– Vinita Nair | Senior Partner, Vinod Kothari & Co. | corplaw@vinodkothari.com

Hon’ble Supreme Court, in the matter of PTC India Financial Services Limited v. Venkateshwar Kari and Another (‘PTC India ruling’), brought out a very important distinction between the meaning of ‘beneficial owner’ under the Depository law, and the right of the pledgee/ pawnee/ security interest holder) to cause the sale of goods pledged by pledgor/ pawnor in terms of the rights arising under the pledge^[1]. The PTC India ruling inter-alia holds that “beneficial ownership” in the context of the Depositories Act should not be confused with beneficial ownership in law. Getting registered as a “beneficial owner” in terms of Section 10 of Depositories Act, 1996 read with Regulation 58 (8) of the SEBI (Depositories and the Participants) Regulations, 1996^[2] (‘Depository law’) does not amount to any transfer of title to the pawnee – it is merely a procedural precondition to sale by the pawnee. It further stipulates that there is no concept of ‘sale to self’ by the pledgee and that the pledgee is bound by the two options provided under Section 176 of the Indian Contract Act, 1872 (‘ICA, 1872’), viz., right to bring a suit against the pawnor and retain the goods pledged as collateral security, or sell the thing pledged on giving reasonable notice to the pawnor and sue for the balance, if any. This ruling triggers the need to review current practice followed by companies and also validity of orders pronounced by Securities Appellate Tribunal (‘SAT’) and SEBI from time to time w.r.t. pledge.

The Apex Court referred to the decision of Securities Appellate Tribunal (‘SAT’) in the matter of Liquid Holdings Private Limited v. The Securities Exchange Board of India^[3] where SAT held that the banks being recorded as beneficial owners of the shares pursuant to invocation of pledge became the members of the target company and subsequent transfer of the said shares by the banks back to the appellants resulted in purchase by the appellants attracting the open offer obligations under SEBI (Substantial Acquisition and Takeovers) Regulations, 1997 [Repealed by SEBI (Substantial Acquisition and Takeovers) Regulations, 2011] (‘Takeover Code’). The Apex Court observed that SEBI should examine the provisions of Depository law and the Takeover Code to avoid discord or ambiguity resulting in  instability or confusion especially on applicability of Takeover Code when the pawnee exercises his right to be recorded as a ‘beneficial owner’, while reserving his right to sell the pledge. Additionally, in the author’s view, there is an equal need to examine the applicability of SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘PIT Regulations’) in the context of pledges^[4], for reasons discussed in the latter part of this article.