This article is written by Shubadha Khandekar a Junior advocate at A&A Law pursuing a Diploma in General Corporate Practice. This article has been edited by Ojuswi (Associate, Lawsikho).
This article has been published by Sneha Mahawar.
Table of Contents
Introduction
In a very interesting case, the bench comprising Justice Tarun Agarwal (Presiding Officer) and Justice M.T. Joshi (Judicial Member) of the Securities Appellate Tribunal (SAT) on 9th August 2021 gave a split verdict in an Appeal preferred by PNB Housing Finance Private Limited (the Company) against an order of Securities and Exchange Board of India (SEBI) with regards to preferential allotment of shares by the Company to certain institutional investors. The present article lays out a brief analysis of the judgement.
Facts
The Punjab National Bank, the largest shareholder in PNB Housing Finance Private Limited with a holding of 33% in the Company, was not able to provide funding to the Company as necessary regulatory approvals from the Reserve Bank of India (RBI) were not obtained. The Company in order to raise its Capital agreed to issue preferential shares of proposed Rs. 4,000 Crores in favour of four institutional investors namely Pluto Investments Société à Responsabilité Limitée (Limited Liability Company) an affiliated entity of Carlyle Asia Partners IV, Limited Partnership and Carlyle Asia Partners V, Limited Partnership, Salisbury Investments Private Limited, Alpha Investments Private Limited, and General Atlantic Singapore Fund Foreign Institutional Investors Private Limited, and accordingly a resolution dated 31st May 2021 came to be passed by the Board of Directors approving the raising of capital through preferential allotment of shares to the proposed allottees at a price of Rs.390/ per share.
The resolution also resolved to convene an Extraordinary General Meeting (EGM) for approval of the resolution by the shareholders. Notice for EGM was issued to the shareholders and thereafter the Stock Exchange was informed about the resolution passed by the Board of Directors and the issuance of Notice to shareholders of the Company. Pending the EGM, the Company received an order from SEBI whereby the Company was restrained to act upon the resolution to hold the EGM for purposes of allotment of preferential shares until it obtained a report from the registered valuer as to the proper valuation of preferential shares, as is provided for in its Articles of Association (AOA). The said order came to be challenged before SAT by the Company.
During the proceedings, on 21st June 2021 SAT allowed the Company to hold EGM to enable the shareholders to vote on the agenda of preferential allotment of shares, but placed a condition that the results not be declared and instead kept in a sealed cover until disposal of the Appeal.
Issues involved
- Is it imperative for the Company to obtain a valuation report from a registered valuer as per Article 19(2) of its AOA or whether the Company is required to get the pricing calculated under Regulation 164 of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018?
- Whether rules of natural justice were followed?
- Whether SEBI has jurisdiction to pass such an order?
Rules/ laws involved in this case
Following are the legal provisions and aspects which were looked into by both the members of SAT while passing their verdicts:
Article 19(2) of the AOA of the Company
The Articles of Association is a set of rules which governs the internal functioning between the entire staff of the Company, and the Company, as well as its staff, is bound to follow these rules.
Article 19(2) of the AOA of the present company provides for offering further shares to any person for cash or anything other than cash if it is authorized by a special resolution passed by the Company and if the valuation/price of such shares is determined by way of valuation from a registered valuer.
The Companies Act, 2013
Section 6
As per the aforesaid section if there is any provision in the AOA, Memorandum of Association (MOA), Article of Company, Resolution, or any other document executed by the company which is contrary to or against the provisions of the Companies Act, then the provisions of the Companies Act will prevail and the provision so provided in the AOA, MOA, Article of Companies, etc, which is contrary to the Companies Act, will become void in the eyes of law.
Section 14
Section 14 provides for alteration of articles of the Company and provides subject to provisions of the Companies Act and MOA of the Company, an alteration can be made in the articles of the Company, by the Company through a Special Resolution, such alteration can also include the conversion of a Company from Private to Public and vice versa, further it also provides for its effect and certain compliances with the Registrar to get the altered articles registered.
Section 24
It provides that provisions relating to the issue and transfer of shares, and non-payment of the dividend of/by Listed Companies or those Companies that intend to get listed, provided under Chapter III of the Companies Act which provides provisions relating to Prospectus and Allotment of Securities, Chapter IV of the Companies Act which provides provisions relating to Share Capital and Debentures and under Section 127 of the Companies Act which provides punishment for failure to distribute dividends, except as provided under the Companies Act shall be administered by SEBI and Exchange Board by making regulations to do so, it also provides for matters which are not to be administered by SEBI and Exchange Board under this Section.
