Wednesday, February 20, 2013

SEBI Adjudication Order: “Persons Acting in Concert”


Nearly three years ago, we had discussed SEBI’s initial order relating to trading of shares in Bank of Rajasthan (BoR). Last week, the adjudicating officer of SEBI has passed an order imposing a heft penalty on 118 entities that traded in shares of for violation of the provisions of the SEBI Takeover Regulations and the SEBI Regulations on Fraudulent and Unfair Trade Practices.

The facts of the case are detailed in the previous post, but they are again summarized in the SEBI adjudicating officer’s order:

… though as per disclosure their holding seemed to have reduced, investigation observed that in reality the holding of the promoters actually increased with the active collusion of front entities who were alleged to be the persons acting in concert (PACs). Thus, it was observed that the shareholding of the promoters of BoR alongwith entities who were alleged to be PACs had increased from 46.80% in June 2007 to 63.15% in December 2009. …  It was alleged that while the Promoter Group conveyed the impression that they were reducing their shareholding, they did not dilute their controlling stake in BoR. On the contrary they had actually increased their holding in a deceptive manner with the active collusion of their PACs, that is, the Tayal Group, the Silvassa Group and the Yadav Group.

One of the key questions was whether the several entities that engaged in the sale and purchase of shares of BoR were interconnected and hence persons acting in concert for purpose of the Takeover Regulations. The test applied by the adjudicating officer after analyzing the various relationships between the entities and the trades among them is as follows:

In view of the above, I find that connections/ relations have been established on the basis of common directors, common addresses, fund transfers, off market transfer of shares, and the submission of the Noticees is devoid of merit. Accordingly, I hold that the Promoter, Tayal, Yadav and Silvassa group were PACs.

The adjudicating officer has sought to establish interconnectedness among the various entities using circumstantial evidence. While it is understandable that it would be difficult to adduce any direct evidence regarding common intention or purpose to obtain control over a company, the sustainability of an order only on the basis of circumstantial evidence remains to be seen.

3 comments:

vswami said...

Impromptu (for sharing thoughts):
Without one concerning self about the merits or otherwise, in any manner, of the ‘adjudicatory’ order discussed, but purely for an academic debate, the key expressions as are readily identifiable from the write-up are, -“.... in a deceptive manner with the active collusion of their PACs,..” : “...only on the basis of circumstantial evidence...” and “...it would be difficult to adduce any direct evidence regarding common intention or purpose...”
Perhaps, in the further proceedings most likely to follow, these are the aspects, being of a vital nature, could be expected to be gone into.
Be that as it should, purely for useful academic discussion among the legal fraternity, one has the following points to pose:
1.Even in matters involving/having the attributes of ‘criminality’, within its meaning under the criminal law, the concept of ‘mens rea’ is, to one’s understanding, not the only deciding criterion; though one of several others.

2.To one’s recollection, in court cases adjudicating on similar issues but arising under the taxation laws, -adjudicated in recent times,on the critically core areas such as, ‘Form v Substance’, ‘Evasion v Avoidance’,so on -the judiciary , in one’s understanding, has not considered it prudent to go by or accept pleadings pitched on the patently dubious, besides being highly vague theoretical ideas, of,-‘intention’, ‘purpose’, so on.

3.Likewise, the concepts of ‘relation’ , ‘related party’ , or the like, cannot be, in the view taken by courts, be the deciding criterion, in no event be the sole factor, in disputes pivoted on the genuineness or legal validity of any commercial transaction.

-may be contd.

vswami said...

To Add-on (further thoughts):
1. As indicated, the concepts of ‘intention’, ‘purpose’ and the like have, time and again, come to be seriously discussed /adjudicated in the context of the law on income-tax. To pin point, those are mainly instances in which amendments of the law were resorted to, many times retrospectively, by invoking those excuses, subjectively, by way of justifying the changes made. For an elaboration of the viewpoints focussed on, reference be made to the published article, -169 Taxman (Mag) pg. 14.
2. As regards the controversy rested on the other concept of ‘related ‘ party transactions , lately that has assumed greater momentum, in the closely connected context of the enactment newly made, popularly known as “transfer pricing provisions”. In the IT Act, section 245R provides that the AAR shall not allow the application to him for an advance ruling if the question raised “relates to a transaction or issue which is designed prima facie for the avoidance of income-tax.” According to the view as canvassed in a published article the said enactment is patently illogical, being devoid of any rational justification. This is an aspect dealt with in detail in the article, - 166 Taxman (Mag), 72.
3.The concluding paragraph above refers to ‘circumstantial evidence’. On an independent reading of the AO’s order, however, one finds no such ‘evidence’ made a mention of or borne out.

In any case, the following noteworthy observations seem to suggest to the contrary, and convey a different impression:

“79. While it has been concluded hereinabove that certain Noticees, as named above, have violated the provisions of 11 (2) of the SAST Regulations, the consequences thereon for such violations ought to follow. However, in this instant case, the target company, that is, BoR, has already been merged with another entity and the company has ceased to exist. Given these peculiar circumstances, the issue is being considered a fit case of imposing a monetary penalty.”

vswami said...

Viewed from a different,not unrelated,Angle:

The point sought to be made in the previous comment will be better appreciated by reading also the preceding paragraph 78, reproduced below:
“78. It is difficult, in cases of such nature, to quantify exactly the disproportionate gains or unfair advantage enjoyed by an entity and the consequent losses suffered by the investors. I have noted that the investigation report also does not dwell on the extent of specific gains made by the Noticees. However, the manipulations as elaborated above are a threat to the safety and integrity of market and thus loss to the investors to that extent. I observe that the game plan of the Noticees continued for over a period of more than two years and hence was of a repetitive nature.”
In one’s understanding, the case on hand has been decided to be a fit one for imposing penalty, more on the grounds of a technical or venial breach of the SEBI made regulatory rules (not strictly legislature made rules as of any 'statute'), rather than on any conclusively evidenced/proven circumstances pointing to strictly a ‘fraud’ within its criminal sense; or, to borrow terms from tax cases, even any ‘conduct contumacious’ in ‘defiance of the law’.
As one imagines, either immediately or at a later point in time,- that is if and when the impost happens to be finally upheld,- in deciding any claim for its tax deduction, the foregoing aspects may be expected to be pressed into service by the 'impostees'.

These observations volunteered ab- extra with a view to completeness of the other taxation angle involved may be found to be in line with the plethora of decided court cases under the law on income-tax.