Legal Implications of Informal Guidance

CS Jaya Sharma 07 Jun 2021 4,620 Views 0 comment Print SEBI | Articles

Introduction:

No law is perfect, thus giving a wider probability of ambiguity among various stakeholders. Moreover, the business environment being dynamic in nature requires to be at par with the current scenario in order to achieve its ultimate goal and also each situation would not necessarily be same as that of the situation quoted under the law or based upon which a prior judgement has already been pronounced.

The Securities and Exchange Board of India (herein after referred to as “SEBI”) receives numerous requests from a variety of market participants with a motive to obtain an advance guidance on the interpretation of SEBI Act, Rules, Regulations and Circulars.

Keeping in mind the instances that have arisen upon the multiple interpretations or ambiguity in the minds of the market participants and powers bestowed Section 11(1) of the SEBI Act 1992 the regulator introduced the Securities and Exchange Board of India (Informal Guidance) Scheme, 2003 (herein after mentioned to as “Informal Guidance Scheme”).

Securities and Exchange Board of India (Informal Guidance) Scheme, 2003:

Information Guidance

Persons eligible to make a requisition for informal guidance:

Intermediary registered under section 12 of the Act;
Listed company;
Company which intends to get its securities listed and which has filed either a listing application with any stock exchange or a draft offer document with the board or the Central Listing Authority;
Mutual fund trustee company or asset management company;
Any acquirer or prospective one under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

Forms of guidance:

No-action letters: Such letters indicate that the Department would or would not recommend action under any Act, Rules, Regulations, Guidelines, Circulars or other legal provisions administered by SEBI to the Board if the proposed transaction in a request made under is consummated.
Interpretative letters: Such letters provide interpretation of a specific provision of any Act, Rules, Regulations, Guidelines, Circulars or other legal provision being administered by SEBI in the context of a proposed transaction in securities or a selected factual situation.

Pre-requisites and time frame:

The application shall be accepted by the Department only when the following conditions are fulfilled:

It shall state that it is made under this scheme and also state whether it is a request for a no-action letter or an interpretive letter;
It shall be accompanied with Rs. 25,000 towards fees;
It shall be addressed to the concerned Authority;
It shall describe the request, disclose and analyse all material facts and mention all applicable legal provisions.

SEBI may dispose off the request expeditiously but not later than 60 days after the receipt of the request. The Department may hear or conduct an interview if it feels necessary. The requestor shall be entitled only to reply. The internal records of SEBI shall be confidential.

Negative List:

those which are general and which do not sufficiently describe the facts;
those which involve hypothetical situations;
those requests in which the requestor has no direct interest;
where the applicable legal provisions are not mentioned;
where a letter has already been issued by that or any other Department on a substantially similar question involving substantially similar facts, as that to which the request relates;
those cases in which investigation, enquiry or other action has been initiated;
those cases where connected issues are pending before any Court and on issues which are sub judices;
those cases where policy concerns require that the Department does not respond.

Where a request is rejected for non-compliance, the fee paid by the requestor shall be refunded to him after deducting therefrom a sum of Rs. 5,000 towards processing fee.

SEBI shall not be under any obligation to respond to a request made under this scheme, and shall not be liable to disclose the reasons for the same.

Legal Impact:

The informal guidance being a resort that can be accessible to the entities, allows them to take an opinion of the regulator on a particular instance. However, such a guidance is merely a view of the Department and shall under no circumstances be binding upon the Board. But the chances are high that the Board shall act in accordance with the letter itself.

It is neither to be construed as a conclusive decision or determination of any question of law or fact by the regulator. Furthermore, it is not an order of the Board under section 15T of the Act thus shall not be appealable.

The guidance offered through the letters issued by Departments is conditional upon the requestor acting strictly in accordance with the facts and representations made in the letter. In other words, the circumstances and the condition of the guidance seeking entity is peculiar. No guidance letter shall be taken as a reference by any other company (other than who has sought the guidance). The guidance is exclusively for that particular entity and that particular circumstance only.

Where the Department finds that a letter issued by it under this scheme has been obtained by the requestor by fraud or misrepresentation, notwithstanding any legal action that the Department may take, it going to declare such letter to be non-est and thereupon the case of the requestor are going to be addressed as if such letter had never been issued.

