BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No. 77 of 2012
Date of decision: 18.05.2012 SRM Energy Limited
601, Pressman House,
70A, Nehru Road, C.T.S. No.
76 & 87, Vile Parle (East),
Mumbai – 400 099.
……Appellant
Versus
- Securities and Exchange Board of India
SEBI Bhavan, Plot No. C-4A, G Block,
Bandra Kurla Complex, Bandra (East),
Mumbai – 400 051. - Arihant Capital Markets Ltd.
3rd Floor, Krishna Bhavan,
67, Nehru Road, Vile Parle (East),
Mumbai – 400 057.…… RespondentsMr. Janak Dwarkadas, Senior Advocate with Mr. Vinay Chauhan, Mr. Anant
Upadhyay, Advocates for the Appellant.
Mr. Kumar Desai, Advocate with Mr. Ajay Khaire, Advocate for Respondent No. 1.
None for Respondent No. 2.
CORAM : P. K. Malhotra, Member & Presiding Officer (Offg. )
S. S. N. Moorthy, Member
Per : P. K. Malhotra
The appellant is aggrieved by the letter dated February 7, 2012 issued by
the Securities and Exchange Board of India (for short the Board) to its merchant
banker stating that the appellant is not eligible to proceed with its rights issue till the
prohibitary order under Section 11 and 11B of the Securities and Exchange Board of
India Act, 1992 (the Act) against Cals Refineries Ltd., one of its (appellant’s)
promoter group entities, is in force.
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- Facts of the case, in brief, are that the appellant is a public limited company
incorporated under the Companies Act, 1956. It is listed on the Bombay Stock
Exchange Limited (BSE). With a view to mobilize funds for the power project and
pursuant to the resolution passed by it under Section 81(1A) of the Companies Act,
1956 the appellant decided to issue shares on rights basis to its existing shareholders.
Accordingly, on August 17, 2010, it filed a draft letter of offer through its merchant
bankers (respondent no. 2) for 5,88,90,000 equity shares of ` 10/- each at par
aggregating to 58.89 crores to its existing shareholders on rights basis in the ratio
of 65 equity shares for every 10 fully paid up equity shares held by them. In the
draft letter of offer, the appellant had disclosed that Cals Refinaries Ltd., a public
limited company, is also one of the promoter group entities listed on BSE and having
a public shareholding of 83.91 per cent. There has been protracted correspondence
between the Board and the appellant relating to the proposed rights issue. While the
request for the proposed rights issue was still under consideration, the Board passed
an ad interim ex-parte order dated September 21, 2011 prohibiting a few entities,
including Cals Refinaries Ltd., from issuing equity shares or any other instrument
convertible into equity shares or alter their capital structure, in any manner, till
further directions in this regard. This order was issued by the Board on being alerted
by its surveillance system of the large scale market transactions indicating that some
foreign institutional investors were converting the global depository receipts
underlying the shares of certain companies, including Cals Refinares Ltd., into
equity shares to sell in the Indian market and most of the cancellations happened
within a short period of time of the issue. This ex-parte interim order was confirmed
by the whole time member of the Board by its order dated December 30, 2011. As
the request of the appellant for the proposed rights issue was still under consideration
and the Board had issued the aforesaid prohibitary orders against Cals Refinaries
Ltd., one of the promoter entities of the appellant, the appellant vide its letter dated
January 23, 2012 sought guidance from the Board regarding applicability of
regulation 4(2)(a) and (b) of the Securities and Exchange Board of India (Issue of 3
Capital and Disclosure Requirements) Regulations, 2009 (for short the regulations)
to the appellant. Regulation 4(2)(a) and (b) of the said regulations interalia provide
that no issuer shall make a public or rights issue of specified securities if the issuer,
any of its promoters, promoter group or directors or persons in control of the issuer
are debarred from accessing the capital market or, if any of the promoters, directors
or persons in control of the issuer was or also is a promoter, director or person in
control of any other company which is debarred from accessing the capital market
under any order or directions made by the Board. It is in response to this letter that
the Board informed the appellant by the impugned order interalia observing that the
Cals Refinaries Ltd. has been directed not to issue equity shares or any other
instrument convertible into equity shares or alter their capital stucture, in any
manner, till further directions. By the said letter, the Board also disposed of
appellant’s request for rights issue observng that it does not satisfy the eligibility
criteria, as provided in regulation 4(2)(a) and (b) of the regulations and hence is not
eligible to proceed with the rights issue till directions against Cals Refinaries Ltd. are
in force.
