Decoding the Ambiguity

In various jurisdictions across the world, the corporate sector revolves around the various milestones achieved in corporate governance. One of the important facets of corporate governance structure is timely disclosures and transparency maintained by Corporates while disseminating information through stock exchanges.

In India also, various reforms have been brought in to provide the mechanism of making such disclosures from Listing Agreement to SEBI (Listing Obligation and Disclosure Requirement) Regulations, 2015. Such delegated legislations contain extensive provisions while dealing with disclosures by company and compliances to be done, thereafter.

To deter the non-compliant companies, penalty provisions are provided in SEBI Act, 1992 and SCRA, 1956. Time and again, SEBI, by imposing stringent penalties on the defaulting companies, has given stern warning and set an example for Listed Companies to adhere to the extant laws pertaining to listing and disclosures.

Clause 36 of the Listing Agreement imposes an obligation on listed companies to make prompt disclosures to the stock exchanges of any event which will have bearing on the performance/ operations of the company as well as price sensitive information. Further, Section 21 of SCRA provides for Conditions for Listing, which provides that Where securities are listed on the application of any person in any recognized stock exchange, such person shall comply with the conditions of the listing agreement with that stock exchange.

SEBI, while enforcing above-mentioned provisions, imposes a penalty under SCRA. Section 23A(a) of SCRA is attracted for the failure to disclose the information within a specified time as stipulated in the Listing Agreement or conditions or bye-laws of the recognised stock exchange. On the other hand, Section 23E of SCRA is attracted on account of the failure of a company to comply with provision of listing conditions or delisting conditions.

However, imposing penalty under the above-mentioned provisions has been under judicial scrutiny, wherein, the Appellate Authority (Securities Appellate Tribunal) have given divergent opinions. SAT, in the case of Suzlon Energy Limited & Anr. v SEBI, while setting aside the penalty imposed by SEBI u/s 23E of SCRA for violation of Clause 36 of Listing Agreement, inter-alia, observed that Section 23E of SCRA has nothing to do with the violation of provisions of the Listing Agreement as the words "fails to comply with the listing conditions" in Section 23E of SCRA cannot mean failure to comply with the conditions in the Listing Agreement.

SAT further held in the aforesaid case that one of the requirements in the Listing Agreement which is required to be complied with is Clause 36 of Listing Agreement whereas Section 23E of SCRA refers to the conditions which are imposed upon a Company when it is applying for its shares to be listed on the stock exchange platform. SAT, while delivering the judgement in Suzlon matter, ignored its own orders in erstwhile cases such as Radford Global Ltd v SEBI, M/s New Delhi Television Limited v SEBI, Oasis Securities Limited & Ors. v SEBI, Electrosteel Castings Limited v SEBI, where SEBI’s power to impose penalty u/s 23E of SCRA was upheld for violation of Listing Agreement. The interpretation coming out from these above mentioned SAT orders is that the conditions set out in Listing Agreement is not to be considered as an obligation to be fulfilled only at the time of listing of securities on a recognised stock exchange but rather it is a continuous obligation upon the Company to comply with the conditions of listing agreement till the time its securities are listed on stock exchange. Considering the object and purpose behind the functioning of SEBI, i.e. protecting the interest of investors and maintaining transparency/fair dissemination of information in the market, the above interpretation seems more plausible.

A different view has been taken by SAT in Suzlon matter with respect to interpretation of Section 23E, and its application on Listing Agreement violation led to a tussle between the Regulator and SAT whereby SAT set aside a number of Orders of SEBI relaying the said judgement. SEBI has challenged these orders before Hon’ble Supreme Court, contesting the interpretation taken by SAT in Suzlon and similar matters.

However, in a recent order in the matter of Electrosteel Castings Limited v SEBI, Hon’ble Supreme Court refused to interfere with the order of SAT, wherein, SAT had upheld the penalty imposed by SEBI on company under Section 23A and 23E of SCRA, 1956, for violation of Clause 36 of Listing Agreement.

The order in the matter of Electrosteel matter upholding the SAT Order, wherein penalty u/s 23E of SCRA for violation of Listing Agreement was imposed, will be helpful in future adjudication of similar cases and hopefully lay the issue to rest.

Abhishek Baid is a partner and Ravinder Kumar is a senior associate at Expletus Legal. Views expressed are personal