Vide Order dated 20.04.2018, SEBI held Suzlon Energy Limited (hereinafter referred to as “SEL”) liable for failure to make specific corporate announcements with respect to truncation or cancellation of orders which were earlier announced by the Company when grasped.

On failure to make such disclosures; the Adjudicating Officer has held the Company liable of penalty under section 23A (e) of SCRA and 23E of SCRA and levied penalty of Rs. 5 lakhs and Rs. 1 Crore respectively under the said provisions. In addition the Company as well the Compliance officer of the Company is found guilty for violation of Code of Conduct under SEBI (PIT) Regulations and hence, a penalty of Rs. 5 Lakhs imposed on the Company and the Compliance Officer under Section 15HB of the SEBI Act.

Background of the Case:

SEBI had initiated an investigation against SEL to determine the veracity of the Corporate Announcements made by the Company during the period from April 1, 2006 to March 31, 2009 and the impact of the announcements on the scrip of the Company.

Investigation in the matter revealed that SEL made around 250 corporate announcements during the investigation period out of which thirty corporate announcements were regarding orders, worth around Rs. 30,662 Cr received by it.

SEBI observed that orders worth approx Rs. 5764 Cr i.e. around 18.80% of the order received and informed by way of various corporate announcements during the period; were either not opted for by the clients or were not executed (truncated or cancelled). It is observed that with respect to certain specific orders, no specific corporate announcement was made by SEL to inform stakeholders about the truncation or cancellation.

In its defense, SEL amongst various defenses had also contended before SEBI that it is incorrect to allege that the market was not informed about their cancellation or non-execution. The Company had provided a periodic update of its ‘order book position’, which comprised information about the value orders that were received, reduced by the value of orders which were either cancelled or un-executed. It also contended that the orders so received and disclosed did not experience any much movement in the price and hence were not considered as Price sensitive at the time of truncation or cancellation.

Issues raised in the matter:

1. Whether SEL and other Noticees have violated section 21 of SCRA read with clause 36 of Listing Agreement? Do the violations, if any, attract monetary penalty under sections 23 A (a) and 23E of SCRA and
2. Whether SEL and other Noticees have violated clause 2.1 of Schedule II Code of Corporate disclosure practices for prevention of Insider Trading, read with regulation 12(2) of PIT, 1992 read with regulation 12 of PIT, 2015? Do the violations, if any, attract monetary penalty under section 15HB of SEBI Act?
3. Whether the Compliance Officer had violated clause 3.2 of Schedule II read with regulation 12(2) of PIT, 1992 read with regulation 12 of PIT, 2015?

SEBI’s observations:

1. That every time SEL had received any order, considering order as price sensitive information, it made timely disclosures to the stock exchange. Drawing a parallel to this, truncation/ cancellation /right of entity to cancel order, should have also been treated as Price Sensitive Information (PSI) and timely disclosure of the same should have been made. Hence, the stand taken by SEL that since the announcement of receiving the order did not have much bearing on the market price when the said announcement was made; truncation/cancel of orders was deemed to be not PSI or material was not accepted by SEBI.
2. Further, SEBI rejected the contention put forth by SEL that all cancellations and annulment of orders were duly updated in the Order book and hence information available in public domain and world at large is aware of the update stating that if the same held good then there would have been no requirement for SEL to make corporate announcement on receipt of orders and that SEL cannot resort to different set of rules for its convenience. It also rejected the plea that there is no timeline mentioned in clause 36 of listing agreement and noted that it is clearly mentioned in the Clause 36 that information mentioned therein should be disclosed immediately. Accordingly, SEBI held that SEL had violated section 21 of SCRA read with clause 36 of listing agreement.
3. SEBI laid down that “Materiality can be determined either based on quantitative parameters or based on qualitative parameters. The quantitative parameters are linked to the financials of the entity whereas qualitative parameters are to be linked to the likely impact of the nondisclosure on the market as also the decision making process of the investors”. On the failure of SEL to elucidate as to why it considered that the orders cancelled/ truncated by Edison and Horizon were price sensitive and the orders truncated/ cancelled by Reliance Energy Limited, P.R China and DLF Home Developers were not price sensitive in nature, SEBI also held SEL liable for the violation of Clause 2.1 of Code Of Conduct under PIT, 1992, which directs a listed company to give price sensitive information to stock exchanges on a continuous and immediate basis.
4. In lieu of the provisions of Clause 3.2 of code of conduct, SEBI while imposing penalty on the Compliance Officer, laid down that it is the liability of the compliance officer to ensure that the Company complies with all its legal obligations.

Key Takeaways:

1. No specific liability has been cast on the managing director or the executive director of the company for making disclosures pertaining to material/price sensitive information and the same has been fastened only on the Company.
2. Every Company should define a standard yardstick for making corporate announcements to ensure that uniformity is maintained.
3. The obligations stipulated in the provisions of SCRA and Listing Agreement mandate that any information/Event which is price sensitive should be reported to the stock exchange immediately by a listed company.
4. Code of Conduct under PIT Regulations casts the onus on the Compliance Officer of a Company to ensure that the Company complies with all its legal obligations.