The Supreme Court of India vide its order in IFB Agro Industries Limited v SICGIL India Limited (4th January, 2023) has resolved the issue of jurisdictional overlap between Securities Laws’ and Company Law between Securities and Exchange Board of India (SEBI) and National Company Law Tribunal (NCLT). In the case where director of SICGIL and his family members started acquiring shares of IFB Agro, and allegedly flouted SEBI (Substantial Acquisition of Shares and Takeover) Regulations 1997 (“SAST”) and SEBI (Prevention of Insider Trading) Regulations, 1992 (“PIT”), IFB Agro approached NCLT to rectify its register of members to the extent of said violation, and NCLT passed an order in favour of IFB Agro, considering violations of SEBI SAST and PIT regulations. The question that arises is, whether NCLT can adjudicate violations of SEBI regulations, to which Supreme Court has held that the process of violation cannot be short-circuited and the remedy and process mentioned in the SEBI Regulations, must be followed, thereby there exists no parallel jurisdiction of NCLT in cases where violation is of SEBI regulations.
Present facts of the case, highlighting two violations are; IFB Agro came up with a business proposal which was rejected by SICGIL, after which directors of SICGIL and their family members started acquiring shares of IFB. The acquisition of shares by all respondents went up to 5%, post which intimation as per Regulation 7 of SAST regulations was sent to IFB Agro, which IFB argued was not in prescribed format. After reaching the 5% mark – SICGIL further acquired shares, which IFB flagged as been violation to PIT regulations since they did not inform/take approval from the company.
On the count of the following violations:
1. Violation of SAST Regulation
2. Violation of PIT Regulation
IFB Agro approached NCLT vide Section 111A of Companies Act, 1956 for rectification of Register of Members, to delete the registry of shares in excess of 5% of SICGIL and associated persons as it had reached 8.22%s for non-compliance of SAST and PIT Regulations.
Order of NCLT
The tribunal examined the matter with singularity approach to test whether there had been any violation of SEBI Regulations – which becomes the foundation to the issue of whether NCLT can adjudicate matters pertaining to exclusive domain of SEBI and Securities Law. On examination of the facts, the tribunal passed the following observation(s):
1. Violation 1 (SAST): SICGIL did not make the disclosure in prescribed format – thereby violating SAST regulations.
2. Violation 2 (PIT): Post crossing the 5% threshold, SICGIL failed to inform further acquisition of around 3.22%.
In light of these violations, NCLT ordered that SICGIL must return the shares in a buyback procedure to IFB Agro at the value of shares which was prevailing on the date of presentation of the petition or market value whichever is higher.
Observations of the Supreme Court
1. Scope of Section 111A – Rectification of Register of Members
The apex court relied upon its judgement in Ammonia Supplies Corporation (P) Ltd. v. Modern Plastic Containers Pvt. Ltd. & Ors. (“Ammonia Supplies”) where it was held that scope of rectification of register of members under Section 111 A of Companies Act, 1956 is essential limited. This cannot be used as a tool for rectification of error which may be disputed in fact and requires adjudication of the matter itself. Thereby the power being summary in nature.
Therefore, it was observed that the present matter is perfect case to be adjudicated before an appropriate tribunal before/solely for rectification of register. The action of rectification is not summarily an action without dispute for exercise of Section 111 A and that NCLT had no jurisdiction to order the same whilst adjudicating a matter which is in domain of Securities Law and governed by SEBI.
2. Appropriate Forum for the said Dispute
The Supreme Court observed that vide Section 30 of SEBI Act, it has been empowered to formulate regulations to safeguard and protect the interests of investors.
For PIT Violation – SEBI (PIT) Regulations, laid down within the powers of SEBI Act, has a well established procedure for inquiry, punitive action and adjudication, in light of which, SEBI as an adjudicating authority cannot be circumvented by IFB Agro, and in essence, IFB Agro is procedurally jumping the mechanism laid down by SEBI which even devoid SICGIL of adjudicatory proceedings and justice.
Similarly for SAST Regulations, Regulation 7 requires compliance of disclosure and triggers open offer once the acquirer acquires 5% of shares. SAST regulations also provide for procedure to meet ends with justice, and IFB Agro cannot circumvent the said regulations by approaching NCLT directly.
In violation of SAST and PIT, SEBI is the sole authority to adjudicate the matter, therefore NCLT has no jurisdiction to entertain the petition and pass the said order.
Broad Principles laid down by the Supreme Court
1. Section 59 A of Companies Act, 2013 or Section 111A of Companies Act, 1956 (earlier) are mere summary powers, and cannot be excercised if there exists scope of adjudication matter. These cannot be independently used by companies to rectify a perceived mistake of law through NCLT.
2. Regulatory bodies like Telecom Regulatory Authority of India (TRAI) , Insurance Regulatory and Development Authority (IRDA), Securities and Exchange Board of India (SEBI) etc are formed with special purpose(s) and intent of legislature for specialized law enforcement in particular domain(s). Where the power to adjudicate/policy formation lies in domain of these bodies it may be summarily wrong that any other forum to interpret and adjudicate the matter even if reliance is placed on regulations passed by these authorities.
3. If a specific law/regulation in domain pertaining to a regulator exists, other adjudicatory forums cannot be approached whilst circumventing the procedure established in accordance with the parent act of the regulatory authority.
Concluding Remarks
This is a landmark judgement with reference to overlapping jurisdictions of regulators and adjudicatory forums. This judgement alone, lays a foundation stone to avoid further disputes in events of aggrieved party approaching a forum where a favourable or faster relief can be obtained rather than approaching the appropriate forum.
The judgement provides a watertight mechanism to separate the generalized idea of COMPANY law jurisdiction and regulatory jurisdiction of corporate action/activities. Every entity, that falls within the jurisdiction of SEBI, TRAI, IRDA would be a company, thereby by very nature of its existence, would also have a jurisdiction of NCLT, but this judgement provides for marking the line of separation between the generalized view of existence of an entity in law and specialized laws that the entity is subject to by the nature of its activities.
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