M/s Apollo Tyres Ltd. vs Securities and Exchange Board of India on 30 December 2016

1. This appeal is filed to challenge the order passed by the Adjudicating Officer (“AO” for short) of Securities and Exchange Board of India (“SEBI” for short) on July 09, 2014. By the said order penalty of ` 1 crore is imposed on appellant under Section 15HB of the Securities

and Exchange Board of India Act, 1992 (“SEBI Act” for short) for failure to comply with SEBI (Buy Back of Securities) Regulations, 1998 (“Buy Back Regulations” for short), penalty of ` 2 lac for failure to comply with Regulation 5A of Buy Back Regulations and ` 1 lac for failure to comply with Regulation 19(7) of the Buy Back Regulations. Thus, total penalty of ` 1.03 crore is imposed on the appellant under Section 15HB of the SEBI Act for failure to comply with the Buy Back Regulations.

2. In the aforesaid appeal, Misc. Application No. 172 of 2014 is filed by 8 family members of Shri. Harshad Mehta (“applicants” for short) who are all notified entities in terms of Section 9 of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992 (“Special Court Act” for short). By the said Misc. Application, the applicants seek an order for being impleaded as party respondents to the appeal. Alternatively the applicants seek an order permitting them to intervene in the appeal. Grievance of the applicants is that the complaint filed by the applicants has led to the passing of the impugned order, however, the impugned order is passed without giving an opportunity of hearing to the applicants, even though the applicants were entitled to be heard pursuant to two orders passed by the Apex Court. It is the case of the appellants that all the facts set out in the complaint have not been considered in the impugned order.

3. Facts relating to the present appeal are as follows:- a) Controlling block of shares, that is, more than 5% of the equity shares capital of the appellant company

held by Shri. Harshad Mehta and his family members were attached by notification dated 06.06.1992.

b) While the Special Court was considering a scheme for sale of shares of the appellant company held by the notified parties, appellant company intervened in the said proceedings and offered to buy back the shares of the appellant company held by the notified parties under Section 77A of the Companies Act, 1956.

c) The Special Court by its order dated 17.08.2000 inter alia held that once the highest offer price is ascertained, the management of the company shall be given an option to buy the controlling block of shares of the appellant company held by the notified persons subject to the conditions set out therein. One of the conditions imposed by the Special Court was that the purchaser(s) shall comply with all regulations including the Takeover Regulations of SEBI.

d) Challenging the order of the Special Court, the appellant company filed an appeal before the Apex Court and the Apex Court by its order dated 23.08.2001 inter alia directed that it will be open to the Special Court to decide whether to have sale of controlling block of shares either by inviting bids for purchase of controlling block as such or by selling

said shares according to the norms fixed for the sale of bulk shares or by the norms fixed in respect of routine shares. It was further directed that if the Special Court thinks that it is best to adopt the norms laid down by it for sale of controlling block of shares, then, when the highest offer is received, the Special Court, inter alia shall give an opportunity to the management of the appellant company to buy the shares or give an opportunity to the appellant company to buy back the shares under Section 77(A) of the 1956 Act.

e) On 01.04.2003 the custodian, by a public notice invited bids from individuals as also from corporates and other entities for sale of 54.88 lac shares of the appellant company held by the notified entities.

f) On 24.04.2003 an enabling resolution was passed by the Board of Directors (“BoD” for short) of the appellant company authorizing its official to appear before the Special Court and negotiate for sale as and when the occasion arises.

g) As the offers received pursuant to the public notice were not acceptable to the Special Court, the appellant company and its management were given an option to buy back or buy the shares. The appellant company

and its management expressed their willingness to purchase the shares at ` 85/- per share. The Special Court called upon the appellant company and its promoters to increase the offer price and the appellant company and its promoters agreed to purchase shares at ` 90/- per share which was agreed to and accepted by the Special Court by its order dated 30.04.2003.

