A tale of two competing delays

By upholding a Sebi order on delayed disclosures by a bank, SAT has clarified a host of vexing issues

A recent ruling by the Securities Appellate Tribunal (SAT) up­holding an order passed by the capital market regulator holding that a listed bank delayed requisite disclosures, but converting the penalty of Rs 10 lakh into a warning due to delay in enforcement, stands out for the cogent clarity on some core issues.

Essentially, the tribunal dismissed arguments about how a binding agreement between the promoters of a bank with another bank, whereby the business undertaking would be merged, was not required to be disclosed. However, the proceedings having been initiated nearly a decade after the event, leading up to an imposition of a penalty of Rs 10 lakh, the tribunal replaced the penalty with a warning. That is the net outcome, but the order is more relevant for why the tribunal reached these conclusions.

On the first issue, the appellant’s argument that an agreement between a listed company and the promoters of another listed company is not required to be disclosed has been dismissed. The argument was that the agreement was not between the two listed companies themselves and one of the sides was represented by the promoters and not the company that would eventually merge. Another argument was that the agreement was a contingent contract, and would not have run its course if the conditions attached to it had not been met — for example, approval by the central bank for the merger.

Dismissing these arguments, the tribunal has provided welcome clarity on how to determine materiality and degree of certainty of such events. “While certainty is paramount for a contract, materiality of an event is what is tested in disclosure; if the event does not fructify disclose that as well with reasons explained,” the tribunal’s order notes.  Analysing the certainty, the tribunal noted that the agreement was signed by the dominant shareholders and office-bearers of the bank being taken over, which would point to the agreement not being some draft that is nowhere linked to a possible reality. Interestingly, the company whose promoters signed the same agreement made a disclosure of the agreement.

The agreement contained provisions that were certain and conclusive, the tribunal noted. It contained the share swap ratio and the substantive and procedural terms of the proposed merger. “Facts relating to this (sic) timelines would undoubtedly indicate a well planned and well executed plan suiting professional companies leaving no element of practical uncertainty regarding the Binding Agreement, though legally many a hornets’ nest can be raised about its binding, contractual nature, which is though not the basis of disclosure law,” the Tribunal has noted. “The reason why disclosure regulations are more onerous and continuous in nature in a disclosure-based regime is because of this market dynamics which factors in every single bit of information which is material to the security of an entity continuously on real time basis.”

Holding that if disclosures in such circumstances had to await complete certainty and completion of material corporate actions, disclosure laws would become redundant, the tribunal has ruled that core regulations prohibiting insider trading would also become a casualty. “The purpose and spirit of disclosure in a disclosure-based regulatory regime is simple and clear; disclose all material and price sensitive events/information and disclose even when one is in doubt. It does not have to be tested with finer legal examination, hairsplitting arguments or semantics.”

On the second issue, the tribunal, reiterating the reasoning it has already set out in multiple judgments in the past, has explained the approach to determining whether delays and laches in enforcement proceedings are fatal to imposition of penalty. “Moreover, corrective actions relating to market violations have to be taken by the regulator as early as possible, at least soon after it becomes known to the regulator, for appropriately punishing the guilty not only for the sake of modifying the behaviour of the violator but also for sending strong messages to the market participants in general,” the tribunal has ruled. In this case, the charge was that there was one trading day’s delay in disclosure, but the delay on the part of the regulator to issue the show cause notice was 2,955 days from the date of the event and about 2,130 days from the date of the preliminary investigation report –  “too wide a gap to be ignored,” in the tribunal’s words.

The Securities and Exchange Board of India’s (Sebi’s) argument that the ground of delay not having been argued before Sebi could not be raised at an appellate stage has been rejected. “Sometimes pleadings are expressed in words which may not expressly make out a case in accordance with strict interpretation of law, in which case, it is the duty of the Court to ascertain the substance of the pleadings in order to determine the question,” the tribunal ruled, holding that if in substance, the point has been argued without explicitly making it in the same language, it would be a valid ground of an appeal. Holding that if an issue is a question of law, and goes to the root of the problem, it can indeed be raised at any stage, the tribunal has replaced the penalty with a warning.

The author is an advocate and independent counsel; Twitter: @SomasekharS