Action against violation of securities laws is not barred simply because of delay in initiating proceedings: SEBI

Read order: SEBI Order in KARVY FINANCIAL SERVICES LTD

LE Correspondent

New Delhi, August 26, 2021: While imposing monetary penalty on Noticee under section 15H(ii) of the SEBI Act, the Securities & Exchange Board of India has held that even when there is delay in initiating proceedings, it can take action against a person who has violated securities laws.

Prasanta Mahapatra (Adjudicating officer), observed that neither SEBI Act nor Regulations framed thereunder prescribed any time limit for initiating proceedings against persons who had violated the securities laws. 

The Board further stated that in the absence of any specific provision in the SEBI Act or Takeover Regulations, the fact that there was delay on part of SEBI in initiating proceedings for violation of any provision of the Act could not be a ground to quash the penalty imposed for such violation. 

As per the background of the case, SEBI conducted examination in respect of Regaliaa Reality Ltd. (RRL) and observed that Noticee Karvy Financial Services Ltd., an NBFC registered with RBI, had extended a loan to RRL. Besides providing other securities, RRL’s promoters pledged Equity Shares, constituting 55.56% of RRL’s paid-up share capital in favour of KFSL (Acquirer). 

As RRL defaulted in paying installments, KFSL invoked the pledge and thus, acquired equity shares and voting rights in respect of pledged shares. Thus, KFSL’s shareholding in Target Company RRL increased from 0% to 55.56%, thereby, breaching threshold of 25% as stipulated under SAST Regulation 3(1). 

Eventually, KFSL made public announcement for making open offer with a delay of 81 days. Thus, it was alleged to have violated provisions of SAST Regulations 3(1) and 4 r.w. Regulations 13, 14, 15, 16, 17 and 18. Accordingly Show Cause Notice (SCN) was issued to Noticee and Adjudicating Officer (AO) was appointed. 

It was submitted on behalf of Noticee that there was extraordinary inordinate delay in issuance of SCN, which had prejudiced them and on this ground, it was prayed that SCN should be dropped. 

After considering the facts & contentions, the Board found that Noticee had been corresponding with SEBI since October 2014 on the subject of acquisition of shares. Thus, even if it was assumed that Noticee was not aware of making public announcement at the time of acquisition of shares in 2012, after being called upon by SEBI in 2014, Noticee was aware of the regulatory requirement of making open offer upon breaching 25% threshold stipulated u/ SAST Regulation 3(1). However, Noticee delayed in making the public announcement, citing litigations with RRL/Target Company. 

The Board reiterated that SAST Regulations in the first place had put onus of public announcement on acquirer and not on Target Company, which is to be complied with regulatory requirements in a time-bound manner. 

While making it clear that there was no delay attributable to SEBI in initiation of proceedings, the Board said that the open offer requirement triggered in the year 2012 had been concluded in 2020 by KFSL upon directions issued by SEBI in 2016 that were duly upheld by SAT in 2018. Therefore, instant proceedings were initiated on May 4, 2021 with appointment of AO and on May 24, 2021, SCN issued was served upon Noticee.

Delay in complying with regulatory requirements by Noticee was due to acts and deeds committed by itself but Noticee was held to have been trying to draw inference from the facts as delay on part of SEBI in initiating instant proceedings that was misconceived, added the Board. 

Besides, SEBI opined that Noticee’s delay in making public announcement had resulted in denying statutory right of company’s shareholders to exit through open offer mechanism at respective point of time. 

At the same time, the Board said that no period of limitation was prescribed in the Act or Regulations for issuance of a show cause notice or for completion of adjudication proceedings and in absence of any period of limitation, authority must exercise its powers within reasonable period that would depend on facts of each case.

The Adjudicating officer thus held that Noticee’s public announcement for open offer with a delay of 81 days was in violation of provisions of SAST Regulations 3(1) and 4 r.w. Regulations 13, 14, 15, 16, 17 and 18 and hence, Noticee was liable for monetary penalty u/s 15H(ii) of the SEBI Act.