RIL promoters did not violate takeover regulations says SAT, quashes SEBI’s Rs 25 crore penalty order

MUMBAI: The Securities Appellate Tribunal (SAT) set aside an April 2021 order passed by Securities And Exchange Board of India (SEBI) that had levied a Rs 25 crore penalty on the promoters of Reliance Industries Limited (RIL) alleging violation of Takeover Regulations in the year 2000, after holding that the company had not violated the regulation.

The matter pertained to debentures with convertible warrants that the company had issued to its promoters in 1994, which were converted into 12 crore equity shares in 2000. The SAT bench of Justice Tarun Agarwala, presiding officer and Meera Swarup, technical member, pronounced the order allowing an appeal filed in 2021 by Reliance Industries Holding Private Limited , the Ambani brothers, company’s CMD Mukesh Ambani, Anil Ambani and eight others.
The SAT held that Reliance Industries Holding Private Limited, the Ambani brothers and all appellants had “not violated” any part of the SEBI Substantial Acquisition of Shares and Takeovers ( SAST) Regulations. It held that the SEBI’s imposition of penalty upon them was illegal and hence “cannot be sustained and is quashed’’ and added even on grounds of delay that “caused serious prejudice” to RIL, it was liable to be set aside.

The SAT also held that there was “an inordinate delay in the issuance of the show cause notice’’ by SEBI It said “even though there is no period of limitation prescribed in the Act and the Regulations for issuance of a show cause notice and for completion of the adjudication proceedings, nonetheless, the authorities are required to exercise its powers within a reasonable period.’’
In 2011 – eleven years after the conversion – SEBI raised an allegation against the RIL promoters of violating its takeover regulations, noted SAT adding “Further, it took SEBI 9 long years to decide the consent application’’.
The order under appeal came “after 21 years of the alleged violation’’ said SAT.
SEBI issued a show cause notice in 2011 alleging that RIL promoters were obligated to have made an open offer in January 2000 upon conversion of 12 crore warrants into equity shares. It then imposed the Rs 25 crore penalty on RIL in 2021 for the alleged failure to make an open offer.
In a 124-page ruling, the SAT relied on a Bombay high court ruling that had held that a person who has acquired securities convertible into equity shares carrying voting rights prior to the coming into force of the 1994 SAST Regulations is not an “acquirer” under the 1994 SAST Regulations and that the conversion of such securities into shares carrying voting rights is not an acquisition triggering a public announcement under the 1994 SAST Regulations.
Hence in case of acquisition of convertible securities such as warrants which entitles the holder to receive shares with voting rights, the SAT held that such obligation under SAST to make a public announcement for an open offer is “triggered at the time of acquisition of such convertible securities’’.
The Tribunal rejected SEBI’s contention that such trigger comes at the time of conversion of warrants into equity shares carrying voting rights.
“Only a person who acquires such convertible securities after coming into effect the SAST Regulations will be an ‘acquirer’ and only such acquisition will be ‘an acquisition’ under SAST regulation said SAT. “The right to obtain shares was vested in the appellants in 1994 when detachable warrants were issued. Such vested rights cannot be rendered nugatory on the enactment of the SAST Regulations,’’ the SAT order added.
After analysing the Act and regulation, their scope and linking it to time-line, the SAT held, “taking into account the scope, purpose and objective of the SAST Regulations, we are of the opinion that since the acquisition took place on 12th January, 1994 much before the enforcement of the SAST Regulations, we are of the opinion that the appellants are not acquirers under the SAST Regulations.’’
The SAT ruling also said “In our opinion, hair-splitting argument as to whether the offence alleged against the appellant is of a continuing or non-continuing nature is not required to be considered in the facts of this case as we have already held that no violation of SAST Regulations has been committed.’’
It held “The contention that violation of Regulation 11(1) is a continuing violation cannot be accepted and is also untenable’’ after noting, “we are of the view that the act of acquisition without making a public announcement is complete and over once and for all with the acquisition. The act of acquisition without making a public announcement does not continue. There is no such thing under the SAST Regulations that acquisition and holding of shares without making a public announcement is a violation. Consequently, there is no ‘de die in diem’ (Latin for action occurring from day to day or a continuing action) as urged by (senior counsel Arvind) Datar.’’
For Reliance senior counsel Harish Salve, Somasekhar Sundaresan and leading law for AZB had appeared while for SEBI it was senior counsel Datar with senior counsel Shiraz Rustomjee and law firm K Ashar & Co.
SAT’s clear verdict in favour of RIL promoters, meant that the “ 23-year old lingering matter has come to an end.’’