h) Accordingly, on 09.05.2003 the BoD of the appellant company resolved to buy-back 36,90,000 shares of ` 10/- each of the appellant company at ` 90/- per share aggregating to ` 33.21 crore belonging to Harshad Mehta Group and thereafter cancelled the said shares bought back from the custodian. On the same day, that is, on 09.05.2003 letters were addressed to the Registrar of Companies and the Stock Exchanges stating therein that the appellant company has decided to buy-back 36.90 lac shares of the appellant company at ` 90/- per share and that the buy-back being under the Special Court Act, the provisions of which override the provisions of other Acts viz the Companies Act 1956, the appellant company may follow the provisions of Section 77A of the Companies Act, 1956 and the Buy Back Regulations as far as practicable.

i) On 10.05.2003 appellant company addressed a letter to SEBI enclosing a copy of BoD resolution dated 09.05.2003 as contemplated under Regulation 5A of Buy Back Regulations.

j) On 12.05.2003 appellant company addressed a letter to the Central Depository Services (India) Ltd. (“CDSL” for short) requesting for extinguishment of 36,90,000 shares of the appellant company bought back by the appellant company. On 12.05.2003 return under Form 4C as contemplated under Section 77A(10) of the Companies Act, 1956 was filed before the Registrar of Companies disclosing the particulars of buy-back.

k) On 13.05.2003 a public notice was issued by the appellant company intimating the general public that pursuant to the orders of the Court, appellant company has bought back 36,90,000 equity shares of ` 10/- each at ` 90/- per share and as a consequence, the paid up share capital, post buy-back, stands reduced from 36.31 crore to 32.52 crore.

l) On 15.05.2003 CDSL confirmed the reduction in share capital of the appellant company in view of extinguishment of shares.

Accordingly, on 15.05.2003 the appellant company updated its

‘Register of Securities Bought Back’ as contemplated under Section 77A(9) of the Companies Act, 1956.

m) On 19.05.2003 appellant company sent a letter to the concerned Stock Exchanges enclosing a copy of the letter received from CDSL confirming reduction in share capital due to extinguishment of shares acquired under buy-back.

n) On 09.09.2011 applicants filed a complaint before SEBI alleging that the appellant company and its promoters violated Section 77A of the Companies Act, 1956 and the Buy Back Regulations while buying back 36.90 lac shares of the appellant company which was approved by the Special Court vide orders dated 30.04.2003 and 02.05.2003.

o) On 08.11.2011 the Apex Court allowed the appeal filed by the applicants against the decision of the Special Court dated 30.04.2003 as modified on 02.05.2003 on ground that the Special Court had failed to comply with the principles of natural justice. However, bearing in mind the fact that sale of 54,88,850 shares was approved by the Special Court and all procedural modalities were stated to have been carried out in the year 2003, the Apex Court did not disturb the shares bought back by the appellant and set

aside the order of the Special Court in relation to 4.95% of the shares acquired by the promoters of the company pursuant to the orders of the Special Court. Thus, 36.90 lac shares of the appellant company acquired by the appellant company under the buy- back option attained finality.

p) On 24.01.2014 SEBI issued a show cause notice to the appellant alleging that buy-back of 36.90 lac shares was in violation of Section 77A of the Companies Act, 1956 read with the provisions contained in the Buy Back Regulations. It was also alleged that the appellant has violated regulation 5A and 19(7) of the Buy Back Regulations.

q) Appellant filed its reply to the show cause notice denying the allegations made in the show cause notice.

r) By the impugned order dated 09.07.2014 the AO has imposed penalty of ` 1.03 crore on the appellant under Section 15HB of SEBI Act for violating the provisions contained in the Buy Back Regulations. Challenging the order of the AO dated 09.07.2014 present appeal is filed.

