SAT upholds SEBI action on Som Distilleries over ‘clever’ disclosure

SAT upholds SEBI action on Som Distilleries over ‘clever’ disclosure

• SAT upheld SEBI's penalty on Som Distilleries for disclosure issues
• Company failed to clearly disclose EGM cancellation reasons
• Tribunal found differing explanations violated disclosure norms

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The Securities Appellate Tribunal (SAT) has upheld the penalty imposed by the Securities and Exchange Board of India (SEBI) on Som Distilleries & Breweries Ltd for inadequate disclosures related to cancellation of a shareholder meeting linked to a fundraise plan.

The tribunal dismissed the company’s appeal against SEBI’s November 2023 adjudication order. The penalty was imposed for violation of disclosure norms under the SEBI Act. The case arose from a SCORES complaint that triggered SEBI’s examination of the company’s disclosures between December 2022 and February 2023. In December 2022, Som Distilleries announced a Rs 100 crore expansion plan and proposed raising funds via preferential issue of convertible equity warrants to promoters. The company later announced an extraordinary general meeting (EGM) scheduled for January 7, 2023, to approve the fundraise.

However, on January 2, 2023, the company informed exchanges that the EGM had been cancelled due to “unforeseen and unavoidable circumstances”. No clear reason was given for cancellation of EGM. However, subsequently, in an investor call on January 27, 2023 director finance of the company stated that preferential issue was deferred due to lower-than-expected funding requirements. SAT held that the company failed to provide clear and accurate disclosure at the time of cancelling the meeting.

SAT order stated, “The reason given for cancelling the meeting is unforeseen or unavoidable circumstances. But, it is relevant to note that in the announcement made on January 27, 2023, the Director Finance has stated that the preferential issue had been deferred due to lesser needs of the funds. Thus, the reasons for cancellation of meeting disclosed on January 2 and 27, 2023 are completely different”.

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The tribunal noted that merely stating cancellation due to unforeseen circumstances did not convey that the fundraising proposal itself had effectively been shelved. It observed that such corporate announcements could influence stock prices and must be transparent. SAT order stated, “once the corporate announcement indicating expansion is announced, there is possibility of increase in the share price. On January 2, 2023, a clever announcement was made stating that the meeting was cancelled. That would not disclose a clear message that Company had cancelled its proposal to issue convertible equity warrants”.

Som Distilleries defended that, there was no disclosure lapse on their part as, meeting had to be cancelled due to unavoidable and unforeseen circumstances. The information with regard to cancellation of the meeting has been disclosed. Therefore, there is no irregularity or violation of any provision of law warranting imposition of penalty.

The tribunal emphasized that listing regulations require listed entities to ensure disclosures are adequate, accurate, explicit, and not misleading. It found that the differing explanations for the cancellation, unforeseen circumstances versus reduced funding needs were against the disclosure standards.

SAT also endorsed SEBI’s finding that potential investor impact and gains were difficult to quantify, but the violation warranted monetary penalty. Concluding that no infirmity existed in SEBI’s order, the tribunal dismissed the appeal and upheld the fine.

What was the case

Som Distilleries made first corporate announcement on December 9, 2022 informing about the board’s decision to raise approximately Rs 100 crores for the expansion plan by issuing convertible equity warrants to promoters. Then the next corporate announcement was on December 15, 2022, stating that EGM of members will be held on January 7, 2023 for consideration and approval for issue of convertible equity warrants. The next corporate announcement was on January 2, 2023, stating that the meeting scheduled on January 7, 2023 was cancelled. Later SEBI investigated the matter and later Adjudication Officer imposed a penalty of Rs 5 Lakh on the company.

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