Securities Law Update For February And March, 2017

With a view to streamline and strengthen the settlement process, SEBI has on February 27, 2017 amended several provisions of the SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2014.

The revised regulations focus on settling the matter in a time-bound manner with levying of interest in the event of excessive delay in filing the application or payment of settlement amount.

Accordingly, a settlement application has to be henceforth filed with SEBI within 60 days from the receipt of the show cause notice. Any delay beyond such period will attract an extra processing fee of Rs. 2000/- per applicant and also be liable to levy of interest @ 6 % per annum on the settlement amount for the delayed period.

A detailed copy of the amendments can be found at:

SEBI has by circular dated March 10, 2017 notified a revised regulatory framework in respect of Schemes of Arrangement by listed entities.

Majority of the amendments under the revised framework appear to have been made with a view to bring the existing provisions in line with the requirements of the Companies Act, 2013 while also throwing clarity on some of the earlier provisions .

The provisions of the revised SEBI framework will apply to all schemes filed by listed entities post March 10, 2017 while all prior schemes filed will continue to be governed by the existing norms.

A specific exemption from the applicability of the aforesaid circular has been carved out for merger of parent company with its wholly owned subsidiary, provided that such scheme is filed with the stock exchange.

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By a recent circular dated March 15, 2017, SEBI has, in consultation with market participants, revised the format of Draft Letter of Offer (DLOF) which is required to be filed by an acquirer with SEBI in accordance with the provisions of SEBI (Acquisition of Shares & Takeover), Regulations, 2011.

One of the significant changes introduced is that the time period for which information is required from the acquirer has now been restricted to 8 financial years preceding the year in which the Public Announcement of the open offer is being made.

Prior to the amendment, there was no time limit on disclosure of records by the acquirer which led to significant difficulties in satisfying compliance requirements. To the respite of market participants, the circular now introduces a fair limit of 8 financial years for disclosure of information which is also in line with the provisions of the Companies Act, 2013.

The said circular will be applicable to all letters of offer filed with SEBI post March 15, 2017.

The Supreme Court of India has in the recent case of NSDL vs. SEBI put an end to a decade long debate on whether administrative orders passed by SEBI can be challenged before the Securities Appellate Tribunal (‘SAT’).

On January 09, 2006, SEBI had issued an administrative circular u/s. 11(1) of the SEBI Act advising that no charges were to be levied by depository on DPs and consequently by DP on a beneficial owner when a beneficial owner transfers all securities lying in his account to another branch of the same DP or to another DP of the same depository or another depository. Being aggrieved by the said circular, NSDL had filed appeal before SAT. While adjudicating the matter, SAT had turned down the preliminary objection raised by SEBI that appeal to SAT u/s. 15T of the SEBI Act can lie only from quasi-judicial orders and not administrative and legislative orders. By its order dated September 29, 2006, SAT held that the expression “order” is extremely wide, and there being nothing in the SEBI Act to restrict an appeal only against quasi-judicial orders, appeals would lie against all three types of orders under the SEBI Act i.e. administrative orders, legislative orders as well as quasi-judicial orders.

Reversing the view held by SAT, the Supreme Court has by its order dated March 7, 2017 held that administrative orders passed by SEBI such as circulars issued under Section 11(1) of the SEBI Act are outside the appellate jurisdiction of SAT under section 15T and hence, no appeal against such orders can lie to SAT.

On the late evening of March 24, 2017, SEBI has released an order passed by its Whole Time Member debarring Reliance Industries Limited (“RIL”) from accessing the equity derivative market for one year and has also directed the company to disgorge profits amounting to Rs. 447.27 Cr. plus interest @ 12% per annum from November 29, 2007 onwards (which collectively aggregates to over Rs. 1000 Cr.) for violating the provisions of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to the Securities Market) Regulations, 2003 for selling a stake in Reliance Petroleum Limited (“RPL”).

As per SEBI’s order, RIL had acted through 12 front entities to take huge short positions in the 2007 November Futures derivatives of RPL (all expiring on November 29, 2007) on NSE. Before taking the positions, RIL had entered into agreements with all the entities for transfer of profit and losses from the trades in consideration of commission.