- Mr. Janak Dwarkadas, learned senior counsel for the appellant, referring to
the provisions of the aforesaid regulation, submitted that this regulation covers only
those cases where the persons/entities falling under the relevant category have been
debarred from accessing the capital market. According to the learned senior counsel,
Cals Refinaries Ltd. has not been debarred from accessing the capital market. The
only direction that has been issued against Cals Refinaries Ltd. is “not to issue
equity shares or any other instrument convertible into equity shares or alter capital
structure in any manner till further directions”. Inspite of the interim order, Cals
Refinaries Ltd. can still do fund raising from the public by issuing non-convertible
instruments. It was further submitted by him that the nature of embargo imposed on
Cals Refinaries Ltd., pending completion of investigations, is very narrow and
limited as distinguished from complete embargo on accessing the capital market as
contemplated in the regulation. It was further submitted by him that the rights issue 4
of the appellant cannot be stifled based on interim order passed solely on the basis of
primafacie findings. The appellant’s rights issue has been jeopardized because of the
time insensitivity exhibited by the Board in processing the offer documents promptly
or within a reasonable time. It was further submitted by him that the successful
completion of rights issue will benefit the public shareholders since with infusion of
the funds, the power project implementation will progress which would result in
exponential growth in the valuation of the appellant company. It is, therefore,
prayed by the appellant that the direction contained in the impugned letter may be set
aside and the Board may be directed to clear the letter of offer.
- Mr. Kumar Desai, learned counsel appearing for the Board, raised a
preliminary issue regarding maintainability of the appeal itself stating that the
impugned letter dated February 7, 2012 is not an ‘appealable order’ within the
meaning of Section 15T of the Act. According to him, it was only a reply to the
query raised by the appellant in its letter dated January 23, 2012 and not an order
passed by the Board. On merits, it was submitted by him that the term ‘debarred
from accessing the capital market’ used in regulation 4(2)(a) and (b) of the
regulations is wide enough to take within its fold the restriction placed on Cals
Refinaries Ltd. prohibiting it from ‘issuing equity shares or any other instrument
convertible into equity shares or alter their capital structure in any manner’. The
terminology used in regulation 4 of the regulations cover all types of debarments,
whether partial or full. In any case, Cals Refinaries Ltd., the promoter group
company, has been directed not to issue equity shares or any other instrument
convertible into equity shares till further directions and, therefore, the appellant also
cannot proceed with the rights issue. - Before we deal with the issue raised by the parties, it is necessary to have a
look at the relevant provision of regulation 4 of the regulations which read as under:-
“4. (1) Any issuer offering specified securities through a public issue
or rights issue shall satisfy conditions of this Chapter at the time of
filing draft offer document with the Board (unless stated otherwise in
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this Chapter) and at the time of registering or filing the final offer
document with the Registrar of Companies or designated stock
exchange, as the case may be.
