The Hindu Business Line : SEBI seized with takeover action

A NUMBER of listed companies across the country have received notices from the Securities and Exchange Board of India (SEBI) on `Violation of takeover regulations — settlement by consent order'. This notice is on certain alleged violations of Regulations 6 and 8 of SEBI's Takeover Regulations 1997 by the companies in 1998, 1999, 2000 and 2001.

The notice alleges that the companies concerned had not only not complied with regulations 6(2), 6(4) and 8(3) of the takeover regulations, but the Regularisation Scheme 2002 introduced by SEBI for this non-compliance was also not made use of. To put the issue in perspective, the requirements of Regulations 6(2) and (4) need to be looked into, which are as follows:

"Regulation 6(2): Every company whose shares are held by the persons referred to in sub-regulation (1) shall, within three months from the date of notification of these regulations, disclose to all stock exchanges on which the shares of the company are listed, the aggregate number of shares held by each person.

"Regulation 6(4): Every company whose shares are listed on a stock exchange shall within three months of notification of these regulations, disclose to all stock exchanges on which the shares of the company are listed, the names and addresses of promoters and, or person(s) having control over the company, and the number and percentage of shares or voting rights held by each such person."

The requirement of regulation 8(3) reads thus: "Every company whose shares are listed on a stock exchange shall, within 30 days from the financial year ending March 31 as well as the record date of the company for the purposes of declaration of dividend, make yearly disclosures to all stock exchanges on which the shares of the company are listed, the changes, if any, in respect of the holdings of the persons referred to under sub regulation (1) and also holdings of promoters or person(s) having control over the company as on March 31."

It can be seen that while Regulation 6 basically is a "transitional" disclosure requirement, Regulation 8 is "continual" one seeking disclosure of details of holdings of over and above 15 per cent of the shares and also those of the promoters as on the year-end and record dates.

After a lapse of 3-7 years, SEBI has now chosen to take up this issue of a procedural non-compliance of aforementioned regulation. This notice of SEBI is not merely to show cause but is also a unilateral demand for penalties ranging from Rs 75,000 to Rs 2,00,000 by way of a "consent order".

While slapping this consent penalty, the notice quotes Section 15A of the SEBI Act to highlight that the penalty under that section is Rs 1 lakh for each day during which such failure continues or Rs 1 crore, whichever is less. The reference to Section 15A is obviously an invitation to accept the consent order for penalty which is expectedly far below the penalty provided by Section 15A of SEBI Act.

The notice also further states that "an adjudicating officer has already been appointed under Section 15 I of the SEBI Act to enquire into the aforesaid violation" and also asserts that "in terms of Rule 4(5) of SEBI (Procedure for Holding Enquiry and imposing penalty by adjudicating officer) Rules, 1995, the adjudicating officer is not bound by the Evidence Act, 1872 and further personal hearing is waived at the request of the persons concerned."

The notice further states that no appeal shall lie if the adjudication is done with the consent of the parties in terms of Section 15T of the SEBI Act. The last two paras of the notice state in short that "SEBI has decided to consider your request if the penalty set out therein is paid" and a consent form is also enclosed to facilitate the consent order within 30 days.

Receipt of a consent penalty order in the form of a notice for a minor technical non-compliance that, too, relating to earlier years has come as a total surprise to all. Having not acted on the returns for so long, it is not clear why SEBI has sent this notice now. Perhaps, it has done so not knowing that the alleged violations, if any, committed during those earlier years is barred by limitation. In fact, the notice suffers from at least the following three drawbacks:

It is unilateral, though it reads: "SEBI has decided to consider your request."

Notice refers to the penalty provided in Section 15A after its amendment on October 29, 2002, in respect of non-compliance of the Regulations, which occurred in the years 1998 to 2001. Prior to the amendment, the penalty was "not exceeding one lakh and fifty thousand rupees for each such failure". The show-cause notice in all fairness should have referred to the penalty prior to October 29, 2002; and

The tone of the notice is as if the adjudicating officer has been appointed under SEBI (Procedure for Holding Enquiry and Imposing Penalty by adjudicating officer) Rules 1995 now, when, in fact, those rules are not in vogue and have been replaced by Rules 2002.

The companies concerned have the following options:

Accept the notice and pay the penalty, wherever they have not complied with the requirements at all;

Accept the challenge and face adjudication proceedings and, in the event of an inconvenient order, go in for an appeal before SAT;

Fight the case on limitation and other grounds; or

Apply for compounding of the offence under Section 24A at the appropriate time.

The best way to success is, of course, to take least form of resistance. Will SEBI come forward to resolve the issue by warning the companies concerned and close the matter at least in those cases where there is no change in the shareholding pattern?

(The author is a Chennai-based chartered accountant.)

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