Meanwhile, between November 6, 2007 and November 23, 2007, RIL sold a total of 18.04 crore shares in the cash market, amounting to 4.01% of RPL’s equity and subsequently, on November 29, 2007 (the day of expiry of November derivative contracts), during the last ten minutes of trading hours, RIL further sold another tranche of 1.95 crore shares on NSE placing orders majorly below the last traded price creating tremendous selling pressure in the market resulting into substantial fall in not only the price of RPL in cash segment, but also the settlement price of the November Futures contracts in the derivatives segment

The front entities’ open short positions in the November derivatives were then automatically squared off (November 29, 2007 being the last settlement day) and thus, they have allegedly made undue extra ordinary profits of about Rs.513 Cr. on such reduced settlement prices ultimately transferring it back to RIL.

During the investigation, SEBI observed that orders of trading in scrip of RPL both in cash and derivative segments were placed by the same person, Sandeep Agarwal (an employee of a wholly owned subsidiary of RIL). Observing the aforesaid, SEBI concluded that entrusting a common person to carry out the trades in both cash and F&O segment was one of the major key factors in the whole operation.

SEBI in its order has observed that “This is not a normal case of price manipulation or volume manipulation. This is a case of a unique strategy of per se not manipulating the price or volume in a single market, but manipulating the settlement price in one market to gain across the volumes accumulated in the other market. The actual manipulation has happened with respect to the convergence price of the spot with the futures.”

As per market news, RIL intends to challenge the said SEBI’s order before appropriate forum.

Whether minority protection rights under shareholders agreement tantamount to acquisition of ‘control’ within the meaning of Takeover Regulations or not?

It is not uncommon to have provisions in agreements inter se shareholders such as board participation, reserved items for affirmative vote by the minority / strategic shareholders for protection of their interest in the company. SEBI has however in the past been holding the view that granting of such rights to minority / strategic investors may allow them to exercise control over the target company and hence, trigger the obligation to make open offer under SEBI Takeover Regulations.

This question had earlier been examined by Securities Appellate Tribunal (‘SAT’) in the year 2010 in the case of Subhkam Ventures (I) Private Limited vs. SEBI when SAT had held that none of the clauses stipulated in the agreement, whether taken individually or together, demonstrate control in the hands of the minority / strategic shareholder. The matter was challenged before Supreme Court by SEBI when the appeal was disposed of by keeping the question of law open and clarifying that SAT’s order was not to be treated as a precedent.

The issue of minority / strategic investors having affirmative rights in a target company by virtue of an agreement came up again recently before SEBI in the matter of Kamat Hotels (India) Limited when the strategic investors namely, Clearwater Capital Partners were alleged to have triggered the open offer obligation at the time of entering into agreement with the company’s promoters which provided affirmative rights to the noticees and not at the time of acquiring shares pursuant to conversion of convertible bonds. Accordingly, SEBI had advised the noticees to make open offer for acquisition for control, to make necessary disclosures to this effect in public announcement and also provide interest @ 10% p.a. on offer price from the date of acquisition of control (i.e. date of agreement).

By its order dated March 31, 2017, SEBI has observed that since the impugned agreement has been extinguished in July, 2014 and also considering the fact that noticees had made adequate disclosure with respect to regulation 12 (acquisition of control) under the public announcement and offered best price to public shareholders, the consideration of question of ‘control’ in the case is not material at this point of time.

Consequently, the question whether or not minority protection rights such as affirmative voting items constitute acquisition of ‘control’ remains unanswered and the market will have to wait a bit longer before there is clarity on the subject.

Not all promoters to be considered as ‘Designated persons’ under Insider Trading Regulations

SEBI by its recent interpretative letter dated February 03, 2017 issued under SEBI (Informal Guidance) Scheme, 2003 in the matter of Kirloskar Chillers Private Limited has expressed that a promoter is required to seek pre-clearance from the compliance officer only if he has been designated as a ‘designated person’ under the insider code of conduct framed by the listed company under SEBI (Prohibition of Insider Trading) Regulations, 2015. Thus, implying that a promoter need not always be designated as a ‘designated person’ by a listed company under its insider code of conduct. Accordingly, listed companies may like to review the list of persons who it designates as ‘designated person’ under the internal code of conduct. Designating specific persons / entities rather than classifying them on the basis of their category may be one of the ways going forward.

Another take-away from the said interpretative letter is that since the compliance officer acts under the overall supervision of the board of directors or audit committee, the internal code of conduct may also provide for review of compliance officer’s acts and omissions by the board of directors and / or the audit committee.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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