SAT Sets Aside SEBI Order Imposing Rs. 25 Crores on Ambani Family & Reliance Promoter Entities

SAT Sets Aside SEBI Order Imposing Rs. 25 Crores on Ambani Family & Reliance Promoter Entities

The Securities Appellate Tribunal (SAT) has set aside a Securities and Exchange Board of India (SEBI) order that imposed a Rs. 25 crores penalty on industrialists Mukesh Ambani, Anil Ambani and other entities for non-compliance with takeover norms in the Reliance Industries case. The order came after Ambanis appealed in the appellate tribunal against the capital markets regulator’s directive.

Noting that the penalty amount following SEBI’s order was deposited by the appellants, SAT directed the markets regulator to refund the amount of Rs. 25 crores within four weeks. In April 2021, SEBI levied a fine totaling Rs. 25 crores on Mukesh Ambani, Anil Ambani, Nita Ambani, Tina Ambani and other entities for non-compliance with takeover norms in a Reliance Industries case dating back to 2000.

In April 2021, SEBI had imposed a cumulative fine of Rs. 25 crores on Mukesh Ambani, Anil Ambani, Nita Ambani, Tina Ambani and other entities for their alleged non-adherence to the takeover norms in a case pertaining to Reliance Industries. The case stretches back to the year 2000. The regulator had accused RIL’s promoters and Persons Acting in Concert (PAC) of failing to disclose the acquisition of a stake greater than 5 per cent in the company.

The Ambani brothers had partitioned the business empire established by their father Dhirubhai Ambani in 2005. SEBI pointed out that the 6.83 per cent stake acquired by RIL promoters along with PACs, following the exercise of option on warrants associated with non-convertible secured redeemable debentures, surpassed the maximum limit of 5 per cent stipulated by the takeover regulations.

According to SEBI the public announcement regarding the share acquisition should have been made on 7 January, 2000. The watchdog body found no such announcement, deeming this as a violation of the takeover regulations. Consequently, the SEBI imposed a penalty of Rs.25 crores jointly and severally on the appellants under Section 15H of the Securities and Exchange Board of India Act, 1992 (SEBI Act) for violation of Regulation 11(1) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (SAST Regulations).

The primary issue determined by the SAT was whether an obligation to make an open offer is triggered under Regulation 11(1) of the SAST Regulations at the time of acquisition of such convertible securities or at the time of conversion of such convertible securities into shares carrying voting rights.

The SAT noted that in the instant case, the convertible warrants were acquired on 12th January, 1994 before the SAST Regulations, 1994 or SAST Regulations came into force. The SAT held that the SAST Regulations is prospective in nature i.e., with effect from 20 February, 1997 when the Regulations came into force.

The SAT noted that Regulation 11(1) contemplates acquisition of shares or voting rights. It does not contemplate shares and voting rights. Therefore, there can be a situation where an acquirer acquires shares or agrees to acquire shares which includes bonds, warrants, etc., and which may or may not carry voting rights.

The SAT observed, “Thus, if the acquirer acquires shares which includes warrants beyond a percentage specified in Regulation 11, then it triggers an obligation to make an open offer. The contention that acquisition of warrants does not trigger the obligation to make an open offer under Regulation 11 as the warrants does not carry any voting rights is misconceived.”

Further, the SAT rejected the contention that such obligation is triggered only when the warrants are converted into equity shares carrying voting rights is erroneous.

The SAT held that, Regulation 2(1)(k) makes it clear that shares include warrants and, therefore, the contention that warrants is not a share for the purpose of Regulation 11(1) is erroneous.

The SAT held that the maxim, “ut res magis valeat quam pereat” is wholly applicable, namely, that it is a cardinal principle rule of construction that normally no word or provision should be considered redundant or superfluous while interpreting the provisions of the statute. Thus, the SAT held that contention of the respondent that the words “includes any security which would entitle the holder to receive shares with voting rights” as provided in the definition of the word ‘shares’ cannot be accepted.

Therefore, the SAT was of the opinion that in case of warrants, the public announcement for open offer is triggered under Regulation 11(1) at the time of acquisition to acquire such warrants which could be made at any time from the date of agreement to acquire such warrants up to four working days prior to the acquisition of voting rights upon conversion.

The SAT observed that, “the acquirer can make the open offer even immediately after agreement to acquire warrants since it is not later than four working days before he acquires and such decision to make an open offer immediately cannot be termed illegal.”

The next issue determined by the Tribunal was whether the impugned proceedings were barred by limitation, delay or laches.

The SAT noted that noted that it took 11 years from the date of the commission of the alleged violation in January, 2000 for SEBI to issue a show cause notice. Further, it took SEBI 9 long years to decide the consent application. The impugned order has come after 21 years of the alleged violation.

The SAT remarked that the delay had caused serious prejudice to the appellant. There was an inordinate delay in the initiation of the proceedings but also in the disposal of the proceedings. The impugned order, thus, was liable to be set aside also on this ground.

Whether the violation of Regulation 11(1) is continuing violation and, therefore, monetary penalty under the amended Section 15H of the SEBI Act could be imposed.

The SAT was of the view, that continuing violation does not mean that the provision existing on the date of passing the impugned order relating to penalty would apply. The SAT held that the alleged violation was not a continuing offence.

Thus, the SAT held that the appellant had not violated Regulation 11(1) of the SAST Regulations. The imposition of penalty upon the appellant was without any authority of law.

Consequently, the SAT quashed the impugned order.