Section 62(1)(c)
It provides for the issuance of further shares by the Company to any person if it is authorized to do so by a Special Resolution, in exchange for cash or any other thing than cash if the amount for shares is determined and valued by the valuation report of a registered valuer, subject to such conditions as may be prescribed.
Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014
For the purpose of Section 62(1)(c) of the Companies Act, which we have seen above, Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014 provides that once a Special Resolution is passed in a general meeting, the Company can issue shares in any manner whatsoever, including a preferential offer to investors, subject to compliance of conditions laid down in Section 42 of the Companies Act, 2013. Further, it provides that the price of the share to be issued by a Listed Company need not be determined by the Valuation Report of a Registered Valuer.
Regulation 164 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018
This Regulation provides for a method to calculate the value/price of the share to be allotted under its preferential allotment.
Rules of natural justice
It consists of three rules:
I. All the parties to the proceedings are to be heard
II. The Court/Tribunal/Authority shall be biased-free while taking decisions.
III. The Judgement/Order given by the Court/Tribunal/Authority shall be a reasoned one.
Observation and verdict of sat
Since a split verdict was passed in this case, the judgement was delivered by Justice Tarun Agarwal (Presiding Officer) and Justice M.T. Joshi (Judicial Member) is both dealt with respectively.
Justice Tarun Agarwal (Presiding Officer)
Issue No. 1
- To answer the principal question, of whether the valuation report of a registered valuer is required for the issuance of preferential shares, the relevant provisions of the AOA of the company and the provisions of law applicable to such issuance were considered.
- At the outset Section 6 of the Companies Act, 2013 was looked into, which makes everything in a document executed by the Company including AOA, MOA, Resolutions, and Agreements, which is contrary to the provisions of the Companies Act, 2013, void. On the same point, placing reliance upon the judgment of Madanlal Fakirchand Dudhediya vs. Shree Changdeo Sugar Mills Ltd. (1962) 32 Company Cases 604 (SC) it was observed that any provision in the AOA of the Company which is repugnant to the Companies Act, 2013 would be void and the Companies Act, 2013 will prevail.
- Keeping the above in mind, Article 19(2) of the AOA of the Company was looked into which made a provision for the determination of allotment price of preferential shares which is to be determined by a valuation report of a registered valuer, even Section 62(1)(c) of the Companies Act, 2013, provides for further issue of raising capital which can be offered to any person if authorized by a special resolution, requires the price of such shares to be determined by the valuation report of a registered valuer subject to such conditions as may be prescribed and for compliance with the applicable provisions of Chapter III of the Companies Act, 2013.
- Thus, Rule 13(1) and Rule 13(2) of Companies (Share Capital and Debentures) Rules, 2014 were read together as per which a listed company whose shares or other securities are listed on a recognized Stock Exchange is not required to determine the value of shares through a registered valuer, and the price is required to be determined in accordance with the Regulations framed by SEBI.
- Further, Section 24 of the Companies Act, 2013 was also considered which empowers SEBI to make regulations for the administration of provisions relating to the issuance and transfer of shares. Therefore, in pursuance of both these conditions, Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018, (ICDR) and more particularly Regulation 164 were delved into as the same provides for pricing machinery for valuation of such shares.
- While considering the mechanism for pricing under Regulation 164 of the ICDR, it was observed that the words “shall not be less than” are not to be interpreted as not less than the value determined by the registered valuer. If a listed company does not have a provision in its AOA or any other binding instrument for valuing its shares through a registered valuer then it will have to follow Regulation 164 of the ICDR and thus there will be two sets of procedures for valuation of shares of listed companies which is not permissible as the same would be against the provisions of Section 62(1)(c), Section 6 and Section 14 of the Companies Act read along with Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014.
- Therefore, it was held that Article 19(2) of the AOA requiring valuation of shares by a registered valuer was dispensed with and the Notice/Order of SEBI dated 18th June 2021 was held illegal and bad in law.
Issue No. 2
- It was observed that SEBI erred in holding that the agenda for conducting the EGM in the resolution passed by the Company was ultra vires as it would go to say that the company does not have authority to conduct the EGM and to put forth the agenda before shareholders for their deliberation. Since the order of the SEBI was passed without any notice and without hearing the Company, it was held to be violative of the rules of natural justice.
- Thus, it was held that SEBI was incorrect to pass such an order in a manner that is violative of the rules of Natural Justice.
