Steelco Gujarat Limited vs Sebi

Date of Decision: 29.1.2018

Appeal No.417 of 2016

1.

Steelco Gujarat Limited

2. SPICA Investments Limited Plot No.2, GIDC Estate, Palej, Dist. Bharuch, Gujarat - 392220. ..... Appellants

Versus

Securities and Exchange Board of India SEBI Bhavan, C-4A, G-Block, Bandra Kurla Complex, Bandra E, Mumbai - 400 051. ... Respondent

Ms. Minakshi Nimbalkar, Advocate with Mr. Satyan Israni, Advocate i/b. S.D. Israni Law Chambers for the Appellant.

Mr. Pesi Modi, Senior Advocate with Mr. Pulkit Sukhramani, Advocate i/b. The Law Point for the Respondent.

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

Per : Justice J. P. Devadhar (Oral)

1. This appeal is filed to challenge the order passed by the Adjudicating

Officer (A.O.) of Securities and Exchange Board of India ('SEBI' for short) on

29th April, 2016. By the said order penalty of Rs.25 lakh is imposed on the

appellants under Section 23E of the securities Contracts (Regulation) Act, 1956

(1956 Act) to be paid by the appellants jointly and severally.

2. Facts relevant for the present appeal are as follows:

(a) Appellant no.1 is a company listed on the Bombay Stock

Exchange Limited (BSE) and Vadodara Stock Exchange Limited.

Appellant no.2 is the promoter of the appellant no.1 company.

(b) Admittedly appellant no.2 held 78.26% shares of the

appellant no.1 company since June 2002.

2

(c) Rule 19(A)(1) inserted to the Securities Contracts

(Regulation) Rules, 1957 (1957 Rules) with effect from 4.6.2010 (to

the extent relevant) reads thus:

"Continuous Listing Requirement -

19A. (1) Every listed company (other than public sector company) shall maintain public shareholding of at least twenty five per cent :

Provided that any listed company which has public shareholding below twenty five per cent, on the commencement of the Securities Contracts (Regulation) (Amendment) Rules, 2010, shall increase its public shareholding to at least twenty five per cent, within a period of three years from the date of such commencement, in the manner specified by the Securities and Exchange Board of India.

Explanation:

For the purposes of this sub-rule, a company whose securities has been listed pursuant to an offer and allotment made to public in terms of sub-clause (ii) of clause (b) of sub-rule (2) of rule 19, shall maintain minimum twenty five percent, public shareholding from the date on which the public shareholding in the company reaches the level of twenty five percent in terms of said sub-clause.

(2) .......

(3) ....."

(d) In view of rule 19A(1) of the 1957 Rules the appellants

were obliged to maintain public shareholding of atleast 25% within a

period of 3 years from 4.6.2010 (the date on which Rule 19(A)(1)

came into force) i.e. on or before 3.6.2013.

(e) As the appellants failed to comply with the minimum public

shareholding requirement under Rule 19(A)(1) of the 1957 Rules

within the stipulated time and in fact complied that obligation

belatedly after delay of 14 months on 6.8.2014, proceedings were

initiated against the appellants and by the impugned order the AO

imposed a penalty of Rs.25 lakhs under Section 23E of the 1956 Act 3

to be paid by the appellants jointly and severally. Challenging the

aforesaid order appellants have filed the present appeal.

3. Ms. Minakshi Nimbalkar, leaned counsel appearing on behalf of the

appellants submitted as follows:-

(a) the financial position of the appellant no.1 company

became weak in the year 2011-12 and hence the appellant no.1

company underwent Corporate Debt Restructuring (CDR). As per

the order passed by the empowered group of CDR on 1.6.2012, 100%

shares of appellant no.1 held by the appellant no.2 (i.e. 78.26% share

of the total equity shares in the appellant no,1 company) were

pledged in favour of State Bank of India.

(b) On 6.3.2013 appellants received a letter from BSE

whereby the appellants were called upon to comply with the

minimum public shareholding requirement as contemplated under the

1957 Rules as amended. By their reply dated 14.3.2013 the

appellants informed BSE that since the 78.26% shares held by

appellant no.2 were pledged to the State Bank of India, it would be

difficult for the company to comply with the minimum public

shareholding requirement.

