Does Sec 11 of Sebi Act apply to the Maruti Suzuki case?

Top institutional shareholders of Maruti Suzuki India are up in arms against the company’s controversial proposal for the Gujarat plant, which they say is against the interests of investors.

With Maruti Suzuki refusing to go back on the plan, these investors have approached the Securities and Exchange Board of India, which is examining the possibility of taking action under Section 11 of the Sebi Act.

Here’s a look at what Section 11 is about and how it could be used:

What is Section 11 of the Act?

The preamble to the Sebi Act states Sebi has been established to protect the interests of investors in the securities market and to promoter and regulate the development of this market.

Section 11B of the Act says if Sebi is satisfied it is necessary in the interests of investors or the orderly development of the securities market, it might issue directions to any person as may be appropriate in the interests of investors in securities and the securities market.

Section 11(1) repeats the preamble -- to protect the interest of investors in the securities market and promoter and regulate the development of the securities market.

It states Sebi can do this by ‘such measures as it thinks fit’.

Lalit Kumar, partner, J Sagar Associates, says, “The use of the words ‘such measures as it thinks fit’ shows the intent of the legislature to give Sebi wide powers to issue orders and directions for the objective for which it has been established.”

Why has Section 11 come under the spotlight in this case?

Technically, Maruti is not on the wrong side of the law, in terms of its proposal for the Gujarat plant. Under Sebi’s new corporate governance norms (effective October 1, 2014) or the new Companies Bill (certain provisions of this are yet to be notified), such a transaction can only go through most minority shareholders vote in favour of this.

However, as the new norms are yet to come into play, Maruti could implement its plan without the consent of public shareholders.

Therefore, in investors’ interests, Sebi could stall the Maruti proposal by taking action under Section 11.

“Section 11 of the Sebi Act is the main provision under which Sebi might consider proceeding in the instant case,” says Jay Parikh, partner, Verus.

What are the chances of Sebi taking legal action against Maruti?

Lawyers say Sebi could only take action if it is fully convinced the interests of all investors have been affected by Maruti’s decision.

The markets regulator has sought details from Maruti on its decision on the Gujarat plant. The company has already replied to Sebi and there hasn’t been any communication after that.

Has Sebi taken action under this section in the past?

Lawyers say a proactive approach by Sebi to safeguard investor interests isn’t unprecedented; there have been several instances in which Sebi has taken action or given directives to companies.

Image: A Maruti 800 car