Sebi-SAT deadlock over listing norms reaches SC

SEBI headquarters in Mumbai, on Feb 18, 20087. Photograph: ABHIJIT BHATLEKAR/MINT
SEBI headquarters in Mumbai, on Feb 18, 20087. Photograph: ABHIJIT BHATLEKAR/MINT


  • SAT has overturned more than half a dozen Sebi orders related to listing-agreement violations, and Sebi has now appealed these judgements in the Supreme Court

NEW DELHI : The stalemate between the Securities and Exchange Board of India (Sebi) and the Securities Appellate Tribunal (SAT) over the interpretation of a specific provision of the securities law has now reached the Supreme Court. SAT has overturned more than half a dozen Sebi orders related to listing-agreement violations, and Sebi has now appealed these judgements in the Supreme Court.

Provision 23(E) of the Securities Contracts (Regulations) Act (SCRA) is at the heart of the impasse. The provision says any company violating listing conditions could attract a penalty of up to 25 crore. Sebi has been taking the view that “listing conditions" specified in the Act mean a violation of listing rules.

SAT, however, has rejected this interpretation taken by Sebi and said the law only applies if listing conditions are not met. It overturned all Sebi orders related to the matter.

Five of the total seven appeals in the matter were registered by the Supreme Court in May. All seven cases have been tagged together, and a two-judge bench comprising Justice K.M. Joseph and Justice B.V. Nagarathna will take up the matter.

Legal experts said there is a separate provision in the SCRA to deal with violations of listing agreements. “SAT has held that failure to comply with ‘listing conditions’ is different from failure to comply with ‘conditions of listing agreement’. From this perspective, the violation of ‘conditions of listing agreement’ does not attract Section 23E of [the] SCRA," said Lalit Kumar, partner, J Sagar Associates.

“Failure to comply with ‘conditions of listing agreement’ is covered under Section 23(2) of [the] SCRA and failure to comply with ‘listing conditions’ under Section 23E. Therefore, on strict interpretation ‘conditions of listing agreement’ and ‘listing conditions’ are different; otherwise, there was no need to have two separate penalty provisions under [the] SCRA for the same offence," he added.

The issue first surfaced in the order Sebi passed against Suzlon Energy Ltd for delayed disclosures in 2021. Apart from other sections, Sebi also included Section 23(E) of the SCRA and imposed a penalty of 1 crore for violation of the provision.

During the appeal, SAT observed the interpretation being taken by Sebi about listing conditions was patently erroneous. While SAT upheld that Suzlon violated the rules, it dismissed the 1 crore fine imposed due to Section 23(E). In 2022, Sebi appealed the case in the Supreme Court, and the verdict is still pending.

In the meanwhile, Sebi used Section 23(E) in at least half a dozen other cases involving listing-agreement violations including in cases of Man Industries (India) Ltd, IFGL Refractories Ltd, and Winsome Yarns Ltd. SAT was also irked that Sebi was continuing to use Section 23(E) despite its ruling in the Suzlon matter, which was supposed to act as a precedent. However, Sebi defended its position saying the Supreme Court has not yet upheld the SAT order.

“Non-compliance of orders of the Tribunal has resulted in undue harassment to the litigant...(it) is a clear case of disrespect to the orders of this Tribunal in utter defiance. The principle of judicial discipline requires that the order of the Tribunal should be followed unreservedly by the AO (adjudicating officer)," SAT said in the IFGL Refractories case judgement dated 6 January. “We also find that the respondents (Sebi) are repeatedly issuing such directions in other matters, knowing fully well that the decision in Suzlon’s case has not been set aside, but they continued to impose penalties."

Legal experts said listing conditions typically mean the conditions imposed on the company while it signs up for listing its shares. It may include conditions such as minimum public shareholding norms. On the other hand, the listing agreement is signed by the company after it lists. The listing agreement specifies the disclosure requirements, and any breach of these requirements is construed as a listing-agreement violation.

“Most of the cases involving listing-agreement violations involve disclosure lapses, and the specific section for such violations stipulates a maximum penalty of 1 crore, but 23(E) penalties can go up to 25 core. Hence, it can lead to situations where the penalty levied by Sebi is excessive," said a lawyer dealing with one of the cases. “Penalties must also be proportional to the scale and nature of violations."

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