SAT quashes SEBI's order to restrain director from accessing Securities market

SAT quashes SEBI's order to restrain director from accessing Securities market

An order passed by the Securities and Exchange Board of India (SEBI) against director of Falcon Tyres Ltd and non-executive director of Dunlop India Ltd has been quashed by the Securities Appellate Tribunal (SAT). The SEBI had restrained them from accessing the securities market for two years for allegedly violating certain provisions of the Listing Agreement and Securities Contracts (Regulation) Rules (SCRR) minimum public shareholding (MPS) requirement.

The order further prohibited them from buying, selling or otherwise dealing in securities, directly or indirectly, or being associated with the securities market in any manner. Additionally, the appellants were also restrained from being associated with any other listed company or SEBI registered intermediary, in any capacity either as a director or as a key managerial person, directly or indirectly, for a period of two years.

Pawan Kumar Ruia, was director and executive chairman of Falcon Tyres Limited while Mohan Lall Chauhan was non-executive director in Dunlop India Limited.

Aggrieved by the order, two appeals were filed in the tribunal against the SEBI order dated 24 March 2021.

SEBI had conducted an investigation regarding the acquisition of shares of Falcon Tyres Limited and Dunlop India Limited by certain entities through preferential allotment. Based on the investigation, a show cause notice (SCN) dated 24 April 2018 was issued to Falcon Tyres Limited, Pawan Kumar Ruia, Sunil Bhansali, S. Ravi, Mohan Lall Chauhan and Damodar Prasad.

Holding that "…violation of Clause 40A of the Listing Agreement read with 19(A) of the SCRR has to be first found against the company and only thereafter SEBI can proceed against the directors who were responsible for the conduct of the business of the company at the time when the violation was committed.", the appellate tribunal asserted that the no proceedings could have been initiated against the appellant without first initiating proceedings against its company i.e. Dunlop.

SAT noted that the SCN issued by SEBI inter alia alleged that the entire scheme of assignment of loan by the group companies of Falcon and Dunlop to three specific entities and subsequent conversion of the loan into equity shares through preferential allotment of shares was done by Falcon and Dunlop in collusion with their group companies and the three preferential allottees with a view to avoid MPS requirements under Clause 40A of the Listing Agreement and was also violative of Rule 19(A) of SCRR.

On finding that the three assignee companies are not promoter group companies of Falcon or Dunlop, SAT observed that "…the company had rightly shown the shareholdings of the three assignee companies as public shareholdings…further…the shareholdings of the assignee companies cannot be clubbed together with the shareholding of the promoter group of Falcon or Dunlop respectively".

It was noted that appellant as an independent director has been penalized for non-compliance of MPS requirement, whereas, the obligation to comply with the said requirement is upon the company, however, in the instant case, Dunlop has not been made a party and no SCN has been issued to Dunlop, the tribunal remarked that "…in the absence of the company being made a party, no proceedings can be initiated against the director of the company."

Thus, the appeal was allowed and the accordingly the order passed by SEBI was quashed.