SEBI’s review order by a whole-time member has exonerated Piramal Pharma once more. Here’s a closer look behind the market regulator’s action, which is only the second time in a decade where a harsher directive was not issued.
A recent order by the market regulator was a stark departure from the norm.
In the review order on Piramal Pharma, the Securities and Exchange Board of India (SEBI) re-examined its previous order that had exonerated the listed entity of alleged violations relating to non-disclosure of material events.
Usually, review orders result in increased penalty or further proceedings, according to legal experts. But in this review order, a whole-time member (WTM) of SEBI has again exonerated the company.
Here is an explainer of what the case was, why it was unusual and what it means for other listed entities.
What was the case?
The market regulator had investigated allegations of non-disclosure of material events by the company such as the shut down of a plant by a state pollution control board in 2018 and the subsequent imposition of a penalty (Rs 8.32 crore) by the National Green Tribunal (NGT) in 2019.
But as the SEBI order noted that these events happened when Piramal Pharma (PPL) had not been in existence. It was de-merged from Piramal Enterprises (PEL), through a Scheme of Arrangement under which all the pharmaceutical undertakings of PEL were transferred to PPL, which was incorporated in 2020 and later listed in 2022.
When these events were disclosed by PPL through their Business Responsibility Report in 2023, it did not cause any significant market reaction and as a result did not qualify as a material event under Section 30 (4) (i).
Also, even PEL had no reason to disclose these events under Section 30 (4) (ii) because they did not cross the materiality thresholds. PEL had framed a policy for determination of materiality— any event or information that was likely to impact 10 per cent or more of the consolidated revenue or 25 per cent or more of the profit after tax (PAT) would be considered material. The penalty amount was much less than both these thresholds, as the SEBI’s review order noted.
On August 31, 2023, SEBI’s adjudicating officer passed an order that exonerated the company.
But the regulator decided to review the order and sent a showcause notice to Piramal Pharma in November, 2023. The review was done because the August order stated that Piramal Pharma could not be held liable for omissions committed by PEL.
On November 8, 2024, SEBI’s WTM passed a review order after this round of examination and once again exonerated the listed entity.
According to the latest order, Piramal Pharma would be held liable for omissions by PEL, but the examination also found that the entity had not committed any omission.
Why was the review highly unusual?
Usually, review orders result in harsher terms.
Sumit Agrawal, the founder of Regstreet Law Advisors, a former SEBI officer and a part of the legal team that represented the Piramal Group, said that this is the second order in 30 review orders passed over the last decade that the regulator has taken such a stand.
Earlier, in 2014 the SEBI Act was amended to allow for such reviews.
He said, “Historically, SEBI has either escalated penalties or initiated further proceedings in nearly all cases—around 99.12 per cent — even after initial exoneration by the Adjudicating Officer (AO) following a thorough examination of the facts and evidence.”
He added, “What’s unusual in this case is that, contrary to SEBI’s standard approach of increasing penalties, the WTM undertook a detailed analysis, including a review of the entity’s materiality policy, clauses of the de-merger scheme and the impact of the events, ultimately concluding that these events were not material and did not warrant penalties”.
The order has addressed the possibility of an anomaly, where a resultant company can say that the legal liability lies with the transferor company. Such an argument could lead to companies de-merging, creating a third entity, and going scot-free. Is that a valid concern?
Agrawal said, “This concern is largely theoretical.”
He added, “SEBI requires pre-approval for any merger, demerger, or arrangement scheme, which allows it to defer approval until liabilities are crystallised and recovered, either through interim measures or settlement. During mergers or de-mergers, companies, typically, account for regulatory risks based on available information at the time.”
“If SEBI were to impose regulatory actions years later based on this hypothetical concern — with substantial consequences— it could indeed create an anomaly, disrupting the industry’s approach to legitimate mergers and de-mergers. The practical solution lies in applying a statute of limitations to SEBI’s actions and ensuring clarity in evidence and allegations, rather than presuming that the industry structures mergers or demergers to escape liabilities”
So was the earlier order erroneous, according to SEBI? Was the review justified?
Yes, according to SEBI’s latest order. The November order noted that the earlier order could have set a wrong precedent for the market. Accepting the earlier order or approach could have “lead to an anomalous situation where the provisions of a scheme duly sanctioned by NCLT [National Company Law Tribunal] or other authority are not given effect, and the resultant company [despite inheriting all the assets and liabilities] escapes the rigours of law citing that the original violation was committed by the transferor company”.
What does the latest order mean for listed entities?
Agrawal said that the decision would shape listed entities’ approach to materiality thresholds and environmental disclosures in their Business Responsibility Reports. He said, “Companies might now reassess and refine their internal materiality policies to better align with SEBI’s disclosure standards, particularly around environmental issues and court or tribunal orders.”
He added, “SEBI expects listed entities to disclose events like factory shutdowns — whether temporary or due to strikes, lockouts, fires, pollution, or court orders — and assess disclosure requirements under regulation 30 or the Business Responsibility Report, indicating a heightened focus on transparency and regulatory compliance. SEBI is determined to deal with such issues with an iron hand, irrespective whether a complaint has been filed or not.