NCLT’s powers to rectify register of members restricted in case of breach of securities laws

– Sharon Pinto, Manager | sharon@vinodkothari.com

Introduction

A recent judgment by the Supreme Court in Ifb Agro Industries Limited vs Sicgil India Limited, has put to rest the concerns regarding rectificatory jurisdiction of NCLT u/s 59 of Companies Act, 2013 (section 111A of the erstwhile Companies Act, 1956). The ruling has shed light on the scope of NCLT jurisdiction in case of rectification of the register of members, in cases where there are violations of specific laws and the facts of the case are such that the same requires proper enquiry, adjudication under the specific statute. The two major questions addressed by Hon’ble Supreme Court are as follows:

• What is the scope and ambit of Section 111A of the Companies Act, 1956 (‘Act, 1956’) / Section 59 of the Companies Act, 2013 (‘Act, 2013’), to rectify the register of members?
• Which is the appropriate forum for adjudication and determination of violations and consequent actions under the SEBI (Substantial Acquisition of Shares and Takeover) Regulations 1997 (‘SEBI SAST Regulations’) and the SEBI (Prohibition of Insider Trading) Regulations 1992 (‘SEBI PIT Regulations’)?

Brief facts

The present case pertains to acquisition of shares of IFB Agro Industries Limited (‘Appellant’) by Sicgil India Limited and its related parties (‘Respondents’) without complying with the applicable provision of SEBI SAST Regulations and SEBI PIT Regulations.  In 2003-2004, with a view to eliminate competition and strengthen its own dominant position in the relevant market, the Respondents started acquiring shares of the Appellant from the open market which resulted into aggregate shareholding of the Respondents crossing 5% of the total paid-up share capital of the Appellant, thereby triggering Regulation 7(1) of the SEBI (SAST) Regulations.

As per the erstwhile Reg. 7(1) of SEBI SAST Regulations, in case of acquisition of shares, taken together with the existing shareholding of the acquirer resulted in more than 5% of the shares or voting rights in a company, an intimation was required to be given within 2 days of acquisition to the target company and the stock exchange where the shares of the target company are listed. It is alleged that although the respondent company had submitted the said disclosure to the Appellant company, the same was not in the prescribed format.

Further, in May 2004, pursuant to further acquisition of shares of the Appellant Company, the individual holding the Respondent 1 listed entity exceeded beyond 5% of the share capital of the Appellant company, thereby triggering the requirement under the erstwhile Reg. 13(1) of SEBI PIT Regulations, which stipulates disclosure to the company within 4 working days of acquisition of more than 5% shares or voting rights in any listed company. However, the Respondent company failed to furnish this disclosure.

Thus, the Appellant company filed a petition application under Section 111A of the Act, 1956 before the Company Law Board for rectification of register of members by deleting the name of the Respondents as the owner of shares which are over and above the 5% threshold. During the pendency of the petition, Act, 2013 came into force and the matter stood transferred to Tribunal.

Vide order dated 05.07.2017, the Tribunal allowed the petition thereby holding that there was a violation of the afore-mentioned provisions of the SEBI SAST Regulations & SEBI PIT Regulations and that the regulatory jurisdiction of SEBI in the instant case would not bar the Tribunal from exercising its power under Section 111A of Act, 1956 in order to undo the mischief. An appeal was preferred by the Respondents against the said order of Tribunal before Appellate Tribunal, and the Appellate Tribunal, without any analysis or reasoning, allowed the appeal and set aside the order of the Tribunal. Thus, against the order of Appellate Tribunal an appeal was preferred before the Supreme Court by the Applicant.

Judgment

Having considered the comprehensive role of the SEBI in regulating the securities market and the adjudicatory powers of SEBI under Securities and Exchange Board of India, 1992 (SEBI Act) which includes that power to settle administrative and civil proceedings under Section 15JB of the SEBI Act, the Hon’ble Supreme Court set aside the order of Appellate Tribunal and held that important role of the Regulator cannot be circumvented by simply asking for rectification under Section 111A of the 1956 Act. The scrutiny and examination of a transaction allegedly in violation of the SEBI (PIT) Regulations/ SEBI (SAST) Regulations will have to be processed through the regulations and remedies provided therein.

Closing thoughts

SEBI, being the specific regulatory authority, has the power to investigate matters under SEBI Act. Thus, the violations of securities laws are required to be looked into by the regulatory body established for the purpose which is enshrined with the power to call for information under the respective statute. The ruling has established that any petition seeking adjudication by specifically authorised regulators on account of breach of specific statutes cannot be given the garb of ‘rectification’. Thus, there exists a restriction on power of the Tribunal w.r.t rectification of register of members which is summary in nature.