Surendra RahalkarHon’ble Supreme Court in their order dated 4th January 2023 decides jurisdictional powers between Securities and Exchange Board of India (SEBI) and National Company Law Tribunal (NCLT) in the matter of IFB Agro Industries Limited (Appellants) v SICGIL India Limited (Respondents) while deciding rectificatory jurisdiction of NCLT.
Facts of the case: –
Respondents, SICGIL India Limited in this case, started acquiring shares of the Appellant from the open market with a view to eliminate competition and strengthen its own dominant position in the relevant market. As of 18.01.2004, the Respondents collectively held just under 5% of the Appellant’s total paid-up share capital.
On 19.01.2004, Respondent No. 1 acquired 600 equity shares of the appellant, and this resulted in the aggregate shareholding of the Respondents crossing 5% of the total paid-up share capital of the Appellant, thereby triggering Regulation 7(1) of the SEBI (SAST) Regulations. Respondent sent intimation on Next Day i.e., on 20.01.2004, where appellant contends that said disclosure was not in prescribed format.
Four months later, on 27.05.2004, Respondent No. 1 acquired additional shares of the Appellant, as a result, its individual shareholding exceeded 5% of the total paid-up share capital of the Appellant. This individual crossing of 5% by Respondent No. 1 triggered the SEBI (PIT) Regulations.
Regulation 13 thereof provides that if any person acquires more than 5% of the shares of a company, then it shall make a disclosure to the acquiree Company. Respondent No. 1 admits to having failed to make this disclosure within the prescribed time.
Filing of Petition for rectification by appellant to delete name of respondent from register of members.
Appellant filed a petition with the Company Law Board under Section 111A of the 1956 Act praying for rectification of its register by deleting the name of the Respondents as the owner of shares which are over and above the 5% threshold. As of the date of filing of the Section 111A petition under The Companies Act,1956, the Respondents collectively held around 8.22% of the Appellant’s paid-up share capital.
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Upon receipt of intimation of filing petition, respondent No.1 sold shares and brought down its individual shareholding to 4.91%. It also intimated the same to SEBI, this fact is contested, as the Appellant claims that Respondent No. 1 never reduced its shareholding.
The said petition was transferred to Hon’ble NCLT when the Companies Act,2013 came into effect. The Hon’ble NCLT has allowed petition on following grounds: –
- Acquisition of shares in excess of 5% was in violation of the SEBI (PIT) Regulations and the SEBI (SAST) Regulations.
- That in case of violation of SEBI regulations, Section 111A empowers a company to apply for rectification, and in such cases, the Tribunal is entitled to pass an order to undo the mischief. The Tribunal opined that the regulatory jurisdiction of SEBI would not bar the Tribunal from exercising its power under Section 111A of the 1956 Act.
NCLT allowed application for rectification with a direction to the appellant to Buy-Back the shares held by Respondents.
Provisions in Brief of Rectification of Register of Members under the Companies Act 1956 and 2013
| Particulars | Companies Act 1956 111A Rectification of register on transfer | Companies Act 2013 Section 59: Rectification of register of members |
| Rectification | The Tribunal may, on an application made by a depository, company, participant or investor or the Securities and Exchange Board of India, if the transfer of shares or debentures is in contravention of any of the provisions of the Securities and Exchange Board of India Act, 1992 (15 of 1992) or regulations made thereunder or the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986 ) or any other law for the time being in force, within two months from the date of transfer of any shares or debentures held by a depository or from the date on which the instrument of transfer or intimation of the transmission was delivered to the company, as the case may be, after such inquiry as it thinks fit, direct any depository or company to rectify its register or records. | Where the transfer of securities is in contravention of any of the provisions of the Securities Contracts (Regulation) Act, 1956, (42 of 1956), the Securities and Exchange Board of India Act, 1992 (15 of 1992) or this Act or any other law for the time being in force, the Tribunal may, on an application made by the depository, company, depository participant, the holder of the securities or the Securities and Exchange Board, direct any company or a depository to set right the contravention and rectify its register or records concerned. |
| Right to Transfer Shares | It does not restrict the right of a holder of shares or debentures, to transfer such shares or debentures and any person acquiring such shares or debentures shall be entitled to voting rights unless the voting rights have been suspended by an order of the Tribunal. | It does not restrict the right of a holder of securities, to transfer such securities and any person acquiring such securities shall be entitled to voting rights unless the voting rights have been suspended by an order of the Tribunal. |
Appeal by Respondent before Hon’ble NCLAT (National Company Law Appellate Tribunal)
The Respondent challenged the said order before Hon’ble NCLAT where they Set-aside the order of Hon’ble NCLT.
Hon’ble NCLAT did not give any analysis or reasoning to set aside the order of Hon’ble NCLT. Hence, the said decision was challenged before Hon’ble Supreme Court.
Questions raised in the appeal before Hon’ble Supreme Court
- What is the scope and ambit of Section 111A of the 1956 Act, as amended by Section 59 of the 2013 Act, to rectify the register of members?
- Which is the appropriate forum for adjudication and determination of violations and consequent actions under the SEBI (SAST) Regulations 1997 and the SEBI (PIT) Regulations 1992?
Hon’ble Supreme Court allowed appeal of respondents on the following grounds: –
Powers of rectification of register of Members
- The power of rectification under section 59 of the Companies Act 2013, continues to remain summary in nature and if any seriously disputed questions arise, the Company Court should relegate the parties to a forum which is more appropriate for investigation and adjudication of such disputed questions. (Ref. Decision of Hon’ble Supreme Court in the matter of Standard Chartered Bank v Andhra Bank Financial Services Ltd. & Others).
- In the matter of Zandu Pharmaceutical Works Ltd. v. Devkumar Vaidya & Ors., it has been held that in a case of violation of the SEBI Regulations, the CLB (Company Law Board) cannot exercise rectificatory jurisdiction unless and until the SEBI, in the very first instance, decides if there has been a violation or not.
Appropriate forum for enquiry and adjudication of violations under the SEBI (SAST) Regulations and the SEBI (PIT) Regulations.
- In SEBI Act, under Section 15-I, SEBI has the power to appoint officers for holding an inquiry, give a reasonable opportunity to the person concerned and determine if there is any transgression of the rules prescribed.
- The regulatory jurisdiction of the Board also includes ex-ante powers to predict a possible violation and take preventive measures. The exercise of ex-ante jurisdiction necessitates the calling of information as provided in Sections 11(2)(i), 11(2)(ia) and 11(2)(ib) of the SEBI Act.
- The Regulator’s significant role cannot be circumvented by asking for rectification under Section 111A of the 1956 Act. Such an approach is impermissible. The scrutiny and examination of a transaction allegedly in violation of the SEBI (PIT) Regulations will have to be processed through the regulations and remedies provided therein.
- The whole procedure cannot be short-circuited by applying under Section 111A of the 1956 Act because there is parallel jurisdiction with the SEBI and CLB/Tribunal. The transaction complained of must suffer scrutiny by the regulator, and it is only for the regulator to determine a violation of the provisions of the SEBI Act and the Regulations.
Conclusion
This judgement provided that, where entity is regulated by Jurisdictional Authority such as SEBI, then the appropriate forum to redress such grievances is that specific jurisdictional authority only. In the present case, Hon’ble Supreme Court held that Hon’ble NCLT under Section 59 of the companies act 2013 cannot exercise a parallel jurisdiction with Securities and Exchange Board of India for addressing violations of the Regulations framed under the SEBI Act.
