Disposed

Kds Corporation Private Limited & Anr. v. the Securities and Exchange Board of India & Ors.

Delhi HC7 Apr 2015W.P.(C)/3300/2015

Case brief

AI extract

What is this about?

Petitioners challenged SEBI's inaction regarding a proposed delisting of Spice Mobility shares, alleging fraud and potential loss. The court held SEBI's investigation power under Regulation 5 is discretionary and directed SEBI to address representations within a reasonable time.

What did the court decide?

Direction to SEBI to deal with the Petitioners' representation in accordance with law within a reasonable time.

Kds Corporation Private Limited & Anr. Vs the Securities… — Company and Corporate | Delhi HC (2015)

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* IN THE HIGH COURT OF DELHI AT NEW DELHI

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Decided on : 07.04.2015

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+ W.P.(C) 3300/2015

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KDS CORPORATION PVT. LTD. AND ANR ………Petitioners Through: Sh. Arun Kathpalia, Sh. Saurabh Seth, Ms. Sonia Dula, Ms. Ankita Singh and Sh. Anurag Singh, Advocates.

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Versus

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THE SECURITIES AND EXCHANGE BOARD OF INDIA AND ORS. ………..Respondents Through: Sh. Sudhanshu Batra, Sr. Advocate with Sh. Shailesh Rana, Advocate.

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CORAM: HON'BLE MR. JUSTICE S. RAVINDRA BHAT HON'BLE MR. JUSTICE R.K. GAUBA

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MR. JUSTICE S. RAVINDRA BHAT (OPEN COURT)

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In these proceedings under Article 226 of the Constitution of India, a writ, order or direction in the nature of mandamus directing the Securities and Exchange Board of India (SEBI), the first respondent herein, to order an investigation under Regulation 5 of the SEBI (Prohibition of Fraudulent and Unfair Practice Relating to Securities Market) Regulations, 2003 (“the Regulations”) into the proposed delisting of the equity shares of M/s. Spice Mobility (Respondent No.4, hereafter “Spice”) from the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) (Respondent Nos. 2 and 3), not to grant any approval to the proposed delisting of the equity

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shares of Spice from the BSE and NSE pending such investigation and also to direct stay of the process of delisting till pendency of such investigation by the SEBI is sought.

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The petitioners contend that they became aware, on 24.01.2015, of a postal ballot notice dated 09.01.2015 uploaded on the website of the second and third respondents seeking approval through postal ballot for voluntary delisting of the equity shares of Spice, from BSE and NSE. They sent a protest letter dated 27.01.2015 demanding that the postal ballot notice be recalled, which Spice refused by letter dated 06.02.2015. Thereafter on 18.02.2015, the petitioners represented to SEBI, claiming an investigation under Regulation 5 of the Regulations, into the proposed delisting of the equity shares of Spice from the BSE and NSE and to direct the latter respondents not to grant any approval to the proposed delisting of Spice‟s equity shares from the BSE and NSE pending such investigation by SEBI. SEBI omitted to take action or respond to the petitioners. On 23.02.2015, Spice passed a resolution approving the delisting.

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The petitioners are aggrieved by the inaction of SEBI in initiating an investigation into the proposed delisting of the equity shares of Spice from the NSE and BSE. The petitioners allege that the said delisting would cause huge financial loss to them as the current market price of the said shares is 28/- while they had, during the financial year 2009-2010, acquired 15,34,487 equity shares at a price ranging from 105/- to ` 140/- each. It is also alleged by the petitioners that two trusts namely “Mahesh PrasadIndependent Non Promoter Trust” and “Mahesh Prasad-Independent Non Promoter (Spice Employee Benefit) Trust” (hereinafter referred to as “the

