Supreme Court rules: NCLT does not have parallel jurisdiction over violations of Insider Trading Regulations with SEBI

Supreme Court rules: NCLT does not have parallel jurisdiction over violations of Insider Trading Regulations with SEBI

The Supreme Court by its division bench comprising of Justices AS Bopanna and PS Narasimha in the case of IFB Agro Industries Limited v. SICGIL India Limited and others upheld the National Company Law Appellate Tribunal (NCLAT) order and observed that under Section 59 of the Companies Act, 2013 the National Company Law Tribunal (NCLT) does not exercises parallel jurisdiction with the Securities Exchange Board of India (SEBI) in the event of violations of Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015.

In the aforementioned case the Appellant- IFB Agro Industries Limited is a listed company engaged in the manufacture of sale of rectified spirit, country liquor etc. The Respondents- SICGIL India Limited and others, wherein the Respondent No. 1 is also a listed company. Respondent No. 2 is the managing director of Respondent No. 1, Respondent No. 3 is the wife of Respondent No. 2, and Respondent Nos. 4-6 are close relatives of Respondent Nos. 2-3. On 19 July, 2004 the Appellant had filed a petition before the Company Law Board (CLB) under Section 111A of the 1956 Act praying for rectification of its register by deleting the name of the respondents, as the owner of shares which were over and above the five per cent threshold.

During the pendency of the petition under Section 111A, the 2013 Act came into force, and the matter stood transferred to the NCLT. The Tribunal framed just one question - Whether the acquisition of shares by the Respondents without complying with the statutory provisions of disclosure norms under SEBI Regulations is valid?

The NCLT opined that in case of violation of SEBI regulations, Section 111A empowers a company to apply for rectification, and in such cases, the Tribunal is entitled to pass an order to undo the mischief. The Tribunal observed that the jurisdiction of SEBI would not bar the Tribunal from exercising its power under Section 111A of the 1956 Act. However, the Tribunal held that the powers exercised by the CLB and SEBI fall in different and distinct jurisdictional fields and therefore, the present order will not prevent SEBI from deciding any violation of its regulations. The Tribunal while allowing the petition, held that the acquisition of shares in excess of five per cent was in violation of the SEBI (PIT) Regulations, 2015 and the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

The Respondents filed an appeal to the NCLAT that whether the Tribunal was empowered to pass an order of buyback while entertaining a petition under Section 111A of the 1956 Act. The NCLAT by its order dated 6 December, 2018 allowed the appeal and set aside the order passed by the NCLT.

Before the Apex Court, the appellants contented that the SEBI Act must be read in addition to, and not in derogation of the Companies Act and that no timely intimation in the prescribed format was given by the respondents when Regulation 7(1) of the SEBI (SAST) Regulations 2011 got triggered. Per contra, the respondents argued that filing a petition under Section 111A is an abuse of process as the petition did not allege any violation of the SEBI (SAST) Regulations and no amendment was made either. The respondents contented that there was no violation of the SEBI (SAST) Regulations, 2011 as the respondents had given a timely intimation in the prescribed format.

The Top Court determined two primary issues:

1. What is the scope and ambit of Section 111A of the 1956 Act, as amended by Section 59 of the 2013 Act, to rectify the register of members?

2. Which is the appropriate forum for adjudication and determination of violations and consequent actions under the SEBI (SAST) Regulations 1997 and the SEBI (PIT) Regulations 1992?

The Court on the first issue asserted that according to Section 59 of the Companies Act, 2013, rectification provision granted to NCLT is a summary power to carry out corrections or rectifications in the register of members. The Court comparatively analyzed Sections 155 and 111A of 1956 Act with Section 59 of 2013 Act and noted that rectification must relate to and be confined to the facts that are evident and need no serious enquiry.

On the second issue, the Court highlighted the roles and duties of the market regulator. The Apex Court was of the view that the regulatory jurisdiction of the Board also includes ex-ante powers to predict a possible violation and take preventive measures. The Court pertinently noted that the SEBI has the power under Regulation 11 to pass necessary directions to remedy an act of insider trading in order to have a complete and comprehensive control over the securities market.

The Apex Court concluded the Appellant was not justified in invoking the jurisdiction of the CLB under Section 111A of the Act for violation of SEBI regulations and that the NCLT exceeded its jurisdiction and committed an error in entertaining and allowing the company petition filed under Section 111A of the 1956 Act.