Facts
Khoday India Ltd., a listed company, failed to maintain the mandatory 25% Minimum
Public Shareholding (MPS) as required under Rule 19A of the Securities Contracts
(Regulation) Rules, 1957 and Regulation 38 of the SEBI LODR Regulations. Instead of
increasing public shareholding, the company voluntarily delisted and proposed a
reduction of share capital under the Companies Act. The Company Court approved the
reduction scheme and directed BSE to fix a fresh record date. SEBI and BSE
challenged this order.
Issues
1. Whether approval of reduction of share capital under the Companies Act can override
compliance with SEBI's MPS requirements.
2. Whether SEBI proceedings for violation of MPS can prevent implementation of a
sanctioned reduction of share capital.
Arguments
SEBI and BSE argued that the company was attempting to bypass the mandatory MPS
requirement and the safeguards provided under the SEBI Delisting Regulations. They
contended that public shareholders could be forced to exit without a proper price
discovery mechanism.
Khoday India Ltd. argued that reduction of share capital under the Companies Act is an
independent proceeding and, once sanctioned by the Company Court, it should be
implemented.
Held
The Karnataka High Court dismissed the appeals filed by SEBI and BSE. It held that
proceedings for reduction of share capital under the Companies Act and regulatory
proceedings under SEBI laws are separate and independent.Approval of a reduction of
share capital does not grant immunity from action under securities laws. At the same
time, pending SEBI proceedings do not automatically prevent implementation of a
validly sanctioned reduction of share capital.
Key Principle
Approval of a reduction of share capital under the Companies Act does not bar SEBI
from taking action for violation of the Minimum Public Shareholding (MPS)
requirements. The company must comply with both the Companies Act and SEBI
regulations independently.