“Good governance with good intentions is the hallmark of our government. Implementation with integrity is our core passion.”

- Narendra Modi

Background:

While it is not unusual for capital and commodities market regulator Securities and Exchange Board of India (SEBI) to impose monetary penalties on listed companies, stock exchanges and intermediaries, last night, it issued a bold yet thoughtful Adjudication Order in as much as it imposes penalty on another statutory body National Highways Authority of India (NHAI), constituted under section 3 of National Highways Authority of India Act, 1988 (NHAI Act).

The order has been passed by SEBI Adjudicating Officer (AO) Mr. Prasanta Mahapatra in the rank of Chief General Manager, imposing a penalty of Rs. 7 lakhs on NHAI under section 15A(b) of SEBI Act, 1992 (SEBI Act) for delayed disclosure of half-yearly unaudited financial results as required under Regulation 52(1) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations).

Although the penalty imposed is meagre, the order is one-of-a-kind and sets the tone for compliance sought from government undertakings or statutory bodies involved in public issuances.

Just to remind the readers, in the year 2011, NHAI had come up with the issue of India's first ever tax-free secured redeemable non-convertible bonds with a 10,000 crore limit. Such bonds had a tenure of 10 and 15 years. Subsequently, NHAI came up with a public issue of bonds worth Rs. 5000 crores during FY 2013-14 and an issue worth Rs. 19000 crore during FY 2015-16. These bonds were listed at BSE and NSE in accordance with SEBI (Issue and Listing of Debt Securities) Regulations, 2008 and LODR Regulations (erstwhile listing agreement). Accordingly, NHAI became a ‘listed entity’ regulated by SEBI.

Factual and Defence Matrix

When NHAI sought an extension of time from SEBI for filing unaudited financials for the year ended 31.03.2019 beyond stipulated time (i.e. 45 days from the end of each half financial year), SEBI found out from stock exchanges 7 instances of delayed disclosure between FY 2015-16 to FY 2018-19 ranging from a delay of 4 days to 78 days.

SEBI had issued an earlier advisory for strict compliance to NHAI, in September 2018.

On seeking reasons for extension, NHAI provided following reasons primarily:

1. It was due to 200 accounting units and need for finalising individual trials;

2. The approval of financials requires a quorum of 2/3rd of its board of directors and 3/4th of part time board members, in accordance with NHAI (Transaction of Business Amendment) Regulations, 2001 which was not met due to preoccupation and non-alignment of availability of members. Without it, no meeting is valid and legal. Further, the financials require confirmation from ministries and officers of the government over whom NHAI had no control;

3. NHAI seeks the approval of the majority of its Board members in relation to all matters including approval of un-audited half yearly results;

4. NHAI has not made any gains due to the delay, nor have there been significant movements in price on declaration of results;

5. AO Show Cause Notice has not identified the ‘officers in default’ under Section 27 of SEBI Act, and therefore, the SCN was bad in law;

6. NHAI also conceded that under the provisions of CrPC, SEBI was required to seek consent from central government before issuing the SCN to NHAI since NHAI is a ‘State’ under Article 12 of the Constitution;

7. NHAI stated that it has endeavoured to reconcile NHAI Act with LODR Regulations and has been prompt and forthcoming in the past in its statutory and contractual obligations.

The AO of SEBI while negating the above submissions reasoned that:

1. There was ‘repeated failure of compliance’ with LODR Regulations by NHAI which continued even after issue of SEBI advisory;

2. The LODR Regulations do not provide for relaxation of the provisions on account of procedural challenges;

3. Irrespective of personal gain, when a law prescribes a manner of disclosure, deviating from the manner deprives the public of information.

4. With respect to identifying ‘officers in default’ the AO observed that proceeding against the officers was outside the scope of these proceedings which was restricted to the listed entity not complying with Regulation 52 of the LODR Regulations.

5. There was no requirement of prior consent from the government as these inquiry proceedings are quasi-judicial in nature, distinct from a criminal action.