(2) No issuer shall make a public issue or rights issue of specified
securities:
(a) if the issuer, any of its promoters, promoter group or directors
or persons in control of the issuer are debarred from
accessing the capital market by the Board;
(b) if any of the promoters, directors or persons in control of the
issuer was or also is a promoter, director or person in control
of any other company which is debarred from accessing the
capital market under any order or directions made by the
Board;”
Regulation 4 appears under Chapter II of the regulations providing common
conditions for public issues and rights issues. It prescribes general conditions
meaning thereby that unless the requirements laid down in these general conditions
are satisfied, the Board will not proceed with granting its clearance for the issue of
capital. These conditions must be satisfied not only at the time of filing of draft offer
document with the Board but also at the time of registering or filing the final offer
document with the Registrar of companies or designated stock exchange, as the case
may be. Admittedly, in the case in hand, when the draft offer document was filed
with the Board, it issued its letter of observations to the appellant on February 8,
- The appellant was aggrieved by some of the observations made thereunder
and filed an appeal before this Tribunal (Appeal No. 34 of 2011). By an order dated
June 6, 2011, the Appeal was allowed and the direction, objected to by the appellant,
was set aside. It is only thereafter that the appellant, vide its letter dated June 17,
2011, filed final letter of offer with the Board through its merchant banker on which
the Board was yet to convey its decision. In the interregnum, the Board had also
passed interim order against various entities, including Cals Refinaries Ltd., not to
issue equity shares or any other instrument convertible into equity shares or alter
capital structure in any manner till further directions in this regard. Regulation 4(2)
prohibits an issuer from making a public issue or rights issue of specified securities if
the issuer or any of the promoters, promoter group or directors or persons in control
of the issuer are debarred from accessing the capital market by the Board or any of
the promoters, directors or persons in control of the issuer is also a promoter, director 6
or person in control of any other company which is debarred from accessing the
capital market under any order or direction made by the Board. It is not in dispute
that the order passed by the Board against Cals Refinaries Ltd. is an order or
direction made by the Board within the meaning of the aforesaid regulation. It is
also not in dispute that Cals Refinaries Ltd. is a company falling within the category
of promoter group as envisaged by regulation 4. The bone of contention in this case
is confined to the issue whether the restraint order against Cals Refinaries Ltd.
prohibiting it from ‘issuing equity shares or other instrument convertible into equity
shares or altering its capital structure in any manner’ falls within the ambit of words
‘debarred from accessing the capital market’ appearing in regulation 4 of the
regulations.
- We have considered the rival submissions and also examined the material
placed on record. In so far as preliminary objection raised by the Board with regard
to maintainability of the appeal is concerned, we do not find any merit in the same.
In a recent order passed by us in the case of H. B. Stockholding Ltd. (Appeal No. 86
of 2011 decided on 25.4.2012), interpreting the provisions of Section 15T of the Act,
we have observed as under:- “An order is primarily a decision which has the effect of a
command, whether called by such name or not and is
distinguishable from an advise or request by the nature of the
consequence that may flow from the non implementation of the
same. Therefore, the words “an order” used in the aforesaid
provision are comprehensive enough to include every order or
decision taken by the Board which adversely affect the rights of
the parties (emphasis supplied ). We have also looked at the
orders/decisions cited by learned counsel on both sides. In brief, the
ratio on the issue under consideration in all these orders/decisions is
that orders which are merely procedural cannot be appealed against
and it is only those orders or decisions taken by the Board which
adversly affect the rights of the parties will fall within the purview
of an appealable order under Section 15T of the Act. To ascertain
whether a communication or decision amounts to an order within
the meaning of the above noted provision, its substance and not its
form has to be seen. If a particular direction, request or observation
is binding and has penal consequence for its violation, the same will
have to be treated as an order within the meaning of the above noted
provision. It is immaterial whether the communication through
which the decision is conveyed is in the form of a letter or order or a
note.” 7
In the case in hand, admittedly, the letter of offer filed by the appellant was still
under consideration with the Board. The appellant, vide its letter dated January 23,
2012, also sought an advice of the Board with regard to the applicability of
regulation 4(2) of the regulations in view of the order passed against Cals Refinaries
Ltd., one of its promoter entities. While furnishing its advice, the Board, by the
impugned order, also conveyed its decision on the pending letter of offer to the
appellant and observed that the appellant is not eligible to proceed with the rights
issue till direction issued against Cals Refinaries Ltd. is in force. The decision taken
by the Board surely affects the rights of the appellant and hence an appealable order
within the meaning of section 15T of the Act. - On the issue whether the prohibition imposed by the Board on Cals
Refinaries Ltd. on issuing equity shares or other instrument convertible into equity
shares or altering its capital structure in any manner falls within the scope of
debarrment from accessing the capital market as mentioned in regulation 4(2) of the
regulations, we are inclined to agree with learned counsel for the Board that the
restraint imposed on Cals Refinaries Ltd. is covered by the provisions of regulation
4(2) of the regulations. Learned counsel for the Board has rightly relied upon the
principles of interpretation as discussed by the Hon’ble Supreme Court in the case of
District Mining Officer vs. Tata Iron And Steel Co. [2001 7 SCC 5] wherein the
Hon’ble Supreme Court has observed that “a statute has to be construed according to
the intent of them that make it and the duty of the court is to act upon the true
intention of the legislature. If a statutory provision is open to more than one
interpretation, the court has to choose that interpretation which represents the true
intention of the legislature”. The Court has further observed as under:-
“The process of construction combines both literal and purposive
approaches. In other words, the legislative intention i.e. the true or
legal meaning of an enactment is derived by considering the meaning
of the words used in the enactment in the light of any discernible
purpose or object which comprehends the mischief and its remedy to
which the enactment is directed.”
