Piramal Pharma (PPL) has been exonerated in a case related to alleged non-disclosure of material information to the shareholders. SEBI failed to prove materiality in the event that was not disclosed by the company.
The case relates to Piramal Enterprise Ltd (PEL) being fined Rs 8.32 crore by the National Green Tribunal (NGT) for failing to comply with environmental standards on water pollution from its pharmaceutical unit. It was further alleged that PEL failed to disclose the closure of its Digwal plant in Telangana in 2018-19 due to water pollution, as ordered by the Telangana State Pollution Control Board (TSPCB) on November 29, 2018. PEL demerged its pharma business into a separate unit PPL but the disclosures on the fine were not made by both the companies.
In a rare instance, SEBI's corporate finance department had sought a review of the earlier order passed by the adjudicating officer (AO) where PEL was let off without penalty. The AO's order was reviewed by the SEBI whole time member (WTM) who observed that "not holding the resultant / transferee company liable for the acts of transferor company, despite the presence of express provisions in the scheme of merger/ demerger/ amalgamation approved by the National Company Law Tribunal would lead to an anomalous situation where the provisions of a scheme duly sanctioned by NCLT / other authority are not given effect, and the resultant company (despite inheriting all the assets and liabilities) escapes the rigors of law citing that the original violation was committed by the transferor company.”
In simple words, the fact remained that both PEL and PPL did not disclose the penalty of Rs 8.32 crores but SEBI failed to prove the 'materiality' in the event, the order concluded. SEBI show cause notice (SCN) had levelled only a generic allegation and there was nothing specific in it.
"In the present matter, the SCN (SCN) issued to the Noticee has levelled a 'generic allegation' that failure to disclose the alleged ‘material’ events had resulted in violation of LODR Regulations. I observe that the SCN has not, in as many terms, specified as to how the said events led to the violation of either a) broad criteria provided in regulation, materiality policy framed by PEL," SEBI's final order observed.
“In the absence of sufficient evidence to support the allegation of non-disclosure regarding the imposition of a penalty by the NGT and the shutdown of the plant by the TSPCB in PEL's Business Responsibility Report (BRR), no violation of SEBI (LODR) Regulations was found on the part of PEL by the WTM in review. Earlier the Adjudicating Officer had also exonerated but the department of SEBI sought a review being unhappy with the exoneration. Consequently, the WTM held that the issue of determining the quantum of penalty does not warrant further discussion as the penalty review would be unnecessary. WTM also found that the quantum of penalty were nowhere close to material as per the materiality policy. As a result, both PEL and PPL have been exonerated. This ruling is landmark and demonstrates a thoughtful application of mind to facts.” said Sumit Agrawal of Regstreet Law Advisors who represented the Piramals along with Senior Counsel Pesi Modi.
The AO initially closed the investigation, concluding that PPL could not be held responsible for PEL's past actions, as PPL was not in existence at the time of the incidents. The officer noted that the disclosure obligations under the LODR Regulations apply only to listed entities, and since PPL was not a listed company when the events occurred, it could not have made the required disclosures.
Sebi reviewed AO’s order and sent a fresh show cause notice (SCN) to PPL. After perusing PPL’s response and hearing the arguments by the company, Sebi’s WTM Amarjit Singh found that AO was wrong in closing the investigation on the reasoning that PPL could not be held accountable for PEL’s actions.
On examination, Sebi found that the events in question did not meet the criteria for materiality in the LODR regulations. The rules specifically require listed entities to disclose information that could significantly impact market perception or alter existing public knowledge. But the review of the matter indicated that the closure of the Digwal unit was brief, lasted only 44 days, and did not have a notable impact on revenue. Additionally, the financial implications of the NGT penalty were deemed non-material under PEL's internal policies. It was found that PPL had included information regarding these incidents in its BRR for 2023, which did not trigger any significant market reaction upon public disclosure.
“It is noted from the submissions of the Noticee that the information about the said events was in-fact included in the Business Responsibility Report of PPL for the year 2023. The alleged ‘material’ events were subsequently made public by PPL and such disclosure did not cause any significant market reaction and I am therefore of the view that PEL was not under an obligation to disclose the said events,” Sebi order said.
Furthermore, the WTM found that the closure of the Digwal plant did not have a significant impact on the revenue of the company and PEL in fact had sufficient buffer stocks of manufactured goods to meet its commitments.