Stressing on the importance of timely disclosure, the AO observed that financials are a barometer of company’s operations and apart from investors, operational creditors, lending institutions also gauge profitability of the company based on the financials before opening a credit line. Timely disclosures are essential to ensure transparency.

Regulatory architecture of SEBI and NHAI

Whereas SEBI’s functions (under section 11 of SEBI Act) relate to protecting the interests of investors in securities and to promote the development of, and to regulate the securities market, NHAI’s functions (under section 16 of NHAI Act) relate to developing, maintaining and managing the national highways and any other highways vested in, or entrusted to, it by the Government.

NHAI consists of a Chairman, not more 6 Full Time Members and not more than 6 part-time members. SEBI on the other hand has a Chairman, a nominee each from the Ministry of Finance, Ministry of Corporate Affairs and Reserve Bank of India and 5 other members of whom at least 3 are whole-time members.

NHAI is tasked with providing and maintaining important projects inter alia National Highways Development Project (NHDP), Golden Quadrilateral, North–South & East–West Corridor, National Green Highway Mission. SEBI regulates securities market.

Administratively, NHAI falls under the aegis of Ministry of Road Transport and Highways, and SEBI under the aegis of Ministry of Finance – both ministries being the arm of Government of India.

Similar to SEBI’s powers to frame regulations which are required to be placed before parliament (sections 30, 31 of SEBI Act), NHAI is also empowered to frame regulations (sections 35, 37 of NHAI Act).

In terms of preparation of accounts of SEBI, it has to follow the process provided under Section 15 of SEBI Act read with SEBI (Form of Annual Statement of Accounts and Records) Rules 1994 in consultation with the CAG of India. Board meetings of SEBI and requirements of quorum (majority of present) are provided in Section 7 of SEBI Act read with SEBI (Procedure of Board Meetings) Regulations, 2001. For listed entities, SEBI has prescribed requirement of quorum in Regulation 17 and the effect of lack of quorum is only adjournment of meeting.

For NHAI, similar requirements of preparation of accounts in consultation with CAG of India are provided under Section 23 of NHAI Act read with NHAI (Budget, Accounts, Audit, Investment of Funds, and Powers to enter premises) Rules, 1990 and its board meetings have to be in accordance with Section 7 of NHAI Act read with NHAI (Transaction of Business) Regulations, 1997 that requires a quorum of 2/3^rd of its board of directors and 3/4^th of part time board members.

It may be noted that the provisions of SEBI Act are in addition to, and not in derogation of, the provisions of any other law for the time being in force. On the other hand, such a provision is non-existent in NHAI Act - providing no overriding effect.

The View

The SEBI AO Order is set in the belief that for an efficient enforcement of securities laws, there can be no support towards those who violate law repeatedly. The order also instils the faith in a bondholder that an entity that has raised moneys through public issues has to be pinned to a minimum standard of disclosure, irrespective of the listed entity being a statutory body or public financial institution.

Although this order of SEBI is one-of-its-kind from a compliance point of view, it would be welcoming if such enforcement is also meted out to all those public and private corporations where woman directors have not been appointed despite multiple warnings.

This penalty order does not augur well for international investments in NHAI’s vision to provide and maintain national highways of global standard. The AO Order nudges the Government of India to appoint members on the board of NHAI in case of vacancy and calls for review of their functioning through conduct of meetings and calling for records to have transparency to stakeholders. It highlights the functioning and limitations of NHAI and raises significant questions on the manner it is governed.

If SEBI Order is appealed, the SAT would have to determine, can ‘lack of quorum or meeting’ be a defence for a non-disclosure or delayed disclosure.

Another legal question would be whether a default by a listed entity can be determined without lifting the veil or examining the directing mind, or without looking into ‘who was in charge of and was responsible to the company’ especially when SEBI itself pins the responsibility on the board of directors or on compliance officers, in many other cases.

Time will tell if the matter is litigated or more likely, settled under SEBI (Settlement Proceedings) Regulations, 2018 without denial or admission.

The author is Sumit Agrawal, Founder of Regstreet Law Advisors, author of a book on SEBI Act and a former Sebi official. He can be reached at sumit@regsla.com.