Kesar Petroproducts Ltd vs Securities And Exchange Board Of India

Tarun Agarwala, Presiding Officer

The present appeal has been filed against the order dated January 30, 2020 passed by the Adjudicating Officer (hereinafter referred to as

‘AO’) of Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) imposing a penalty of Rs. 9.50 lacs for non-

compliance of the minimum public shareholding (hereinafter referred to as ‘MPS’) requirement of atleast 25% of the total issued share capital

of the listed company and for using the non-prescribed method to meet the MPS norms and reclassification of a promoter to a public shareholder

without prior approval of the stock exchange.

The facts leading to the filing of the present appeal is, that the appellant faced huge financial losses and was declared a sick company under the

Sick Industrial Companies Act, 1985 (hereinafter referred to as ‘SIC Act’). On August 17, 2007, the Board of Industrial and Financial

Reconstruction (hereinafter referred to as ‘BIFR’) under the SIC Act sanctioned a scheme of rehabilitation of the appellant company. The

scheme provided the manner in which the company was to be revived and also for the functioning of the management. The scheme was valid for

seven years till December 2014. Under this scheme, new promoters took over the management of the company. It may be noted here, that the shares

of the company was suspended from September 2007 from trading on the stock exchange platform on account of defaults committed by the previous

management. This suspension continued till February 2014.

On June 4, 2010, Regulation 19A of the Securities Contract Regulation Rules, 1957 (hereinafter referred to as ‘SCR Rules’) was

incorporated which provided that listed entities were required to maintain a MPS of 25% of the issued share capital and were given a period of three

years i.e. up to June 3, 2013 to ensure the compliance of the MPS requirement. Based on the aforesaid insertion of Rule 19A of SCR Rules, SEBI

issued circulars dated December 16, 2010, February 8, 2012 and August 29, 2012 specifying certain methods to comply with the MPS requirement. In

the circular dated August 29, 2012, it was also specified that any listed entity desirous to do the MPS requirement through other means may approach

SEBI with appropriate details.

Since the MPS requirement was not complied by the appellant, the Whole Time Member (hereinafter referred to as ‘WTM’) passed an

interim order dated June 4, 2013 prohibiting the company and its directors and promoters including promoter group from buying, selling or dealing in the

securities till compliance of MPS requirement. The interim order was confirmed on January 11, 2016 and by an order dated September 5, 2017, the

restraint orders against the appellant was vacated on finding that the company had now complied with the MPS requirement as on March 2016.

It transpires that a show cause notice was issued on May 6, 2019 to show cause as to why an appropriate penalty should not be imposed for non-

compliance of the MPS requirement. After considering the reply and after looking into the material evidence on record, the impugned order was

passed imposing a penalty of Rs. 9.50 lacs.

We have heard Mr. Viraj Parikh, the learned counsel with Mr. Sumit Agrawal, Mr. Tarun Toprani, Mr. Kavish Garach, Ms. Shivali Shah, the

learned counsel for the appellant and Mr. Vishal Kanade, the learned counsel with Mr. Nishit Dhruva, Mr. Zulfiqar Jariwala, Mr. Yash Garach, Mr.

Yash Dhruva, Mr. Shabbir Jariwala, the learned counsel for the respondent.

Having heard the learned counsel for the parties, we are of the opinion that the charge against the appellant for non-compliance of the MPS

requirement cannot be sustained. Prior to June 4, 2010, there was no requirement of any listed company to have a MPS requirement. This MPS

requirement came into force when Rule 19A was inserted in the SCR Rules with effect from June 4, 2010. The rehabilitation scheme was sanctioned

on August 17, 2007 and, at that moment of time, there was no requirement to comply with the MPS requirement, otherwise, it would have become

part of the scheme. The company was implementing the scheme which ran its course till December 2014. Thus, till December 2014, it could not take

into consideration the effect of complying with the MPS requirement under Rule 19A of SCR Rules.

In the meanwhile, the company was restrained by an interim order of the WTM dated June 4, 2013 from accessing the securities market for non-

compliance of the MPS norms. We find that after this BIFR scheme came to an end on December 2014, the company took immediate steps to

comply with the MPS requirement under Rule 19(2)(b) and 19A of the SCR Rules, by issuing warrants to various entities in February 2015, pursuant

to which the warrants were converted into shares in March 2016. As a result of the conversion of the warrants into shares the shareholding of the

promoters reduced to 36.20% and the public shareholding increased to 63.80%. Thus, the company was in compliance with the Rule 19(2)(b) and 19A

of the SCR Rules. This fact was noticed by the WTM while revoking in its order dated September 5, 2017 holding that the company had complied

with the MPS requirement in March 2016.

In our view, there is no delay on the part of the appellant in complying with the MPS requirement in the given facts and situation. We find that

immediately after the scheme came to an end in December 2014 the appellant took recourse to comply with the MPS requirement which was done

within 15 months. In this regard, we may state that when Rule 19A was incorporated, listed companies were given three years’ time to comply

with the MPS requirement. Further, Rule 19A was amended on July 24, 2018 by which Rule 19A(5) was inserted which stipulated that if a public

shareholding in a listed company fell below 25%, as a result of implementation of the resolution plan approved under Section 31 of the Insolvency and

Bankruptcy Code, 2016, then such company was given a period of three years to bring the public shareholding to 25%. Similar provision is however

lacking and the framers of Rule 19A did not factor the rehabilitation scheme under SIC Act while framing the Rules. However, Section 32 of SIC Act

provides that the scheme shall have effect notwithstanding anything inconsistent thereunder contained in any other law. In our view, implementing

Rule 19A of the SCR Rules may come in the way in the implementation of the rehabilitation scheme under the SIC Act and could contravene Section

32 of the SIC Act.

We however find that from January 2015, the appellant took only 15 months to comply with the MPS requirement. Thus, in the peculiar facts and

circumstances of the case which will not be treated as a precedent we find that there was no inordinate delay in compliance with the MPS

requirement. Consequently, no penalty could be imposed for non-compliance of the MPS requirement.

A penalty has been imposed for using the non-prescribed method by the appellant to meet the public shareholding requirement. The basis is that

the circulars issued by SEBI were not complied. Since we have held that Rule 19A could contravene the provision of Section 32 of the SIC Act during

the period of implementation of the scheme, the circulars issued by SEBI for implementation of Rule 19A, thus, would automatically not apply. The

penalty under this head also cannot be sustained.

Admittedly, the appellant reclassified a promoter to a public shareholder without seeking prior approval from the stock exchange. This was

apparently in violation of Regulation 31(A)(2) of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements)

Regulations, 2015 (hereinafter referred to as ‘LODR Regulations’). Thus, penalty under this head is justified.

For the reasons stated aforesaid, the appeal is partly allowed. The impugned order in so far as imposition of Rs. 3 lacs for violation of MPS

requirement, Rs. 3.5 lacs for violation of the circulars by using the non-prescribed method to meet MPS norms are quashed. The violation of Rs. 3 lac

for reclassifying the promoter to a shareholder without seeking prior approval from the stock exchange is affirmed. The penalty of Rs. 9.50 lacs is

reduced to Rs. 3 lacs which would be paid by the appellant within a period of four weeks from today.

The present matter was heard through video conference due to Covid-19 pandemic. At this stage it is not possible to sign a copy of this order nor

a certified copy of this order could be issued by the Registry. In these circumstances, this order will be digitally signed by the Private Secretary on

behalf of the bench and all concerned parties are directed to act on the digitally signed copy of this order. Parties will act on production of a digitally

signed copy sent by fax and/or email.