IN THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No: 113 of 2003
|
Date of Decision
|
19.4.2006
|
|
A.R.Dahiya and Associates
|
…..Appellant
|
|
Versus
|
|
|
1. Securities & Exchange Board of India
|
|
|
2. Haryana State Industrial Development Corporation
|
|
|
3. Polo Hotels Limited
|
….Respondents
|
Mr. Amit Jhanji, Advocate with Shri Prakash Punjabi, Advocate for the appellant
Mr.Cherag Balsara, Advocate with Mr. Mihir Mody, Advocate for Respondent No. 1.
Mr. Ishtiaq Ali, Advocate for Respondent No.2
None for Respondent No.3
CORAM
Justice N.K. Sodhi, Presiding Officer
C. Bhattacharya, Member
R.N. Bhardwaj, Member
Per: Justice N.K. Sodhi, Presiding Officer
What should be the price of the shares which an acquirer is required to offer to the remaining shareholders of the target company in terms of Regulation 20(2)(b) as it stood prior to its amendment w.e.f. 09/09/2002 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (for short “the Regulations”) is the primary question which arises for consideration in this appeal filed under Section 15T of the Securities and Exchange Board of India Act, 1992 (hereinafter called “the Act”). Relevant facts giving rise to this appeal which are not in dispute may first be noticed.
2. On 4.1.1993 one Shri V.P. Garg (for short Garg) entered into an assisted sector agreement with Haryana State Industrial Development Corporation Limited (for short “the Corporation”) – a government company for setting up a modern resort hotel complex with recreation facilities at village Chowky (near Panchkula), Tehsil Kalka in the state of Haryana and the parties thereto agreed to collaborate with one another for the profitable implementation and operation of the project in the assisted sector through a company already got incorporated by Garg under the name and style of M/s. Polo Hotels Ltd. with its head office in Chandigarh (hereinafter referred to as the target company). Apart from the term loan which the Corporation gave to the promoter, the former also subscribed to 3 lac shares of the target company of Rs. 10/- each. This agreement contained a clause regarding buy back of shares of the Corporation. Sub-clauses (a) and (b) of clause 24 of the agreement provided that at any time after the target company goes in for commercial production, the Corporation could with the consent of Garg, off-load its shareholding partially or fully in such manner as it may deem fit. Garg, however, had the pre-emptive right to buy the shareholding of the Corporation. After the expiry of 5 years from the date of commencement of commercial production by the target company or at the expiry of 7 years from the date of its incorporation whichever was earlier, Garg was bound to purchase the equity shareholding of the Corporation in the target company at a price to be determined in terms of sub-clause (c) of clause (24) of the agreement. This sub-clause which is relevant for our purposes reads as under:-
“(c) On buy back of shareholding of the Corporation by the Collaborator under sub clause (b), the price to be paid shall be highest of the:
(i) Issue price of the shares plus simple interest for the period at the lowest normal lending rate of interest on term loans under refinance scheme of IDBI prevailing at the time of first issue of shares to the Corporation under this agreement. OR
(ii) The highest price of the shares ruling on any of Indian Stock Exchange for a period of two months preceding the date on which the Collaborator ought to purchase the shares held by the Corporation as provided in clause (b) above: OR
(iii) Assessed value of the shares as determined by the Auditors of the Company on the basis of net worth of the Company on the date of sale of the shares.”
It is common case of the parties that Garg defaulted not only in the repayment of the term loan but also in buying back the shares of the Corporation in the target company. It is also not in dispute that the buy back became due in April 1999.
