SEBI imposes Penalty of Rs. 25 crore on Ambani & Family for Violating Takeover Regulations

SEBI imposes Penalty of Rs. 25 crore on Ambani & Family for Violating Takeover Regulations

The Securities and Exchange Board of India (SEBI) had investigated alleged irregularities relating to the issue of 12 crore equity shares in January 2000 by Reliance Industries Limited (RIL).

A penalty of Rs. 25 crore was imposed on Mukesh and Anil Ambani and other family members by the adjudicating officer (AO) of the has imposed a joint penalty of Rs. 25 crore on Mukesh and Anil Ambani for violation of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

From the disclosure filed under Regulation 8(3) of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeover) Regulations, 1997 by RIL to Bombay Stock Exchange (BSE) on 28 April 2000, it was observed that it had disclosed the above mentioned 38 allottee entities as Persons Acting in Concert (PACs) with the RIL promoters.

It was observed that the shareholding of RIL promoters together with PACs had increased from 22.71 percent as on 31 March 1999 to 38.33 percent as on 31 March 2000. Out of these, 7.76 percent shares were acquired consequent upon a merger and thus were exempt under Regulation 3(1)(j)(ii) of Takeover Regulations.

However, 6.83 percent shares that were acquired by RIL promoters together with PACs in exercise of 3 crore warrants, were alleged to be in excess of the ceiling of 5 percent prescribed in regulation 11(1) of Takeover Regulations.

It was alleged that the obligation not to make additional acquisition of more than 5 percent of voting rights in any financial year unless such acquirer makes a public announcement to acquire shares in accordance with the regulations under regulation 11(1) of Takeover Regulations arose on 7 January 2000, i.e. the date on which the PACs were allotted RIL equity shares on exercise of warrants issued in January 1994.

Since the promoters and PACs have not made any public announcement for acquiring shares, it is alleged that they have violated the provisions of regulation 11(1) of Takeover Regulations.

According to Regulation 11(1) of the Takeover Regulations, RIL was obligated not to make the additional acquisition of more than 5 percent of voting rights in any financial year unless it made a public announcement to acquire shares. Since the RIL promoters and Persons Acting in Concert (PACs) did not make any public announcement for acquiring shares, it was found that the Ambanis violated the provisions of Regulation 11(1).

It was contended by the Ambani family that initiation of adjudication proceedings against the noticees, seventeen years after the acquisition of the warrants and eleven years after the acquisition of shares was unreasonable and time-barred.

They also stated that the provisions of takeover regulations do not apply to the issue of warrants and conversion of warrants. The acquisition of shares was exempt under Regulation 3(1)(c) of the 1997 Takeover Regulations. The noticees were not provided with a full inspection of documents in complete violation of the principles of natural justice.

The order passed by K Saravanan (AO) read, "I hold that the Noticees by not making a public announcement has violated and have been continuing to violate the provisions of Regulation 11(1) of the Takeover Regulations."

SEBI order further read, "It is noted that in the instant matter the noticees have been alleged to have failed to make a public announcement to acquire shares of RIL and deprived the shareholders of their statutory rights/opportunity to exit from the target company and therefore they breached the provisions of Takeover Regulations. Such charges against the noticees make the instant matter grave."

Under Section 15H of the SEBI Act (amended in October 2002), a maximum penalty of Rs. 25 crore or three times the amount of profits made out of the failure is allowed. The regulatory body further mentioned that it was difficult to certain the unfairness again made by RIL promoter entities.

The AO proceeded to place reliance on a number of the Supreme Court judgments and stated that "I note that the SEBI Act, 1992 is a social welfare legislation for the protection of investors and it is the paramount duty to interpret its provisions and to adopt such an interpretation that would further the purposes of law and if possible, eschew the one which frustrates it."

It added, "Hence, it is necessary to uphold the obligation to give a public announcement of an open offer to investors at large which obligation has not been complied with till date. Acceptance of any argument for not making a public announcement of an open offer would tantamount to total disregard to the concerns of the public share-holders as the violation is not one of mere procedural nature but goes against the very grain of the statute under consideration."

The SEBI ruled, "In the event of failure to pay the said amount of penalty within 45 days of the receipt of this order, SEBI may initiate consequential actions including but not limited to recovery proceedings under Section 28A of the SEBI Act, 1992, for the realization of the said amount of penalty along with interest thereon, inter alia, by attachment and sale of movable and immovable properties."