[Krishna is a student at National Law School of India University.]
On 8 November 2024, the Securities and Exchanges Board of India (SEBI) set a precedent in Piramal Pharma Limited (PPL) for unlisted demerged subsidiary companies liable for non-disclosure of potentially material events about their listed predecessors. As precedent, this order is sure to raise eyebrows since it extends disclosure obligations onto unlisted companies and even any unrelated company that enters into a business transfer agreement with the transferor.
The saga dates back to November of 2019 – Piramal Enterprises Limited (PEL) fell under controversy on account of environmental pollution. The Telangana State Pollution Control Board (TSPCB) ordered the closure of PEL’s Digwal manufacturing plant and ordered PEL to pay compensation of INR 8.32 crore. In 2022, PEL underwent restructuring. In March 2020, PPL was incorporated as a subsidiary of PEL. Subsequently, by a scheme of amalgamation, the entire pharmaceutical business was transferred to PPL. As customary, clause 12.2 of the scheme of amalgamation provided that the demerged undertaking (that being PPL) would undertake all legal proceedings of PEL capable of being continued against PPL under relevant law. Clause 4 states “all the liabilities relating to the Demerged Undertaking [pharmaceutical business of PEL], as on the Appointed Date [April 01, 2022] shall become the liabilities of the Resulting Company [PPL] by virtue of this Scheme”.
Due to the aforesaid transfer of liabilities, PPL in fact paid the small remaining portion of the fine levied by TSPCB, the bulk of which was already paid by PEL. In 2022, PPL was listed on the stock exchanges, and thereby fell under the regulatory gaze of the SEBI.
Adjudicating Officer’s Order
In May 2023, SEBI noted that PEL did not disclose either the fact that PPL did not disclose that the National Green Tribunal (NGT) fined its holding company, PEL, nor did it disclose that the Digwal plant was ordered to be closed by TSPCB. The SEBI took further offence to the fact that PEL’s business responsibility report (which were included in PEL’s annual report) completely omitted these facts. However, SEBI could not take action since PPL was not only unlisted at when these events but did not exist altogether. PPL was exonerated.
The Whole-Time Member’s Order
Both the Adjudicating Officer (AO) and the Whole-Time Member (WTM) exonerate PPL from liability for the alleged violation of SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (LODR). However, they differ in rationale. The AO appreciates that PPL was unlisted (and non-existent) when the NGT fine was levied in 2019, and hence had no duty to disclose these facts. Only PEL had to disclose the same.
However, the WTM disagreed – holding held that because the scheme of arrangement transferred all liability from PEL to PPL regarding the pharmaceutical business, and therefore, PPL was under an onus to disclose. This reasoning is flawed. Certainly, while the liability to pay PEL’s fines and settle credits with respect to the pharmaceutical business clearly now rests upon PPL, it cannot mean that statutory duties stood transferred as well. Disclosure obligations are created by legislation, and no scheme of arrangement can transfer these duties to another company, let alone an unlisted one. One cannot simply contract around statutorily-imposed duties, and the WTM has failed to recognize this.
The next issue the WTM grappled with was the fact that PPL was unlisted when the aforementioned events took place. The disclosure obligations under the LODR could not have been extended to PPL during this time – so there was no question of reporting the same. However, the WTM says: “The present proceedings do not seek an answer from the Noticee as to why the relevant disclosures were not made by the Noticee itself at the relevant time. Rather, the presenet proceedings have been initiated to crystalize the liability, if any, emanating from the alleged disclosure violations committed by PEL, out of which, the Pharma Division was carved and is being currently handled by the Noticee in terms of the Scheme.” Effectively, the WTM is attempting to hold PPL liable not for its failure to disclose PEL’s fine, but instead to hold PPL liable for PEL’s failure to report the same.
This reasoning is untenable and absurd as it attempts to blur the line between PEL and PPL despite it being well-established that a subsidiary holds a separate legal identity from its parent. Separate legal identity is a principle with a tested pedigree dating back to Salomon v. Salomon. If it were truly the SEBI’s intention to “crystallize liability emanating from violations committed by PEL”, it should proceed against PEL itself and not it's subsidiary. if the issue is that the parent company has failed to comply with LODR, it makes little sense to hold the subsidiary liable. Ultimately, while SEBI can certainly proceed against PPL for PEL’s liability, like an unpaid fine, SEBI cannot go after PPL for statutory non-compliance by an altogether different company.
However, the story does not end here. What is most interesting in this case is that despite the legal gymnastics SEBI uses to fasten liability onto PPL, it ultimately exonerates PPL. This is because SEBI rules that the NGT fine and closure of the plant were not “material” events under the LODR. As such, neither PEL nor PPL had to disclose them. This reveals SEBI’s hidden anxiety.
The WTM’s order itself reveals that SEBI is worried that companies will flout the LODR by demerging, creating a new entity, and altogether avoiding reporting of mishappenings concerning the transferor. This concern is illusory. The prospect of demerging an entire undertaking merely to flout disclosures is unlikely, given the costs involved. Moreover, the NCLT must sanction all mergers and demergers and SEBI must be given prior notice of the same.
SEBI’s order is problematic for a third reason: Consider a business transfer agreement between Company A, a large conglomerate, and Company B, a furniture company. A wants to transfer its woodworks department to B. Even assuming for simplicity's sake both A and B are public, listed companies. A and B are unrelated to one another. B has the additional burden of disclosing any detail about A that may be material under the LODR. This is nearly impossible because A is a massive conglomerate; the search and information costs are prohibited. Even if B is a private company, it must still pay heed to the LODR if it ever aspires to go public. This example is extreme but serves to illustrate how the WTM order raises the costs of amalgamations across the board.
Conclusion
The WTM order in PPL applies the retrospective application of LODR upon unlisted companies birthed through a demerger from listed transferors. By holding companies liable for the disclosure failure of holding entities, the order undermines the principle of separate legal identity. In doing so, the order conflates the liability of the parent and subsidiary. While these are more theoretical concerns on established precedent, the order has presented a practical problem: it significantly raises transaction costs for amalgamations and business transfers, as entities would need to conduct exhaustive disclosures about unrelated parties. SEBI is concerned that amalgamations may be used to flout LODR, but this article has addressed why this concern is unwarranted. However, if SEBI legitimately believes this to be a concern, it must precisely tailor the LODR to account for the same. By tackling the issue through judicial means, the order has created regulatory uncertainty and makes legitimate business transfers between unrelated companies much more expensive.
コメント