The Securities Appellate Tribunal -SAT dismissed an appeal filed by Reliance Industries in the company's dispute with SEBI regarding alleged contravention of FUTP regulations ahead of the 2007 merger between Reliance Petroleum and RIL
The Securities Appellate Tribunal (SAT) on Monday dismissed an appeal filed by Reliance Industries Ltd (RIL) against a Rs11 crore penalty order passed by market regulator Securities and Exchange Board of India (SEBI). The market regulator had imposed the fine on RIL, the country's largest private company, for alleged violations of insider trading norms and contravention of its regulations on Fraudulent and Unfair Trade Practices (FUTP).
The SAT has been hearing almost over seven-year-old case of alleged insider trading arising from the merger of Reliance Petroleum Ltd (RPL) with RIL back in 2007. The dispute relates to alleged contravention of the FUTP regulations ahead of the 2007 merger between RPL and RIL.
Earlier in January 2014, the SAT sought clarification from SEBI and RIL on how new consent settlement norms would affect the ongoing case between the regulator and the company.
In May 2012, SEBI tightened the regulations for settlement through consent framework, as a result of which many cases including those related to insider trading, cannot be settled through this mechanism. SEBI notified a stricter set of consent norms that exclude settlement of serious offences such as insider trading, front-running, violations of listing disclosure norms and illegal pooling of money, among others.
The new norms are retrospective and apply to all cases from 20 April 2007. SEBI also excluded all pending cases from the consent settlement process and made it mandatory for an affected party to file for consent within 60 days of receiving a SEBI show-cause notice.
Reliance had said that when the impugned trades had taken place the new SEBI norms on insider trading were not in force. The SAT said that the norms were passed retrospectively and as such did not leave room for RIL to challenge the SEBI order.
Earlier, SAT had rejected RIL's plea to settle the case through consent orders thrice. The SEBI order rejecting the RIL plea to settle through Consent Orders noted the violations as “Alleged violation of regulation 3 of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 in the matter of Indian Petrochemicals Corp Ltd.”
SEBI on 3 January 2013 made public a list of 149 consent applications, including 16 from various entities related to RIL group, which it had found unsuitable for settlement through consent process.
As per SEBI, these 149 consent applications were rejected as they were not found to be in consonance with the revised guidelines. SEBI said that proceedings in these cases will continue in accordance with law.
These include 13 applications from various entities in a case involving alleged violation of SEBI regulations for “Prohibition of FUTP” in a matter of RIL’s erstwhile subsidiary Reliance Petroleum.
Besides, there are three applications related to alleged violation of “Prohibition of Insider Trading Regulations” in the matter of another erstwhile RIL group company—IPCL—which used to be a government-owned company and was later acquired by Mukesh Ambani-led group as part of a disinvestment exercise.
Both the companies, Reliance Petroleum and IPCL, used to be separately listed entities, but were later acquired by RIL and got delisted from the stock exchanges. The merger process for RPL was completed in 2009.
With the implementation of the pre-requisite to have at least one resident director, foreign companies doing business in India will now have a tough time ensuring the residency requirement
The Ministry of Corporate Affairs (MCA) seems to be in top gear, issuing clarifications, circulars and notifications in response to the numerous queries and representations received from various stakeholders. In the case of directors, MCA clarified rules about Independent Directors a few days ago and now subsequent to examining the matter, MCA has issued clarifications on residency requirements.
Provisions under Companies Act, 2013
Section 149(3) of the Companies Act 2013 (Act, 2013) stipulates following requirement:
“(3) Every company shall have at least one director who has stayed in India for a total period of not less than one hundred and eighty -two days in the previous calendar year.”
The section has been enforced with effect from 1 April 2014 and has led to confusion regarding the applicability of this provision in the current financial year/ calendar year. So, in order to eliminate any sort of confusion, MCA has come out with a clarification vide General Circular No 25/2014 dated 25 June 2014 ( ).
Previous Calendar Year - clarified
The applicability of section 149 (3) mandating the residency requirement for a total period of not less than 182 days in the previous calendar year shall commence from 1 April 2014. The period from 1st April 2014 till 31 December 2014 (Calendar Year 2014) will be period taken into consideration for ensuring compliance with previous calendar year. Accordingly, the number of days for which the director(s) need to be a resident in India, during the above mentioned period shall be computed proportionately (instead of 182 days) and in all cases shall exceed 136 days.
Position for recently incorporated companies
The MCA clarified that Companies incorporated between 1 April 2014 to 30 September 2014 should have a resident director either at the incorporation stage itself or within six months of their incorporation. Further, Companies incorporated after 30 September 2014 needs to have the resident director from the date of incorporation itself.
Impact of this provision on Companies
The residency requirement will ensure that the Board shall continue to monitor directly the management of the company on a regular basis and shall be responsible for acts and deeds of the company. The continued presence of at least one director will not delay statutory action steps and will be a step forward towards meeting the timely corporate compliance requirements. Moreover, this provision will mostly affect foreign companies intending to start businesses in India, earlier they used to typically appoint foreign directors as the directors of the Indian subsidiary because such a requirement was missing in the Act of 1956. The intention of the Section 149 (3) is not limited to incorporation, but at all times thereafter, in order to ensure that there will be at least one resident director in case any issue arises with regard to the accountability of the Board. With the implementation of this pre-requisite, foreign companies doing business in India will now have a tough time ensuring the same.
(Nikita Snehil works with Vinod Kothari & Co)
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