4. Mr. Dwarkadas, learned Senior Advocate appearing on behalf of the appellant submitted that under Section 77A(2)(f) of the Companies Act, 1956 inserted by the Companies (Amendment) Act, 1999, buy-back of its own shares by a company is permitted inter alia subject to compliance of Buy Back Regulations. In the present case, the buy-back of its own shares by the appellant was not by any of the modes prescribed in regulation 4(1) of the Buy Back Regulations. In fact the appellant had brought back its shares outside the SEBI Buy Back Regulations and under a ‘scheme’ formulated by the Special Court vide its order dated 17.08.2000 which was approved by the Apex Court vide order dated 23.08.2001. Thus, the appellant had brought back its shares from the custodian through a bidding process conducted by the Special Court in the Court itself. The Buy Back Regulations operate in the normal course when a company wishes to buy-back its shares, however, in the present case, the buy-back is a Court initiated and sanctioned buy-back which process was not initiated by the appellant and hence the buy-back was not within the scope of Buy Back Regulations.

5. Counsel for the appellant further submitted that assuming without admitting that the Buy Back Regulations were applicable, the AO ought to have held that in the present case the appellant has in fact complied with the said regulations to the extent possible. It is further submitted on behalf of the appellant that the Special Court Act is a special statute of a later date and hence would override another Special Law (SEBI Act) of an earlier date. In any event, it is submitted, without prejudice that the appellant had voluntarily undertaken steps to comply with the

requirements of Section 77A of the Companies Act, 1956/ Buy Back Regulations to the extent possible [i.e. compliance of regulation 5A & 19(7)] and therefore the appellant cannot be held guilty of violating the Buy Back Regulations.

6. Mr. Desai learned Counsel appearing on behalf of SEBI and Mr. Sancheti, learned Senior Advocate appearing on behalf of the Applicants/ Interveners in Misc. Application No. 172 of 2014 submitted that as per the orders passed by the Apex Court, the buy-back option given by the Special Court to the appellant and upheld by the Apex Court was subject to compliance of Section 77A of the Companies Act, 1956/Buy Back Regulations. Assuming that it was not possible to comply with the Buy Back Regulations, the appellant ought to have sought relaxation under regulation 26 which the appellant failed to do and thus it is evident that the appellant has violated Section 77A of the Companies Act, 1956/ Buy Back Regulations and hence imposition of penalty of ` 1 crore is justified.

7. As regards penalty of ` 2 lac and ` 1 lac for violating regulation 5A & regulation 19(7), counsel for SEBI and counsel for Intervener submitted that in the facts of present case, it is established that the appellant had in fact violated regulation 5A & 19(7) and hence imposition of penalty of ` 2 lac and ` 1 lac respectively cannot be faulted.

8. We have carefully considered rival submissions.

9. It is a matter of record that the buy-back proposal put up by the appellant was accepted by the Special Court subject to compliance of Section 77A of the Companies Act, 1956/Buy Back Regulations. Even in the order of the Apex Court dated 08.11.2011 the dispute relating to compliance of Section 77A of the Companies Act, 1956/Buy Back Regulations is specifically recorded and after holding that the buy-back was in violation of the principles of natural justice, in view of all procedural modalities for buy-back were stated to have been carried out in the year 2003, the Apex Court did not deem it fit to disturb the buy- back of shares allowed to the appellant by the Special Court. Thus, the question as to whether the buy-back of its shares by the appellant company was in compliance of Section 77A of the Companies Act, 1956/ Buy Back Regulations or not, was a question that could be determined by SEBI.

10. By the impugned order the AO has imposed penalty of ` 1 crore on the appellant under Section 15HB of SEBI Act for violating the Buy Back Regulations and has imposed penalty of ` 2 lac and ` 1 lac for violating regulation 5A & regulation 19(7) of the Buy Back Regulations.

11. Specific case of the appellant before the AO was that since the buy-back was initiated and sanctioned by the Special Court, the Buy Back Regulations were not applicable and assuming that the said regulations were applicable, then, it was applicable only to the extent of regulation 5A and regulation 19(7) and in fact, the appellant has

complied with the said regulations and, therefore, the AO is not justified in holding that the appellant has violated the Buy Back Regulations.