3. Sometime in March, 1999 Garg entered into an agreement with one Shri A.R. Dahiya (for short Dahiya) for the sale of his entire shareholding of 28.09% in the target company. This agreement was subject to the approval of the Corporation and contained a clause that Garg would be absolved of fulfilling the buyback obligation provided the Corporation agrees to accept Dahiya in place of Garg. In pursuance to this agreement Garg sent a communication dated 31/03/1999 to the Corporation requesting the latter to accept the guarantee of Dahiya as the new promoter director in lieu of his buyback guarantee and accordingly absolve him from the obligation for buyback of shares. Dahiya also wrote a letter to the Corporation on 15/04/1999 informing it that he was entering into an agreement for purchase of equity shareholding of Garg in the target company and for complete takeover of its management. He requested that since he was taking over the management of the target company, he was prepared to buyback the equity holding of the Corporation under the assisted sector agreement in place of Garg on the same terms and conditions. The contents of this letter are relevant for resolving the controversy between the parties and therefore it is necessary to reproduce the same hereunder for facility of reference:-
“The Managing Director 15/04/99
Haryana State Indl. Dev. Corp.
Sector 17
Chandigarh
Subject: BUY-BACK OF EQUITY SHARES HELD BY THE CORPORATION.
Dear Sir,
We would like to bring to your kind notice that we are entering into an agreement for purchase of equity share holding held by Mr. Vikas Paul Garg, the original promoter/director of M/s. Polo Hotels Ltd. And also for complete takeover of the management of the said company. We understand that Mr. Vikas Paul Garg is under an obligation to buy-back 3,00,000 equity shares held by the Corporation in the said company under assisted sector agreement.
Since we are taking over the complete management of the company we also confirm that we are prepared to buyback the equity holding of the Corporation also under assisted sector agreement in place of Mr. Vikas Paul Garg on similar terms and conditions. However, since the buyback is due only in April, 99 and due to tight liquidity position, we request you to allow us to make the payment in respect of buyback in monthly installments of Rs. 20.00 lacs each starting from September, 99. We are enclosing herewith the post dated cheques in respect of buyback obligations as detailed below:
|
Cheque No
|
Date
|
Banks Name
|
Amount
(Rs. In lacs)
|
|
206835
|
25/09/99
|
Canara Bank, P. Kurla
|
20.00
|
|
206836
|
25/10/99
|
--do--
|
20.00
|
|
206837
|
25/11/99
|
--do--
|
20.00
|
|
0624248
|
26/11/99
|
Bank of Punjab
|
11.25466
|
We now request you to absolve the original promoter from the buyback obligation and to allow the change in management in our favour in your records for which we shall be signing a fresh Assisted Sector Agreement. We also confirm that we shall make the balance payment at the time of final settlement.
Thanking you,
Yours faithfully,
Sd/-
(A.R. DAHIYA)”
On receipt of the aforesaid two communications the Corporation addressed a letter to Garg on 19/04/1999 accepting the request made by Garg and Dahiya. This letter reads as under:
“This has reference to your letter dt. 31.3.99 requesting HSIDC for change of management of the company M/s. Polo Hotels Ltd. to new promoter Shri A.R. Dahiya and Associates and accepting the guarantee of Shri Dahiya, the new promoter/director in lieu of the buy-back guarantee given by you. We have considered your request and are agreeable, in principle, for the change of management and absolving you from the obligation for buy-back of equity subject to the Assisted Sector Agreement/FC agreement being signed by the new promoters.”
Since the Corporation agreed to accept the guarantee of Dahiya in lieu of buy-back guarantee given by Garg, all the three parties entered into a financial collaboration agreement on 19/04/1999 whereby the Corporation agreed that Dahiya and his associates would takeover the financial stakes of Garg in the target company and that Dahiya would step into the shoes of Garg as an incoming collaborator and shall obtain all the necessary approvals/ permissions from different authorities.