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The following further observations made by the Hon’ble Supreme Court in the same
judgment are also relevant and are reproduced for ease of reference :-
“The most fair and rational method for interpreting a statute is by
exploring the intention of the legislature through the most natural and
probable signs which are either the words, the context, the subject-
matter, the effects and consequences, or the spirit and reason of the
law. In the court of law what the legislature intended to be done or
not to be done can only be legitimately ascertained from that what it
has chosen to enact, either in express words or by reasonable and
necessary implication. But the whole of what is enacted “by necessary
implication” can hardly be determined without keeping in mind the
purpose or object of the statute. A bare mechanical interpretation of
the words and application of legislative intent devoid of concept or
purpose will reduce most of the remedial and beneficent legislation to
futility.”
Regulation 6 of the regulations prohibits any issuer to make a public issue or rights
issue where the aggregate value of specified securities offered is fifty lakh rupees or
more unless
a draft offer document has been filed with the Board through the lead
merchant banker. The Board is empowered to specify changes or issue observations,
if any, on the draft document. This regulation further mandates that if the Board
specifies changes or issue observations on the draft offer document, the issuer and
lead merchant banker shall carry out such changes in the offer document and comply
with the observations issued by the Board before registering the document with the
Registrar of Companies etc. It will, thus, be seen that complying with the directions
issued by the Board is mandatory for the issuer and the merchant banker. This
requirement also indicates the purpose of filing the draft document with the Board
before it is registered with the Registrar of Companies or filed with the designated
stock exchange. The Board, as a market regulator and as protector of interest of
investors in securities, is mandated to see that proper disclosures are made in the
draft document to enable investors to take an informed decision before investing
their money. Examining the issue in the light of the above principles, we are of the
view that the words ‘debarred from accessing the capital market’ in regulation 4(2)
of the regulations will take within its fold, the words ’restraint on issue of equity
shares or any other instrument convertible into equity shares or altering the capital
structure in any manner’. Looking at the aim and objective of the regulations and the
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general conditions, the word ‘debarred’ used in regulation 4(2) cannot be given a
restricted meaning of complete prohibition only. Such prohibition can be partial,
interim, ad-interim or in any other form during the time when request for public issue
or rights issue is under consideration either with the Board or filing of the document
with the Registrar of Companies. Admittedly, the Board had offered its observations
on the draft offer document submitted by the appellant to which the appellant had
responded after an order passed by this Tribunal and the appellant has yet to register
and file the offer document with the Registrar of Companies. Since the draft offer
document has not been finalised, the general conditions as laid down in regulation 4
will be applicable and the Board is justified in denying its clearance to the offer
document on non fulfilment of these conditions. We are, therefore, not inclined to
interfere in the matter at this stage.
In view of the above, the appeal stands dismissed with no order as to costs.
Sd/-
P. K. Malhotra
Member &
Presiding Officer (Offg. )
Sd/-
S. S. N. Moorthy
Member 18.05.2012
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