Last week, the Securities Appellate Tribunal (SAT) asked the Securities and Exchange Board of India (SEBI) to be even-handed in its approach to market constituents. Dealing with an appeal involving a challenge to a rejection by SEBI of a request for exemption from making an open offer, the SAT, has said SEBI should be consistent to send right signals to the market.
The case involved a preferential allotment proposed by a listed company in urgent need of funds. The Takeover Panel recommended an exemption from making an open offer. However, SEBI rejected the recommendation, and argued that the company could have raised funds by way of a rights issue or a public issue, and the choice of preferential allotment was not really necessary. While most of SAT's order deals with this choice of reason by SEBI (essentially ruling that a company was free to make its choice on the most assured and timely fund-raising option, so long as it is compliant with law), the SAT has noted that others had been given exemptions in similar circumstances without such reasoning being invoked.
"We may notice another contention... that in a number of cases where the facts and circumstances were identical, the Board itself has been granting exemption... an order dated September 14, 2007 passed by a whole time member in the case of Jumbo Bag Ltd... in that case also a promoter group of Jumbo Bag Ltd. had acquired equity capital in that company which triggered Regulations 10 and 11(1) of the takeover code. In that case also the funds were required to meet the expansion activities of the company and the promoter acquirers came forward to provide additional financial assistance as in the case before us. The promoter acquirers were granted exemption by the whole time member holding that the shareholders of the company would not be affected in any manner as there was no change of management or control and that it was a fit case to grant exemption under Regulations 3(l). Same is the position in the case before us," the SAT has noted.
"We are not examining the details of those orders and suffice it to say that the Board has in the past been granting exemption to acquirers in circumstances that exist in the present case. Then why not in the present case as well. It must be remembered that it is in public interest that a statutory regulator like the Board should be consistent in its approach as that would send the right signals to the capital market and would also insulate the Board from the charge of discrimination," the SAT has advised.
This observation is not some special landmark legal insight. However, it is reflective of what is being increasingly experienced. For instance, although our legal system has done away with a regulator having a say in whether or not a specific person may access the capital market, and has in turn, adopted a system of disclosure-based market access, regulators have not liked "feeling helpless" about the quality of persons accessing the market. The subjective powers under Sections 11 and 11B of the SEBI Act, 1992 too give SEBI a sense of moral right to make interventions despite every box in a legal compliance checklist being checked, leading to regulatory positions that are legally unsustainable.
Examples abound. Attempts at prohibiting payment of non-compete fees in a sale of business triggering an open offer; not clearing offer documents for public issues based on discomfort with the issuer company or its promoters; not granting exemptions from an open offer for some acquirers while granting exemption for others in the same position Ã¢Â€Â” these are all but manifestations of the same approach. In fact, one of the past chairmen has signed directly conflicting orders relating to the same allegedly illegal synchronised transaction, with one of the parties to the trade being held guilty, and yet absolving the counterparty.
This is not peculiar to SEBI. Every regulator, particularly those in the financial sector can be found in the same position. There is no counterpart of the SAT to oversee their functioning, and the only legal recourse for them is to file a writ petition in a high court, which by definition, cannot get into the wisdom of the regulator's action. It is time for introspection for the regulatory system. (The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.)