SAT Quashes SEBI Order Penalising Director for Minimum Public Shareholding Violation Without First Proceeding Against Company
Moneylife Digital Team 09 September 2022
The Securities Appellate Tribunal (SAT) has quashed the order passed by Securities and Exchange Board of India (SEBI) against a director of Falcon Tyres Ltd and a non-executive director of Dunlop India Ltd inter alia restraining them from accessing the securities market for a period of two years for allegedly violating certain provisions of the Listing Agreement and Securities Contracts (Regulation) Rules (SCRR) minimum public shareholding (MPS) requirement.
Two appeals were filed in the tribunal against the SEBI order dated 24 March 2021 which restrained the appellants (Mohan Lall Chauhan and Pawan Kumar Ruia) from accessing the securities market for a period of two years and further prohibited them from buying, selling or otherwise dealing in securities, directly or indirectly, or being associated with the securities market in any manner. Additionally,the appellants were also restrained from being associated with any other listed company or SEBI registered intermediary, in any capacity either as a director or as a key managerial person, directly or indirectly, for a period of two years.  
SEBI conducted an investigation regarding the acquisition of shares of Falcon Tyres Limited and Dunlop India Limited by certain entities through preferential allotment. Based on the investigation, a show cause notice (SCN) dated 24 April 2018 was issued to Falcon Tyres Limited, Pawan Kumar Ruia, Sunil  Bhansali, S. Ravi, Mohan Lall Chauhan and Damodar Prasad. 
Pawan Kumar Ruia, was director and executive chairman of Falcon Tyres Limited  while Mohan Lall Chauhan was non-executive director in Dunlop India Limited
Holding that “…violation of Clause 40A of the Listing Agreement read with 19(A) of the SCRR has to be first found against the company and only thereafter SEBI can proceed against the directors who were responsible for the conduct of the business of the company at the time when the violation was committed.”, the appellate tribunal asserted that the no proceedings could have been initiated against the appellant without first initiating proceedings against its company i.e. Dunlop.
SAT noted that the SCN issued by SEBI inter alia alleged that the entire scheme of assignment of loan by the group companies of Falcon and Dunlop to three specific entities and subsequent conversion of the loan into equity shares through preferential allotment of shares was done by Falcon and Dunlop in collusion with their group companies and the three preferential allottees with a view to avoid MPS requirements under Clause 40A of the Listing Agreement and was also violative of Rule 19(A) of SCRR.
On finding that the three assignee companies are not promoter group companies of Falcon or Dunlop, SAT observed that “…the company had rightly shown the shareholdings of the three assignee companies as public shareholdings…further…the shareholdings of the assignee companies cannot be clubbed together with the shareholding of the promoter group of Falcon or Dunlop respectively”. 
Lastly, noting that appellant as an independent director has been penalised for non-compliance of MPS requirement, whereas, the obligation to comply with the said requirement is upon the company, however, in the instant case, Dunlop has not been made a party and no SCN has been issued to Dunlop, the tribunal remarked that “…in the absence of the company being made a party, no proceedings can be initiated against the director of the company.”
The tribunal thus concluded that “…the impugned order against the appellants cannot be sustained.”, and allowed the appeal. 
The order was passed by justice Tarun Agarwala (presiding officer), justice MT Joshi (judicial member) and Ms Meera Swarup (technical member).
Advocates Kunal Katariya, Sahebrao Wamanrao Buktare and Chirag Shah appeared on behalf of the appellant, whereas SEBI was represented by advocates Anubha Rastogi, Chirag Shah and Tanmay Gor.
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