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BEFORE
THE ADJUDICATING OFFICER
SECURITIES
AND EXCHANGE BOARD OF [ADJUDICATION ORDER NO. AP/AO-13/2006-07] UNDER SECTION 15 I OF SECURITIES AND EXCHANGE BOARD
OF In
the matter of indirect acquisition of shares of EVEREST INDUSTRIES LTD. By, �� HOLCIM (
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|
Shares
held prior to open offer� |
Shares
held after completion of open
offer on 26.04.05 |
||
|
Shareholder |
Number |
% |
Number |
% |
|
Holcim & PACs |
24,670,000 |
13.82 (13.13) |
61,961,901 |
34.71 (32.98) |
|
Equity of ACC |
178,533,611 (187,882,049) |
100.00 |
178,533,611 (187,882,049) |
100.00 |
*Figures within brackets
represent the fully diluted equity of ACC and its % thereof)
9)
Since, ACC held 76.01% of EIL�s equity, it was
alleged that the aforesaid acquisition of 34.71 % shares of ACC, also led to
indirect acquisition of shares of EIL by the acquirers. Accordingly, the undersigned
was appointed as Adjudicating Officer, vide SEBI order dated February 22, 2006,
to inquire into and adjudge under Section 15H (ii) of the SEBI Act, 1992, the
indirect acquisition of shares of Everest Industries Ltd. (EIL) by Holcim and
not making a public announcement to acquire further shares of EIL, in terms of
Regulation 11(2A) r/w Regulation 14(4) of the SEBI (Substantial Acquisition of
Shares and Takeovers) Regulations, 1997.
10)
Accordingly, the undersigned issued a show cause
notice vide letter dated April 13, 2006 alleging that Holcim did not made the
necessary public announcement as required under Regulation 11(2A) of SEBI
(SAST) Regulations, 1997 read with 14(4) of the said regulation, to the
shareholder of EIL, which makes it liable for penalty under Section 15H (ii) of
SEBI Act, 1992.
11)
New Delhi Law Office (NDLO), representing Holcim,
sought additional time to file reply vide its letter dated April 27, 2006,
which was granted till May 15, 2006 vide letter dated May 03, 2006. However,
vide letter dated
12)
Under the above circumstances, the undersigned was
of the opinion that an inquiry should be held in the matter. Accordingly, vide
letter dated May 23, 2006, June 16, 2006 was fixed as the dated for inquiry.
Holcim was also granted time till
13)
Holcim in its letter dated June 02, 2006 submitted
that, Holcim Group's business policy is to pursue only activities pertaining to
cement, aggregates and service, and to divest of all non core activities,
whereby the group has divested non core assets worth $1.25 bn during the period
2002 to 2005. Since 2003 Holcim does not own any asset that used fibre cement
in production, as use of asbestos fibres is prohibited in
14)
Holcim stated that it entered into an agreement
(TA) with Accurate Finstock Pvt. Ltd. (AFPL) on January 20, 2005 whereby AFPL
agreed to acquire 76.01% of EIL�s equity from ACC, as and when Holcim acquires
control of ACC. Accordingly AFPL made a PA on January 24, 2005 to the
shareholders of EIL in terms of Regulation 10 and 12 of SAST to acquire 20% of
EIL equity @ Rs. 147/- per share and copy of the PA in this regard was enclosed
as annexure D. Upon closure of the open offer of ACC, the directors of ACC proposed
to execute the obligations under the TA dated January 24, 2005, in ACC�s board
meeting on July, 13, 2005, it was submitted. AFPL filed LoO with SEBI, which
was subsequently advised by SEBI to be withdrawn vide letter dated September 6,
2005, it was stated. Consequently, the open offer of AFPL was withdrawn by its
Merchant Banker by issuing a PA dated
15)
Subsequently, vide SPA dated October 14, 2005,
Everest Finvest (India) Pvt. Ltd. (EFI) and other buyers agreed to acquire
7,400,020 shares of EIL (just >50% of EIL�s equity) @ Rs. 134 per shares,
Holcim submitted. �EFI made a PA to
acquire 20% of EIL�s shares from the shareholders of EIL @ 184 / shares; the
ensuing open offer closed on February 18, 2006, it was stated. Relying upon the
opinion of Retd. Justice H.H. Kania and the SC judgment in the matter of
Technip case, Holcim made a request to SEBI for no-action vide letter dated
July 26, 2005 under the SEBI Informal guidance scheme. This request was
rejected vide SEBI letter dated
16)
Holcim submitted that it was under no obligation to
make an open offer to the share holders of EIL u/r 11(2A) r/w 14(4) of SAST. Relying
upon the chain principle enunciated in the Bhagwati Committee Report as well as
in the UK City Take over code and also the SC verdict in the matter of Technip
case, Holcim submitted that SAST is triggered only if the first company�s
shareholding in the second company constitutes a substantial part of the assets
of the first company or one of the main purposes of acquiring control of the
first company was to secure control of the second company. In the instant case,
Holcim submitted that the shareholding of ACC in EIL constituted only 3% of
ACC�s assets and EIL�s turnover was just 5% of ACC�s turnover, thus SAST is not
triggered.��������������������������������������������������������
������������������������������������������
17)
Holcim relied upon SEBI press release dated
18)
On the day of inquiry, Aswath Rau and Indranil D.
