were incapable of performance then the appellant ought to

have sought relaxation under regulation 26 of the Buy Back Regulations

is without any merit. As noted above, apart from contending the Buy

Back Regulations were not applicable, the appellant had alternatively

contended that in the present case, at best it could be said that only

regulation 5A & regulation 19(7) were applicable and that the said two

regulations have been complied. Once the appellant contends that only

regulation 5A & regulation 19(7) were applicable and that the said

regulations have been complied with, then it was obligatory on part of the

AO to record a finding that apart from regulation 5A & regulation 19(7)

which other regulations were applicable and if those regulations were

incapable of performance then only relaxation of those regulations could

be sought under regulation 26 of the Buy Back Regulations. Without

recording a finding as to which other regulation was applicable in the

present case, the AO is not justified in holding that the appellant has

violated the Buy Back Regulations and impose penalty of ` 1 crore.

15. It is not in dispute that the maximum penalty that can be imposed

under Section 15HB of the SEBI Act for violating the Buy Back

Regulations is ` 1 crore. In the present case, the AO has imposed penalty

of ` 1 crore for violating all the provisions contained in the Buy Back

Regulations and further imposed penalty of ` 2 lac and ` 1 lac for

violating regulation 5A & regulation 19(7). Thus, total penalty of ` 1.03

crore is imposed on the appellant which is in excess of the limit

prescribed under Section 15HB of the SEBI Act. Since regulation 5A & 14

regulation 19(7) are contained in the Buy Back Regulations, without

recording a finding that apart from regulation 5A & regulation 19(7) any

other regulation is violation by the appellant, the AO could not have

imposed penalty of ` 1 crore especially when separate penalty of ` 2 lac

& ` 1 lac has been imposed on the appellant for violating regulation 5A

& 19(7) of the Buy Back Regulations.

16. In these circumstances, without going into the merits of the case,

including the merits on the issue relating to imposition of penalty for the

alleged violation of regulation 5A & regulation 19(7), we set aside the

impugned order dated July 09, 2014 and restore the matter to the file of

AO for fresh decision on merits and in accordance with law. Before

passing the final order the AO shall consider the question as to whether

the applicants from whom the shares were brought back by the appellant

company should be heard in the matter and if found necessary, give an

opportunity of hearing to the applicants before passing the final order.

17. Appeal as also the Misc. Application No. 172 of 2014 are disposed

of in the aforesaid terms with no order as to costs.

Sd/-

Justice J.P. Devadhar Presiding Officer

Sd/-

Dr. C.K.G. Nair Member 30.12.2016 Prepared & Compared By: PK