By Aryaman Kapoor and Samriddhi Guha, Second Year Students at Jindal Global Law School
On August 12, 2021, the Board of Directors of Aurobindo Pharma Limited, announced its financial results for the first quarter along with the dividend. At the same time, it also announced its agreement to acquire a majority stake in Cronus Pharma Specialties India Private Limited. After this notice was made public, the stock of Aurobindo Pharma Limited spiraled down by 25% and hit a fresh 52-week low due to a decline in revenue as well as a rejection by the market of the Cronus Pharma acquisition deal due to the low revenue base. After this, on August 20, 2021, there was another notice issued by Aurobindo Pharma in compliance with Regulation 30 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (‘LODR’), in which it was stated that the agreement to acquire Cronus Pharma was mutually terminated by both the parties and that the Board of Directors approved this termination of the acquisition. After this notice was made public, the stock of Aurobindo Pharma rebounded reflecting a positive reaction of the investors towards the termination of their plan to acquire Cronus Pharmaceuticals.
Importance of Disclosure Requirements under the LODR
SEBI (Listing Obligations and Disclosures Requirements) Regulations, 2015 is one of the most important regulation under the Securities and Exchange Board of India. The objective of the Regulation 30 under the LODR is to maintain transparency and fair disclosures by all the listed entities in India. Disclosure requirements for listed companies are strictly mandated under Regulation 30 of the LODR. As per this regulation, the listed companies shall take mainly three conditions into consideration when deciding the materiality of an event. First, whether the omission of such an occurrence or circumstance would cause a change in publicly accessible information, second, whether the information would cause a major market reaction if disclosed, and third, anything else that the Board of Directors deems to be material. This requisite of disclosures is of the highest importance to resolve, inform and address the queries of the stakeholders of the Company, that may arise when the Company is facing an unforeseen challenge or to determine the ‘grounds of materiality’.
The current regime of disclosure requirements not only cover the substantive aspects of the content of disclosure, but also call upon the Company to disclose many sources of intra group conflicts and self-dealings. This helps to assess the competence of the management and its attitude towards its capital providers, identify sources of risk, and develop a predictable picture of the financial future of the Company. Further, the Securities Appellate Tribunal (‘SAT’) in the case of Milan Mahendra Securities Pvt. Ltd. vs SEBI noted that the objective of these regulations maintains positioning all shareholders at an equal footing.
Moreover, SEBI in their adjudication order for Simplex Infrastructure Ltd. highlighted the importance of disclosures under Regulation 30 of the LODR. Furthermore, in the same case, the Securities Appellate Tribunal (‘SAT’) stated that the listed entity must provide adequate and timely information to its shareholders in order to enable them to obtain a degree of control proportionate to their equity ownership. Such disclosures also serve a larger purpose to provide transparency in financial transactions and it is for this purpose that dissemination of full information is required.
Violation of SEBI Regulations
Regulation 30 (2) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 states that every listed company should make a disclosure of events which are deemed to be material as per Para A of Part A of Schedule III of Listing Regulations. A detailed list of these events was also specified in a circular dated September 9, 2015. In this circular under subheading 1.1 of Annexure I, there are specific details that must be disclosed when a listed company signs an agreement to acquire another entity. Aurobindo Pharma Limited did comply with this regulation and in their notice dated August 12, 2021, where they informed about the agreements signed to acquire a majority stake in Cronus Pharmaceuticals. There was a full disclosure of the required information listed in the above stated SEBI circular.
Now, as per clause (d) of subhead 5.9 under Annexure I of the same SEBI circular, the reasons for termination of an agreement and the impact of the same is deemed material and is required to be disclosed to the public. However, in the notice, which was issued on August 20, 2021, it was merely mentioned that the acquisition agreement was mutually terminated and that the same was approved by the Board of Directors. There was no declaration of why this agreement was terminated and what the impact of the same would be, which is material information as per the SEBI circular dated September 9, 2015. Therefore, there is a clear case of non-disclosure and a violation of the LODR, as even after a month of the notice, no further information has been provided to the public.
For such violations, the Securities Contracts (Regulation) Act, 1956 (‘SCRA’) comes in to play. Section 23E of this Act lays down the penalty for failure to comply with provision of listing conditions. Such a violation of non-disclosure can be levied with a fine of up to twenty-five crores. In similar cases in the past, SEBI has swiftly investigated and adjudicated matters of non-disclosure. The same can be seen in the PC Jewellers Limited settlement order where the enterprise had failed to disclose certain objections raised by State of Bank of India with regards to its proposed “buy-back” offer to National Stock Exchange and Bombay Stock Exchange, thereby attracting a penalty under Section 23E of the SCRA and for the investigation of the same, an Adjudicating Officer was appointed under Section 23-I of the SCRA to adjudge and inquire into the alleged violations. Furthermore, Regulation 30(2) was violated in the matter of DS Kulkarni Developers Limited where pursuant to investigation, the adjudicating officer concluded various non-compliance violations with regards to failure of disclosure of material information of the enterprise’s defaults on loans to banks and various financial institutions. Subsequently, adjudication proceedings were initiated under Section 23E of the SCRA for the alleged violations.
In the present case, it is surprising that even after one month of this termination of the agreement to acquire Cronus Pharma, SEBI has not taken note of such a grave violation by Aurobindo Pharma. No adjudicating officer has been appointed to look into this violation and there has no coverage of the same in any of the major media channels. Up until now we have only come across a LinkedIn post that has highlighted this inconsistency.
Last year in May 2020, SEBI had settled their investigation into Aurobindo Pharma for insider trading and it may be the case that SEBI does not wish to investigate them again. Given that the present violation was not related to the previous defaults, it is pertinent for SEBI to note this violation and adjudge this matter in order to ensure that the interests of the investors are safeguarded. There may also be a possibility that the present issue was not an intentional case of non-disclosure but an oversight on the part of the listed entity’s compliance department. However, the same will be clear after an investigation by SEBI. Hence, it is pertinent for an adjudicating officer to be appointed in order to investigate the same.