Deshmukh, Advocates, Amarchand Mangaldas represented Holcim and filed
authorization letter dated
19)
In the written submission dated
20)
Holcim�s role (already mentioned) in the open offer
by AFPL @ 147 to shareholder EIL and subsequently by EFI @ 184, was in the
benefit of EIL�s shareholder, it was submitted. Holcim relied upon the SAT
order in the matter of Sterling Investment Corporation Ltd. to support its
contention that where shareholders interest is not compromised, penalty need
not be imposed. Further, Holcim claimed that the SC ruling in Technip case,
automatically grants exemption from seeking exemption u/r 3 & 4 of SAST.
21)
I have
a)
Regulation 10 of SAST, r/w Regulation 21(1),
prohibits an acquirer, who holds less than 15% of a target company�s equity,
from acquiring shares, such that his aggregate holding would exceed 15% of its
equity, unless he makes a public announcement to acquire a minimum of 20% of the
company�s equity. No upper limit for acquisition of shares is provided under
this provision, except for acquisition through market purchase or through
preferential allotment, where the upper limit of 55% is prescribed. �
b)
Regulation 11(1) of SAST, r/w Regulation 21(1),
deals with situation where the acquirer already holds more than 15% and less
than 55% of a company�s equity. In such situation, the acquirer is prohibited
from acquiring more than 5% of the company�s equity in any financial year,
unless he make a public announcement to acquire a minimum of 20% of the
company�s equity.
c)
In terms of Regulation 21(2), if an acquisition u/r
10 or 11(1) of SAST, through an agreement or MoU, exceeds 55% of a company�s
equity then also the acquirer has to offer to acquire a minimum of 20% of the
company�s equity and reduce the size of his acquisition through MoU, such that
the �public shareholding� in the target company does not fall below the level
prescribed for the purpose of continuous listing, as agreed in the Listing
Agreement with the exchange.
d)
Regulation 11(2) of SAST, r/w Regulation 21(1), deals
in situation where the acquirer already holds more than 55% and less than 75%
of a company�s equity. In such situation, the acquirer is prohibited from
acquiring any shares of the company unless he makes a public announcement to
acquire a minimum number of shares, such that the �public shareholding� in the
target company does not fall below the level prescribed for the purpose of
continuous listing, as agreed in the Listing Agreement with the exchange.
e)
Regulation 11(2A), deals with situations wherein an
acquirer seeks to reduce the �public shareholding� of a listed company to less
than the level prescribed for the purpose of continuous listing, as agreed in
the Listing Agreement with the exchange. In such situation, the acquirer has to
make an open offer under the delisting guidelines of the Board and not under
the provisions of SAST. However, exemption from making open offer under the
delisting guidelines is available in case of indirect acquisition by virtue of
global arrangement. �
f)
Regulation 12 deals of SAST, r/w Regulation 21(1),
deals with acquisition of control over a company, with or without acquisition
of shares. In such situation, the acquirer is required to make a public
announcement to acquire a minimum of 20% of the company�s equity.
g)
Most importantly, for all the aforesaid
regulations, the term acquisition also includes indirect acquisition either in
22)
The explanation to the cited provisions of SAST
makes it very clear that all these provisions are applicable, even in the case
of indirect acquisitions. Further, regulation 3 of SAST and its sub regulations
list out situations wherein acquisition u/r 10, 11 & 12 of SAST are exempt from
making open offer, subject to conditions prescribed therein. There is no automatic
exemption available to indirect acquisition under regulation 3 of SAST, notwithstanding
the recommendation made in the Bhagwati Committee report. Therefore, exemption
from making an open offer to the shareholder of EIL, as claimed by Holcim, was
available only in its imagination, and not in the regulations. �If at all Holcim was entitled to exemption, as
claimed by it, it should have approached the Takeover Panel of SEBI constituted
under Regulation 4 of SAST Regulations.