Merely a View

Case study:

i. Arbutus Consultancy LLP and Others vs. Securities and Exchange Board of India (“SEBI”)

Facts of the case:

India Bulls Real Estate Limited (IBREL) a company listed on BSE and NSE was incorporated on April 04, 2006. India bulls Infrastructure and power Limited (‘Target Company”) is a wholly owned subsidiary of IBREL incorporated on November 09, 2010. Pursuant to a scheme of arrangement and demerger filed with the Delhi High Court in 2011, the power business of IBREL was consolidated and thereafter, demerged into the Target Company, as a separate undertaking since the target company being a listed company, the shareholding pattern of promoters was filed with the stock exchanges in 2012.

Laurel Energetics Private Limited (“Laurel’) one of the co-promoters of IBREL and the target company acquired shares from other co-promoters in July, September and October, 2014 the disclosures of which were duly made under the SEBI (Substantial Acquisition of Shares and Takeover) Code, 2011.

On October 28, 2015 the appellants along with persons acting in concert (PAC) made a public announcement for acquisition of equity shares worth 35.94 crores from public shareholders of the target company.

In accordance with regulation 3(2) of the code if the acquirer along with PAC holds shares or voting rights in a target company entitling him to exercise 25% to 75% of the voting rights, and proposes to acquire more than 5% of the voting rights, then such acquirer shall make a public announcement to open offer.

Regulation 10 of the code provides for General exemptions which enlists certain exemptions or transactions that are exempted from the obligation to make an open offer under regulation 3 and 4 of the code

In accordance with the present case an acquisition pertaining to inter-se transfer of shares among persons named as promoters in the shareholding pattern filed by the target company in terms of the listing agreement or the takeover code for not less than 3 years prior to the proposed acquisition.

SAT observed that under Regulation 10(1)(a)(ii) states that in order to be eligible for exemption to an open offer inter-se transfer of shares among persons named as promoters in the shareholding pattern 3 years prior to the proposed acquisition”

SAT rejected the argument that promoters have to be named in the listing agreement for a minimum period of three years and not necessarily three years subsequent to the signing of listing agreement. SAT further observed that if such interpretation is then a company listed today with an unchanged promoter for more than three years prior to listing becomes eligible for exemption from making an open offer for inter-se promoter transfer even tomorrow. Hence the very intention of amending the law is defeated.

Analysis of SAT and SEBI’s Informal guidance

The promoters cited SEBI’s Informal Guidance dated October 25, 2012, which was issued to Weizmann Forex Ltd. The promoters argued that the situation is exactly similar to that in Weizmann Forex Ltd. However, SAT stated that “When the statute is clear informal guidance should not be relied on. Informal guidance scheme cannot be used to reduce the importance of the statute itself.

SAT observed that “Straight forward reading of Reg. 10 of Takeover Regulations 2011 unambiguously shows that Appellants were not eligible for exemption. When a straight forward reading of Regulation/law is available that is the only way it should be read. In the instant matter no other interpretation is actually possible” With reference to the SEBI’s Informal Guidance given to Weizmann, SAT stated that the SEBI official has erred by inadvertently providing an interpretation in the spirit of the Takeover Code, 1997 oblivious of the changes happened in terms of Takeover Code, 2011 SAT stated that “Such a mistake made by an officer of the respondent cannot be used to furtherance of the mistake.

SAT further stated that the guidance by the department in regards to the SEBI’s informal guidance scheme shall not be binding on SEBI. The letter issued by SEBI shall not be construed as a conclusive decision or determination of any law or fact by SEBI and such letters shall not be considered as an order of board under section 15T of the SEBI Act 1992.

Conclusion:

The Interpretative letters of SEBI shall be construed only as a means of clarifying the interpretation difficulties and not an evidence to be presented as a question of law. Hence, the interpretative letters shall only be construed to the effect of clarification of a particular law of SEBI and not the order of board under Section 15T of the SEBI Act 1992.

The Letters are issued with a specific disclaimer to the effect that the interpretative letter is based on the facts and circumstances as provided and different facts might lead to different interpretation and the letter does not express the decision of the board on the questions referred.

Bibliography:

https://www.sebi.gov.in/informal_guidance.html

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1351132

http://oii.igidr.ac.in:8080/xmlui/bitstream/handle/2275/137/WP-2011-008.pdf?sequence=1&isAllowed=y

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