SAT Quashes SEBI Order in Electrotherm: Exercise of Discretionary Powers Unreasonable & Unfair under Takeover Regulations

SAT Quashes SEBI Order in Electrotherm: Exercise of Discretionary Powers Unreasonable & Unfair under Takeover Regulations

The Securities Appellate Tribunal (SAT) in the case related to the alleged takeover of Electrotherm (India) Ltd., quashed an order passed by the Securities and Exchange Board of India (SEBI), observed that in view of the long lapse of time from the date of acquisition till the date of the SEBI order, the discretion exercised by the chief general manager (CGM of SEBI) in directing the appellants to make an open offer was not a proper exercise of discretion.

In its order, the bench of Justice Tarun Agarwala (Presiding Officer) and Meera Swarup (Rechnical Member) observed that, “The discretion is an effective and important tool for effective and good governance administration but in the present context such exercise of discretion was not appropriate given the fact that Regulation 44 provides other options which could have been exercised. In our opinion, the exercise of discretion in the instant case was not fair and reasonable.”

In the present case, the British Virgin Islands-based Ferryden International Ltd and Ahmedabad-based Ashok Bhandari had challenged the order passed by SEBI on 16 March 2023.

As per the order, the CGM had directed them to make an open offer within 15 days and pay interest at 10% p.a. (per annum) from 12 March, 2007 on the consideration amount to the shareholders who accepted the open offer. Further, the CGM had imposed a penalty of Rs. 10 lakhs on them and restrained them from the markets until the open offer was made.

The market regulator had probed the scrip of Electrotherm for the alleged violation of SEBI's substantial acquisition of shares and takeovers (SAST) regulations.

The investigation revealed that two Singapore-based companies, Castleshine Pte Ltd and Leadheaven Pte Ltd, cumulatively held an 18% stake in Electrotherm. These two companies were allotted 1 million warrants on 9 September 2005, which were converted into 1 million shares on 27 February 2007.

As a result of the conversion of warrants into shares, both Castleshine and Leadheaven held 10.95% each in Electrotherm as of 31 March 2007.

On 12 March 2007, Ferryden International, owned by Mr Bhandari, acquired Castleshine and Leadheaven. It resulted in Ferryden and Mr Bhandari owning more than 15% of Electrotherm and triggered an open offer as per Regulation 10 of the SAST regulations.

However, Ferryden and Mr Bhandari had failed to make any announcement. After four complaints, they filed the necessary regulatory disclosure in 2019. Based on the complaints, SEBI conducted an investigation and, in December 2021, issued show-cause notices to them.

While exercising its discretion, the SEBI CGM directed that under Regulation 44, Ferryden and Mr Bhandari should make an open offer and pay interest at the rate of 10% from 12 March 2007 to the date of payment of consideration to shareholders of Electrotherm.

The SAT remarked that if there is a violation of Regulation 10, then a direction can be issued under Regulation 44 of the SAST Regulations and penalty can also be imposed under Regulation 35 and Section 15H of the SEBI Act.

The SAT was of the view that the decision of the Supreme Court in Sunil Khaitan (supra) is squarely applicable in the instant case.

“Admittedly, the acquisition was made in the year 2007. At that time, there were 3,618 shareholders who could have availed the opportunity to exit from the target Company. As on date there are only 400 shareholders and, therefore, the direction to make an open offer will not provide equality of treatment to all stakeholders who held shares on the trigger date,” SAT noted.

While quashing the March 2023 order, the SAT asked the SEBI CGM to pass an appropriate order within three months after considering other provisions of Regulation 44 of the SAST regulations.