23)
Holcim has relied upon the Supreme Court order
dated May 11, 2005 in the matter of Technip SA Vs SMS Holdings (P) Ltd and Ors
in the Civil Appeals Nos. 9258-65 of 2003 (Technip case) to support its
contention that for indirect acquisition, there is no need to make an open
offer. I examine the cited ruling. South East Marine Engineering and
Construction Ltd., (SEAMEC) is a company registered under the provisions of Indian
Companies Act, 1956 and listed on NSE, BSE, ASE and CSE. Coflexip SA, of France,
through its chain of subsidiary companies held 58.24% of SEAMAC. Technip SA is
another company registered in
24)
Given the plain reading of SAST regulations 10, 11,
12 along with the exemptions available in Reg. 3, in tandem with SC ruling in
Technip case, it is clear that the contention of Hoclim that it was not
required to make an open offer to the shareholder of EIL u/r 10 and 12 of SAST
is absolutely untenable. Acquisition of shares and control over ACC by Holcim
and PACs triggered SAST regulations, thus obligating them to make open offer to
the shareholders of EIL. �In terms of the
provisions of Regulation 21(1) of SAST, the public offer made by the acquirer
to the shareholders of the target company (EIL) shall be for a minimum 20% of
the voting capital of the company.� Had
Holcim complied with the provisions of SAST Regulations and given an open
offer, the result of the same would have increased their holding in EIL to
76.01%+20% , i.e. 96.01%, which in any case was a fit case for delisting.� This is so because even if we take 10% as the
minimum continuous listing requirement, the 3.99% public shareholding is far
less than that.� In this regard, I would
like to refer to the provisions of Rule 19 (2) (b) of Securities Contracts
(Regulation) Rules, 1957, which inter �alia mandates that 10% of securities
issued by a company were to be offered to the public.� Therefore it can be concluded here that
resultantly, and as a consequence of an indirect acquisition of EIL by Holcim,
and crossing the 'delisting threshold', the ultimate requirement and obligation
of Holcim was to make delisting offer in respect of acquisition of EIL under
the delisting guidelines read with Regulation 11(2A) of SAST Regulations. ��In view of the above, the response to the
questions framed in paragraph 21 of this order is that the provisions of
Regulation 11(2A) of SAST are triggered and accordingly it was obligatory on
the part of Holcim to comply with Regulation 11 (2A) of SAST, i.e. to give
delisting offer in respect of acquisition of EIL.
25)
�Holcim has
contented that in the instant case, the acquisition of EIL is �as a result of
global arrangement�, thus qualifying it for exemption from making open offer
under delisting guidelines. The term global arrangement is not defined in SAST.
However, from experience and also from facts pertaining to the Technip case, as
already discussed, the connotation of term �global arrangement� is clear. In
the instant case, the acquirers and PACs, except HIL, all are incorporated in
India. Importantly their intended target company was ACC, which is registered
in India and not abroad. None of the conditions for �global arrangement� as in
the Technip case is satisfied in the instant case. Therefore, I do not find any
merit in the submission of Holcim that the instant case is an indirect acquisition
�as a result of global arrangement�.
26)
Holcim
has cited the exemption from making open offer in the Robert Bosch GmBH
(annexure L to the reply) to support its contention. From perusal of the press
release pertaining to the cited case, I find that its facts may be comparable to
the instant case, but the only inference that I am able to draw is that Holcim
knew about the exemptions that were granted by the Board based on
recommendation of the Takeover panel constituted under Regulation 4 of SAST.
However, Holcim deliberately choose not to seek exemption from making open
offer to the shareholder of EIL. �This
inference is amply supported by Holcim�s act in seeking �no-action� under the
Informal guidance scheme of the board. It is not a mere co-incidence that this
letter was dated July 26, 2005, ie the last date by which Holcim was required
to make open offer to the share holders of EIL. The intention is clearly
mischievous. �If at all any doubt was
there in the minds of Holcim, they could have approached SEBI under the
Informal Guidance Scheme for clarification, but they failed to do so and
instead choose a path i.e. 'No action letter', which is nowhere recognized in
the context of Indian Laws.� I would
further add here that Holcim tried to sit on judgment in its own case by not
seeking exemption under Regulation 4 of SAST from SEBI Takeover Panel.� But at the same time I doubt that Holcim
would have got exemption, and I say this because of the following provisions:-
Regulation 3 (1A) of SAST:
3 [(1A) The benefit of availing exemption under the
relevant clauses of sub-regulation (1), shall be subject to compliance with
requirement specified in sub-regulation (2A) of regulation 11.]
