Incorrectly Labeled Promoter couldn’t be Penalized if the Company did not follow LODR Regulation 31A

Case Details: Kashyap K. Mehta v. BSE Ltd. - [2023] 148 taxmann.com 375 (SAT-Mumbai)

Judiciary and Counsel Details

• • Tarun Agarwala, Presiding Officer & Ms Meera Swarup, Technical Member
  • Ms Akansha Jain, Practicing Company Secretary for the Appellant.
  • Pesi Modi, Sr. Adv., Manish Chhangani, Ms Samreen Fatima, Sumit Yadav, Pulkit Sukhramani & Ms Vidhi Jhawar, Deepank Anand, Advs. for the Respondent.

Facts of the Case

In the instant case, the appellant acquired 42,909 shares of company ‘M’ and attempted to take control of the company through an open offer. The appellant was classified as a promoter in accordance with the SEBI ((Substantial Acquisition of Shares and Takeovers) (SAST) Regulations, 1997.

However, the offer failed, and the previous board of directors refused to hand over control. As a result, the Board of Directors passed a resolution appointing the appellant as an additional director with a specific stipulation that he would not have any role in the company’s day-to-day affairs and would not be liable for any compliances. Subsequently, the appellant resigned from his position as an additional director.

Ten years later, the appellant’s demat account was frozen as the company failed to pay its annual listing fees. The company informed the respondent that the appellant was not in control of the company as his acquisition of shares to take control over the company had failed. Thus, the appellant was not a promoter and due to a clerical mistake, he was wrongly classified as a promoter in the shareholding pattern of the company. He had now been categorised as a public shareholder.

The Securities Appellant Tribunal (SAT) observed that the respondent refused to unfreeze the demat account, stating that the company had not followed the necessary procedures for reclassifying the appellant in terms of Regulation 31A of the SEBI (LODR) Regulations, 2015.

SAT Held

The SAT held that if a company had defaulted in payment of annual listing fees, then action could be taken against the company under Regulation 24 of the SEBI (Delisting of Equity shares) Regulation, 2009.

The SAT, further held that the appellant could not be penalized merely because the company had not followed the procedure provided under Regulation 31A of the LODR Regulations. Therefore, the order of the respondent to freeze the demat account of the appellant could not be sustained and was to be quashed.