(c) Similarly on receiving letter dated 23.4.2013 from

SEBI, appellants held a meeting with the officials of SEBI wherein

appellants pointed out that 100% of promoter shareholding are

pledged with bankers who are not willing to reduce their security,

and therefore, the promoter's shareholding cannot be reduced by way

of sale in the secondary market. Thereupon SEBI suggested that the

pledged shares may be sold to the bankers thereby achieve the

minimum public shareholding requirement. Accordingly the

appellants took steps to sell the pledged shares to the bankers. 4

(d) In the meantime, the Whole Time Member (WTM) of

SEBI by his order dated 4.6.2013 directed inter alia, freezing of

voting rights and corporate benefits like dividend, rights, bonus

shares, spit etc till such time the minimum public shareholding

requirement was achieved. Thereafter, on the appellants achieving

the minimum public shareholding requirement on 6.8.2014, the

WTM of SEBI passed an order on 21.10.2014 whereby the directions

contained in the order dated 4.6.2013 were revoked and the matter

was referred for adjudication proceedings under Sections 23E and

23H of 1956 Act.

(e) It is submitted that the delay in selling the pledged

shares was on account of delay on part of bankers and therefore, the

delay was beyond the control of the appellants. Moreover, it is

submitted that none of the mitigating factors contained in Section23J

of the 1956 Act have been considered in the present case. In these

circumstances, counsel for the appellants submitted that in the facts

of present case, penalty imposed on the appellants deserves to be

quashed and set aside.

4. We see no merit in the above contentions.

5. As per rule 19A(1) which came into force with effect from 4.6.2010 it

was obligatory on part of the appellants to achieve minimum public

shareholding requirement by 3.6.2013. Clause 40A of the listing agreement

requires the issuer company to comply with the requirements of Rule 19(2) and

Rule 19A of 1957 Rules within the time stipulated therein. Section 23E of

1956 Act provides that if a company or any person responsible to comply with

Rule 19A inter alia fails to comply with the listing conditions or commits 5

breach thereof, shall be liable to a penalty not exceeding twenty five crore

rupees.

6. In the present case, on the date on which the appellants pledged

78.26% shares in favour of the bankers in the year 2012, Rule 19A(1) was

already in operation and therefore, before pledging the shares, the appellants

ought to have ensured that the obligation under Rule 19A(1) were complied

with, if necessary by selling the requisite shares to the bankers, instead of

pledging the shares with the bankers. Failure to do so was in gross violation of

Regulation of 19A(1) of 1957 Rules.

7. Apart from the above, when SEBI suggested that the minimum public

shareholding requirement could be achieved by selling the pledged shares to the

bankers, the appellants ought to have prevailed upon the bankers to do the

needful within the stipulated time. However, the appellants failed to prevail on

the bankers.

8. It is relevant to note that for non compliance of Rule 19A the WTM of

SEBI by his order dated 4.6.2013 had imposed certain restrictions inter alia on

the appellants as more particularly set out therein. Inspite of the said order

passed by the WTM on 4.6.2013, appellants failed and neglected to comply

Rule 19A till 6.8.2014. In these circumstances, it is apparent that the appellants

are grossly guilty of violating rule 19A of 1957 Rules.

9. Provisions contained in the 1956 Act and the rules made thereunder do

not contain any provisions for granting extension of time for compliance

beyond the time stipulated in the Act and the Rules. Therefore, in the facts of

present case, where the appellants are guilty of violating Rule 19A(1) of 1957

Rules for more than 14 months cannot escape penal liability. 6

10. Argument of the appellants that the delay on part of the bankers to sell

the pledged shares cannot be attributed to the appellants is without any merit,

because in the first instance the appellants ought to have ensured compliance of

rule 19A before pledging the shares. Alternatively, the appellants ought to have

implemented the suggestion given by SEBI to sell the shares to the banker

within the stipulated time. Having failed to impress upon the bankers to sell

requisite shares within the stipulated time, the appellants are guilty of violating

Rule 19A(1) of 1957 Rules and hence the appellants cannot escape penal

liability by alleging that the bankers are responsible for the delay.

11. Argument of the appellants that the AO has failed to consider the

mitigating factors set out in Section 23J of the 1956 Act is also without any

merit. Penalty imposable under Section 23E of 1956Act for violating the

provision contained in the listing agreement which includes compliance of the

requirement contained in 19A(1) of 1957 Rule is up to Rs.25 crore. In the

present case, the AO after considering all mitigating factors has imposed

penalty of Rs.25 lac as against the imposable penalty of Rs.25 crore. In such a

case, penalty imposed cannot be said to be unreasonable or excessive.

12. In the result, we see no merit in the appeal and the same is hereby

dismissed with no order as to costs.

Sd/-

Justice J. P. Devadhar Presiding Officer

Sd/-

Jog Singh Member

Sd/-

Dr. C.K.G. Nair Member

29.1.2018 Prepared and compared by RHN