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trusts”), holding 15.49% and 5.22% of the issued and paid up equity share capital, are listed as public shareholders, but in reality the trusts are under the control of the promoter (the seventh respondent, holding 74.36% of the issued and paid up capital of the company) of Spice, which is allegedly using the votes cast by these trusts to delist the shares from BSE and NSE. It is also argued that such trusts cannot be characterised as public shareholders as that would be in violation of Regulation 3(9) of the SEBI (Share Based Employee Benefits) Regulations, 2014. The petitioners also submit that during the period July 1, 2014 to December 31, 2014, 10,20,617 shares have been traded in 8952 trades and that 10,20,617 shares in a period of six months cannot be considered as limited volume (“there is limited liquidity in the scrip of the Company”, as stated by the Spice) and thus the proposal of delisting is against the interest of shareholders.

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4. Regulation 3(9) of the said regulations is reproduced below for ease of reference:

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“Regulation 3(9): For the purpose of disclosures to the stock exchange, the shareholding of the trust shall be shown as „nonpromoter and non-public‟ shareholding.

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Explanation: For the removal of doubts, it is clarified that shares held by the trust shall not form part of the public shareholding which needs to be maintained at a minimum twenty-five percent as prescribed under Securities Contracts (Regulation) Rules, 1957.”

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Reliance has been placed by the petitioners on the order dated 08.10.2014 of the High Court of Bombay in Pankaj Bhatt & Anr. Vs. Union of India & Ors. (WP(C) No. 2157 of 2014), which according to the petitioners is similar to the case in hand. In the above case, the petitioners were aggrieved by the order of the SEBI, which permitted the delisting of

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companies to be proceeded with even after prima facie finding that a particular company holding majority public shares was possibly under the control of the respondent company‟s promoter and that it was acting in concert with the respondent company‟s promoter. The court found that SEBI had erred in permitting the respondents to proceed with the delisting and injuncted the respondents from delisting.

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In reply to the protest letter dated 27.01.2015 of the petitioners, Spice issued a letter dated 06.02.2015 answering the claims and allegations of the petitioners. Spice contended that the offer price would be determined through book building process after determination of floor price by the promoters and the Merchant Banker, in accordance with the SEBI (Delisting of Equity Shares) Regulations, 2009 and hence, all public shareholders of the equity shares, sought to be delisted shall be entitled to participate in the book building process in adherence to Schedule II of the SEBI (Delisting of Equity Shares) Regulations, 2009. The shareholders so participating may place their bids at a price which may be at or above the floor price. The shareholder also has the option to stay invested in the company and not to tender shares. It is also urged by Spice that the equity shares are „infrequently traded‟ and the proposed delisting is in the interest of the public shareholders from the perspective of providing an exit opportunity, in the circumstances, as per the parameters specified in SEBI (Delisting of Equity Shares) Regulations, 2009.

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Spice denied the Petitioners‟ allegations that the trusts are under the control of the seventh respondent. The petitioners urge that the shares which were held by Spice Televentures Private Limited, the transferor company,

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were transferred to the trusts pursuant to the scheme of amalgamation under Sections 391/394 of the Companies Act, 1956, duly approved by this court and the Allahabad High Court, whereby Spice Televentures Private limited merged with Spice, the fourth respondent. The said respondent further responded that the trusts were and would continue to remain independent bodies under the control of their respective trustees and that there is no interference from other external bodies. The newspaper report dated 04.02.2011 sets out that the trusts were created for the benefit of employees of the fourth respondent, its subsidiaries and associate companies and one Mahesh Prasad, is the managing trustee who reportedly stated that the gains derived from selling the shares will be distributed among the top 300 employees.

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This court has carefully considered the submissions. The allegation of the petitioners that the proposed delisting would cause heavy financial loss cannot be accepted for the reason that in the instant case, acquiring shares or divesting their holding from a company is a voluntary act which is carried out at the option of a shareholder. Neither Spice nor the seventh respondent, have not concededly, forced the petitioners to divest from the company. Spice in its letter dated 06.02.2015, has stated that the delisting and the consequent determination of the offer price, floor price and the final offer price would be in accordance with the extant SEBI regulations, i.e. through book building process and that the shareholders including the petitioners have a right to participate in the same (Regulation 14(1), SEBI (Delisting of Equity Shares) Regulations, 2009).