4. On 20/04/1999, that is, the day following the day on which the parties entered into the aforesaid tripartite financial collaboration agreement Garg and Dahiya entered into an agreement whereby the latter agreed to purchase from the former his entire share capital of 28.09% in the target company at the rate of Rs. 8.50 per fully paid up equity share. Since this purchase/acquisition was more than 15% of the total shareholding of the target company, the Regulations got triggered and in terms of Regulation 10, Dahiya – the acquirer - was required to make a public announcement to acquire shares of the target company in accordance with the Regulations. The agreement between Garg and Dahiya also had a similar provision and Dahiya had undertaken to comply with the Regulations and accordingly came out with a public announcement in terms thereof. It is common ground between the parties that after the aforesaid agreement Dahiya made a public announcement on 24/04/1999 making an offer to the remaining shareholders of the target company to purchase a minimum of 20% shares of the said company at an offer price of Rs. 8.75 per equity share. A draft letter of offer was sent by Master Capital Services Limited – the merchant banker of Dahiya to the Securities and Exchange Board of India (for short “the Board”) for its approval. This letter was sent on May 5, 1999. It is relevant to mention here that both in the public announcement and in the letter of offer Dahiya did not disclose the fact that he and his associates had already bought back the shares of the Corporation which it held in the target company and that payments had been made to the Corporation by issuing post dated cheques in April 1999 as referred to in his letter dated 15.4.1999 which has been extracted hereinabove. On receipt of the draft letter of offer the Board sought some clarifications from Dahiya through his merchant banker. Amongst others, the following two clarifications were sought.
“3. The price at which the acquirers propose to acquire shares from HSIDC as per the agreement dated 19/04/99 has to be calculated and specified up front in the offer document.
“4. If the price payable to HSIDC as per the said agreement is higher than the present offer price of Rs. 8.75 per share, justify the offer price as per Reg. 20 (6).”
Here again it may be mentioned that the question of making such queries by the Board would not have arisen had Dahiya made proper disclosures in the public announcement and also in the letter of offer. Had he disclosed that he had paid Rs. 71,25,466/- to the Corporation towards the consideration for buying back its shares, the dispute which is now staring at us may not have arisen. The draft letter of offer which was sent to the Board was approved as per its communication dated September 30, 1999 subject to certain changes and disclosures as suggested thereunder. Since the Board was not aware of the fact that Dahiya and his associates had already paid the price to the Corporation for buying back the shares held by it in the target company, the price of Rs. 8.75 per equity share as mentioned in the public announcement and the draft letter of offer was approved. On receipt of this communication from the Board the letter of offer was sent to all the shareholders of the target company offering them a price of Rs. 8.75p in terms of the schedule contained therein. It is not in dispute that in response to the public announcement Dahiya could acquire only 2.42% of the shares of the target company presumably because the offer price was not attractive and the shareholders did not offer their shares for Rs. 8.75 when the face value was Rs. 10/-.
5. The Board then received some complaints from one Komlam Sardana alleging that Dahiya had acquired 3 lac equity shares of the corporation for Rs. 71,25,466/- at the rate of Rs. 23.75p. per share. The grievance of the complainant was that Dahiya had not offered this price to the remaining shareholders. It was further alleged in the complaint that Dahiya had suppressed this fact both in the public announcement and also in the letter of offer and also from the Board. The complainant also brought to the notice of the Board that Dahiya did not have sufficient cash flow and had requested the corporation to receive the amount by way of monthly installments of Rs. 5 lacs each. The fact that the post dated cheques issued by Dahiya had been dishonoured and that criminal proceedings were initiated against him was also brought to the notice of the Board by the complainant. A copy of the compliant was forwarded to Dahiya through his merchant banker seeking their comments. Before filing his response, Dahiya moved an application on 2.12.1999 seeking exemption from the applicability of the Regulations under Regulation 3(1)(i) on the plea that Regulations 10, 11 and 12 did not apply to the transfer of shares from State level financial institution to co-promoters of the Company. The merchant banker however submitted its reply to the Board on 18.12.1999 and confirmed that shares from the corporation had not yet been acquired by Dahiya. The Board