Issue No. 3
- The Ld. Tribunal observed that SEBI has acted at a pre-mature stage and without any jurisdiction by stepping in at the stage where only a resolution was passed by the Board of Directors which was yet to be placed before the shareholders in the EGM, had it been the case where the agenda at issue was put before the Shareholders and approved by them, and where such a resolution was in contravention with the ICDR Regulations only then SEBI would have jurisdiction intervene and take steps. Reliance was placed on the case of Praful Patel vs. SEBI (1999) 19 SCL (Bom.) facts of which were akin to the present case, and thus its decision was squarely applicable.
Justice M.T. Joshi (Judicial Member)
Issue No. 1
- Justice M.T. Joshi harmoniously constructed all the provisions while determining whether Article 19(2) of the AOA is repugnant to Section 6 of the Companies Act. Referring to the judgment passed in the matter of Naresh Chandra Sanyal vs. Calcutta Stock Exchange Trader Association (1971) AIR 422 Supreme Court, it was also observed that the AOA of a Company is like a contract that governs the internal relationship between the Company and the shareholders and therefore is binding upon both.
- It was observed that Regulation 13 of the Companies (Share Capital Debentures) Rules, 2014, which is not mandatory, only provides that the price of shares to be allotted shall not be required to be determined by the report of a registered valuer, hence, the said regulation does not restrict the company from getting the price determined by a registered valuer. Also, Regulation 164 of the ICDR provides for the minimum value at which such shares are to be allotted and there is no bar to allot such shares at a price that is arrived at by a valuation done by a registered valuer until and unless the value is above the minimum value as is provided under Regulation 164 of the ICDR.
- Therefore, it was held that there is no repugnancy or contradiction between all these provisions and they can stand together.
Issue No. 2
- After the company made a corporate announcement on both the boards i.e. NSE and BSE, the Company was called upon to provide information in pursuance of which a joint report of both the boards came to be submitted before SEBI. SEBI also called upon the Company to provide certain information and after perusing the said information, it was found that the Company has not followed the procedure as prescribed by Article 19(2) of its AOA, due to which the order came to be passed and therefore it cannot be said that the order passed by the SEBI was arbitrary or was faulted upon.
Issue No. 3
- It was observed that SEBI has passed such an order in the exercise of its primary duty of protecting the rights of the investors, hence SEBI has acted well within its jurisdiction while passing the said order in the interest of the investors.
Outcome
As there was a difference of opinion between both the members that resulted in the split verdict, the papers, and proceedings of this Appeal was referred to the Presiding Officer of the Administrative side for appropriate orders. However, after the present order was passed by SAT, SEBI approached the Supreme Court challenging the same. Soon thereafter, rather than going into a legal battle, the Company scrapped the deal with the four institutional investors and moved an application before SAT seeking permission to withdraw the Appeal, which came to be allowed on 16th November 2021, thereby putting an end to the litigation.
Opinion
Keeping in mind that the function of the judiciary is to interpret the existing laws and not to introduce new laws, one might feel that the findings of Justice Tarun Agarwal are correct and just, however, one must not forget that if two laws can be interpreted and constructed in a manner consistent each other, then such an interpretation ought to be upheld and such provisions are to be constructed harmoniously (M.S.M Sharma v. Krishna Sinha, AIR 1959 SC 395), provided it fits within the boundaries of the law, which approach has been taken by Justice M.T. Joshi.
Thus, it can be safe to say that the view taken by Justice Tarun Agarwal did not consider the interpretation of the exact intention of the statutes as he construed the provisions by taking a strict and literal approach which was unnecessary. Even while determining the principal question of how having two sets of procedures for valuation of shares of listed companies would be against the provisions of the law was not clarified in the verdict which can be termed as a loophole in his verdict.
On the other hand, the verdict of Justice M.T. Joshi seems to hold more water. On fine consideration of the provisions and the intent of the legislature, it becomes crystal clear that the law does not restrict such companies from following the procedure as is provided in the relevant statute or strictly following their AOA as far as the valuation of shares is considered. Such liberty has been given in the statute itself therefore the Company was at liberty to act in the way it acted, as there is no specific bar restricting the Company to not acting so.
Conclusion
The question involved in the matter was straightforward yet a technical one, the interpretation and construction of the provisions involved in this matter would have been the determining factor of the results of this litigation. Irrespective of the Appeal being withdrawn, the determination as to the principal question raised in the Appeal needs to be dealt with as the same has pointed out a lacuna in the provisions provided by the statute.
References
Pnb Housing Finance Ltd vs Sebi on 9 August, 2021 (indiankanoon.org)
The Companies (Share Capital and Debentures) Rules, 2014
Principles of Natural Justice – iPleaders
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