12. Having imposed penalty of ` 2 lac & ` 1 lac for the alleged violation of regulation 5A & regulation 19(7) of the Buy Back Regulations, the AO could not have imposed additional penalty of ` 1 crore by simply stating that the appellant has violated the Buy Back Regulations. In other words, for imposing penalty of ` 1 crore, the AO ought to have specifically stated that apart from violating regulation 5A & regulation 19(7) which other regulation was violated by the appellant. Although in para 20 of the impugned order the AO has referred to regulation 3 & 4 of the Buy Back Regulations, there is no finding recorded in the order that the appellant has violated those regulations. Since, regulation 5A & regulation 19(7) are the only two regulations which are identified to have been violated, for which separate penalty has been imposed, the AO could not have imposed additional penalty of ` 1 crore by merely recording that the appellant has violated the Buy Back Regulations.

13. In the show cause notice it was alleged that the appellant had violated only regulation 5A & regulation 19(7). As a result, there was no opportunity to the appellant to demonstrate that the appellant has not violated any other provisions of the Buy Back Regulations. In the absence of any finding that the appellant apart from violating regulation 5A & regulation 19(7) has violated any other regulation, the AO is not justified in imposing penalty of ` 1 crore.

14. Argument of SEBI that if the provisions contained in the Buy Back Regulations were incapable of performance then the appellant ought to have sought relaxation under regulation 26 of the Buy Back Regulations is without any merit. As noted above, apart from contending the Buy Back Regulations were not applicable, the appellant had alternatively contended that in the present case, at best it could be said that only regulation 5A & regulation 19(7) were applicable and that the said two regulations have been complied. Once the appellant contends that only regulation 5A & regulation 19(7) were applicable and that the said regulations have been complied with, then it was obligatory on part of the AO to record a finding that apart from regulation 5A & regulation 19(7) which other regulations were applicable and if those regulations were incapable of performance then only relaxation of those regulations could be sought under regulation 26 of the Buy Back Regulations. Without recording a finding as to which other regulation was applicable in the present case, the AO is not justified in holding that the appellant has violated the Buy Back Regulations and impose penalty of ` 1 crore.

15. It is not in dispute that the maximum penalty that can be imposed under Section 15HB of the SEBI Act for violating the Buy Back Regulations is ` 1 crore. In the present case, the AO has imposed penalty of ` 1 crore for violating all the provisions contained in the Buy Back Regulations and further imposed penalty of ` 2 lac and ` 1 lac for violating regulation 5A & regulation 19(7). Thus, total penalty of ` 1.03 crore is imposed on the appellant which is in excess of the limit prescribed under Section 15HB of the SEBI Act. Since regulation 5A &

regulation 19(7) are contained in the Buy Back Regulations, without recording a finding that apart from regulation 5A & regulation 19(7) any other regulation is violation by the appellant, the AO could not have imposed penalty of ` 1 crore especially when separate penalty of ` 2 lac & ` 1 lac has been imposed on the appellant for violating regulation 5A & 19(7) of the Buy Back Regulations.

16. In these circumstances, without going into the merits of the case, including the merits on the issue relating to imposition of penalty for the alleged violation of regulation 5A & regulation 19(7), we set aside the impugned order dated July 09, 2014 and restore the matter to the file of AO for fresh decision on merits and in accordance with law. Before passing the final order the AO shall consider the question as to whether the applicants from whom the shares were brought back by the appellant company should be heard in the matter and if found necessary, give an opportunity of hearing to the applicants before passing the final order.

17. Appeal as also the Misc. Application No. 172 of 2014 are disposed of in the aforesaid terms with no order as to costs.

Sd/- Justice J.P. Devadhar Presiding Officer

Sd/-

Dr. C.K.G. Nair Member 30.12.2016 Prepared & Compared By: PK