SEBI appeal against its listing power is improper

The Securities and Exchange Board of India (SEBI) is reported to have appealed a decision by the Securities Appellate Tribunal (SAT) that over-ruled the Bombay Stock Exchange’s (BSE) refusal to issue an in-principle listing approval to a listed company.

SEBI’s decision to appeal is worthy of raising eye-brows although the judgement of the SAT may raise a technical question of law.

Under the listing agreement between stock exchanges and listed companies, listed companies require an in-principle listing approval of the stock exchange for issuance of further shares. When granting such approval, stock exchanges check if the issuance of securities is in compliance with the requirements imposed by SEBI.

A listed company had to make two allotments under the Corporate Debt Restructuring Scheme notified by the Reserve Bank of India (CDR) to its lenders. The BSE had refused the in-principle listing approval on the ground that technical requirements under the SEBI (Disclosure and Investor Protection) Guidelines, 2000 (Guidelines) were not met.

The allotment had been made after a period of prescribed deadline of 15 days from the shareholder authorisation of the allotment. Moreover, the prior shareholding of the allottees was not in demat form, and that the listed company was not able to demonstrate that prior shareholding of the allottees had been locked in for six months before allotment — both, requirements of the Guidelines.

SAT rejected the first ground because, under the Guidelines, allotments under the CDR were not covered by the 15-day deadline for allotment. Moreover, the listed company demonstrated that it had diligently pursued the allottees (banks and financial institutions) to provide their physical share certificates for being dematerialised, but the allottees did not provide the certificates. Therefore, the certificates too could not be rubber-stamped with the legend containing lock-in requirements for the six-month period prior to the allotment. There was no allegation that the allottees had indeed sold shares prior to the allotment. Therefore, the non-conformity by the listed company on these two grounds were technical, and beyond its control

In setting aside the ground of technical non-conformity, the SAT invoked the powers of SEBI under the Guidelines to waive technical non-compliance with the Guidelines. SEBI has appealed against the decision on the ground that such power could have been exercised only by SEBI and not by the SAT. While this may be a question of law that entitles SEBI to appeal, there is a central policy aspect that this situation highlights.

In every appeal before the SAT against a refusal to grant listing, SEBI’s position has invariably been that SEBI does not have any say in disputes between stock exchanges and listed companies. Indeed, where listed companies have made SEBI a party to the proceedings, SEBI has filed affidavits stating that it ought not to be made a party in such disputes. Even in the current case where SEBI has appealed to the Supreme Court, it is evident that SEBI did not make any argument, although it was made a party.

Against this backdrop, SEBI’s decision to appeal the SAT judgement on the ground SEBI has the power to waive a technical inconsequential breach, does not sound right. SEBI should either proactively enter into the arena of problems faced by listed companies with stock exchanges (there is a plethora here – numerous appeals are filed in the SAT against listing refusal by the BSE), or SEBI should be consistent with its sworn statements, and not oppose the SAT’s invocation of statutory appellate jurisdiction.

It is settled law that an appellate body has the power to exercise all the powers capable of being exercised by the authority below. Therefore, if the BSE could refuse listing, an appellate body can allow listing. SAT having invoked a provision that enables SEBI to grant a waiver, by itself, does not seem to raise a serious enough ground for filing an appeal in a case involving an inconsequential and technical breach. Over time, stock exchanges seem to have lost their ability to decide controversies and keep looking to SEBI, often resulting in significant delays in listing. The latest appeal will further that culture. (The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.)

somasekhar@jsalaw.com