Although,
I have got no authority to give any finding for which only the Board is
empowered to decide on the recommendations of Takeover Panel under Regulation 4
of SAST, but in general the benefits of exemption under Regulation 3 of SAST
would not be available to acquirer if provisions of Regulation 11(2A), as in
the present matter, is attracted.
27)
The violation thus being established, the next
issue is penalty imposable u/s 15H (ii) of SEBI Act, 1992, on the acquirers for
not making open offer under SAST. �In
this regard I refer to Section 15H(ii) of SEBI Act, 1992, as under:-
Penalty for non-disclosure of
acquisition of shares and take-overs
15H. If any person, who is required under this Act
or any rules or regulations made thereunder, fails to,-
(i)
���..
(ii) make a
public announcement to acquire shares at a minimum price,
he shall be
liable to a penalty [twenty-five crore rupees or three times the amount of
profits made out of such failure, whichever is higher].
28)
To determine the quantum
of penalty under Section 15H (ii), the undersigned considered the following
factors as provided in the section 15J of SEBI Act, 1992 viz. (a) the amount of
disproportionate gain or unfair advantage, wherever quantifiable, made as a
result of the default; (b) the amount of loss caused to an investor or group of
investors as a result of the default and; (c) the repetitive nature of the
default. The amount of disproportionate gain or unfair gain to acquirers for
not making the open offer to the shareholders of EIL is not directly
ascertainable as there is a contingent element of open offer under the
delisting guidelines. In other words basis of penalty may be drawn from the
amount of money involved as a result of the default by Holcim and which can be computed
as the value of 23.99% of EIL�s equity @ Rs. 147 /(basis AFPL offer) per share,
which works out to be Rs. 51,64,78,326 (51.64 crores). The value of loss caused
to the investor is also not precisely ascertainable as they did eventually get
the benefit of open offer @ Rs. 184 / share in February 2006, from EFI, but it
was Holcim who was required to make an open offer by July 26, 2005. Here it is
to be emphasized that the losses of shareholders as a result of default by the
Holcim, is made good by an entity EFI, which is different from Holcim.� I have a strong feeling here that the conduct
of the Holcim has been in complete defiance of the provisions of SAST
Regulations.� In addition to this I find
it shocking that Holcim, by ignoring the provisions of SAST Regulations, have
been able to get easy liquidity (easy money) of their shareholding in EIL.� Firstly, they could avoid parting with money
equivalent to value of 23.99% of public shareholding in EIL, which comes out to
be Rs. 51.64 crores.� Lastly, they could
get the liquidity of about 50% of their shareholding in EIL without complying
with Regulation 11(2A) of SAST, when EFI gave the public offer and entered into
a Transaction Agreement (TA) with Holcim for purchase of 50% of its
shareholding in EIL. Further, there is an element of opportunity loss to the
shareholders of EIL, which is substantial and has a bearing on the interest of
minority shareholders of EIL, especially looking at the pace of the Indian
Securities Market. To be fair enough, Holcim�s conduct towards Indian
consumers, by not producing products with asbestos fibre, is indeed exemplary,
but cannot be a mitigating factor for this proceeding. I am aware of SAT
rulings that have down played the role of monetary penalty in cases where the
acquirer subsequently made open offer to the shareholder of the �target
company�. However, as Holcim has not made any open offer to the shareholder of
EIL, it does not qualify for this benefit also.
29)
Considering the large
amount of monies involved as a result of default by Holcim, which comes out to
be in anyway above Rs. 50 crores since they failed to give public offer under
SAST Regulations, I think it appropriate to impose a penalty of Rs. 25 crores
on Holcim, which according to me would be commensurate to the nature of
violation committed by Holcim. �
30)
I, therefore, in exercise
of the powers conferred under section 15-I (2) of the SEBI Act, 1992, read with
Rule 5 of SEBI Adjudication Rules, I hereby impose a penalty of Rs. 25 crores (Rs.
Twenty Five Crores only) on Holcim (India) Pvt. Ltd. (Formerly known as Holdcem
Cements Pvt. Ltd.) under section 15H (ii) of SEBI Act, 1992 for the violations of
Regulation 11(2A) of SAST Regulations.
31)
Holcim (India) Pvt. Ltd.
shall pay the said amount of penalty by way of demand draft in favour of �SEBI-
Penalties Remittable to Government of India�, payable at Mumbai within 45 days
of receipt of this order. The said demand draft should be forwarded to Mr. S.V.
Muralidhar Rao, General Manager, Mittal Court, 1st floor, B- Wing, 224, Nariman
Point, Mumbai 400 021.
32)
This order of
adjudication is made and passed on 25th day of August 2006 at
Mumbai.
AMIT PRADHAN
ADJUDICATING OFFICER
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