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Regulation 15 (2) provides as follows:

W.P.(C) 3300/2015

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“15. (1)…. (2)…

(a)… (b)…

(c)…

Explanation: For the purposes of this sub-section, equity shares shall be deemed to be infrequently traded, if on the recognised stock exchange, the annualised trading turnover in such shares during the preceding six calendar months prior to month in which the recognised stock exchanges were notified of the board meeting in which the delisting proposal was considered, is less than five percent (by number of equity shares) of the total listed equity shares of that class and the term „frequently traded‟ shall be construed accordingly.

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(3)…”

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In these writ proceedings, this court cannot on the basis of assertions, facially hold that the shares or scrip of the company is adequately traded or otherwise. Likewise, the allegation that the trusts are under the control of seventh respondent and are acting in concert with that respondent is a factual dispute for which this court, in judicial review is hardly equipped to deal with. Prima facie, it appears that the petitioners appear to have raised this allegation on an apprehension that Spice would influence the trusts and use the votes cast by the trusts to delist from the BSE and NSE. Under Regulation 3(9) of the SEBI (Share Based Employee Benefits) Regulations 2014, shares held by trusts such as the trusts in question would not form part of public shareholding under the minimum 25% rule provided for in the Securities Contracts (Regulation) Rules, 1957. The petitioners allege that characterisation of the trusts as public shareholders is in violation of the above mentioned provision. The petitioners‟ case is that the order of the Bombay High Court in Pankaj Bhatt (supra) is similar to the case at hand. In

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that decision the Court while allowing the claim for injunction against delisting, had sufficient reasons to believe that injury might be or may already have been caused. Here, we note that the power of the SEBI to order for an investigation as envisaged in Regulation 5 of the Regulations is discretionary power. Regulation 5 of the said regulations is reproduced below for ease of reference:

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“5.Where the Board, the Chairman, the member or the Executive Director (hereinafter referred to as “appointing authority”) has — reasonable ground to believe that

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(a) the transactions in securities are being dealt with in a manner detrimental to the investors or the securities market in violation of these regulations;

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(b) any intermediary or any person associated with the securities market has violated any of the provisions of the Act or the rules or the regulations,

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it may , at any time by order in writing, direct any officer not below the rank of Division Chief (hereinafter referred to as the “Investigating Authority”) specified in the order to investigate the affairs of such intermediary or persons associated with the securities market or any other person and to report thereon to the Board in the manner provided in section 11C of the Act."

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The language of the above regulation shows that the SEBI has discretionary powers of investigation. This power may be exercised upon satisfaction as to existence of reasonable ground to believe that violation in terms of Regulation 5 (a) or (b) has occurred. The power is not compulsive in the sense that depending on the facts shown the SEBI may chose either to investigate the matter or not to pursue it furhter. Since the Petitioners have represented to the SEBI, which has not made any order in that regard, it would be inappropriate for this court to assume that the said body would not

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act, act improperly or act in a manner contrary to the Regulations. Any direction in exercise of judicial review at this stage would be based on the assumption of objective facts. All that this court can do is to require the SEBI to deal with the Petitioners‟ representation, in accordance with law within a reasonable time, having regard to the facts presented to it. It is open to the petitioners to seek appropriate remedies in accordance with law. 12. The writ petition is accordingly disposed off in the above terms.

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S. RAVINDRA BHAT
(JUDGE)
R.K. GAUBA
(JUDGE)
APRIL 07, 2015

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Kds Corporation Private Limited & Anr. v. the Securities and Exchange Board of India & Ors.

Case brief

What is this about?

What did the court decide?

Kds Corporation Private Limited & Anr. v. the Securities and Exchange Board of India & Ors.

Case brief

What is this about?

What did the court decide?

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