sought further clarification from the merchant banker on 29.2.2000 regarding non-disclosure of the payment of Rs. 71,25,466/- by Dahiya through post dated cheques. It was in reply to this communication that the merchant banker as per its letter dated 13.4.2000 informed the Board that Dahiya had not even informed it (merchant banker) about the factum of payment made through post dated cheques. The Board then sought a clarification from the Corporation through its letter dated 2.6.2000 as to whether the letter dated 15.4.1999 which has been reproduced in the earlier part of our order pertains to the buy back of shares and whether the post dated cheques were deposited with the Corporation as comfort/security for the buy back obligations. The Corporation by its letter dated 1.8.2000 then informed the Board that the post dated cheques for Rs. 71,25,466/- submitted by Dahiya along with his letter dated 15.4.1999 had been issued towards the purchase consideration for the buy back of 3 lac shares held by the Corporation in the target company. It appears that the Board was prima facie satisfied that Dahiya had not disclosed the correct facts and that he had suppressed some material facts in the public announcement and also in the draft letter of offer and that he had violated Regulations 16(viii), 20(2)(b) and 45(5) of the Regulations. A notice was issued to him to show cause why action be not taken against him under Regulations 44 and 45 of the Regulations read with Section 11B and 24 of the Act. Dahiya filed his reply to the show cause notice and after hearing him, his merchant banker and the Corporation the Board by its order dated August 1, 2003 issued directions to Dahiya under sub-section (3) of Section 4 read with Section 11B of the Act and Regulations 44 and 45 of the Regulations directing him to make a fresh public announcement for 20% shares as required under Chapter III of the Regulations in accordance with Regulation 10 and offer to the shareholders of the target company the price of Rs. 23.75 per share along with interest at the rate of 15% per annum for the period from 16.11.1999 to the actual date of payment of consideration. The complainant had also been summoned by the Board but she did not appear. Dahiya was also directed to pay the balance amount at the aforesaid rate to all the shareholders who had offered their shares in pursuance to the public announcement dated 24.4.1999 along with interest. It is against this order that the present appeal has been filed.
6. We have heard the learned counsel for the parties. There is no gainsaying the fact that Dahiya on acquiring the shareholding from Garg had made a public announcement on 24.4.1999. On 15.4.1999 he had addressed a communication to the Corporation whereby he bought back 3 lac shares of the Corporation in terms of the buy back arrangement provided for in the agreements dated 4.1.1993 and 19.4.1999. These shares had been bought back at the rate of Rs. 23.75 per share. According to Regulation 16(viii) of the Regulations it was incumbent upon Dahiya to state this fact in the public announcement. He did not do so and instead offered a price of Rs. 8.75 to the remaining shareholders of the target company. This, in our view, was clearly a suppression of a very material fact which would affect the minimum offer price of the shares which had to be offered to the remaining shareholders of the target company. As is clear from Regulation 16(viii) the public announcement should have contained the highest price paid by Dahiya for acquiring/buying back the shares from the Corporation at the rate of Rs. 23.75 as this transaction had taken place on 15.4.1999 which was during the 12 months period prior to the date of public announcement. What is contended by the learned counsel for the appellant is that the amount that was paid to the Corporation through post dated cheques on 15.4.1999 was not by way of consideration for the buy-back shares from it but the amount had been deposited with the Corporation by way of comfort/security for buy back obligation and to demonstrate to the Corporation that Dahiya was a man of means who could buy back the shares subsequently. This contention cannot be accepted in view of the letter written by Dahiya on 15.4.1999 forwarding the cheques to the Corporation which has been reproduced in the earlier part of the order and also in view of the letter dated 11.1.2001 written by the Corporation to the Board. As already noticed, Dahiya had stated in his letter that the cheques were being enclosed towards consideration for buying back the equity holding of the Corporation. It would be relevant to recall that when Garg had entered into an agreement with the Corporation on 4.1.1993 he had undertaken to buy back the shares of the Corporation after five years of the target company going into commercial production or within seven years of its incorporation. When Garg walked out from the target company and Dahiya was accepted as an incoming collaborator he(Dahiya) stepped into the shoes of Garg and was equally bound by the terms of the agreement dated 4.1.1993 and also by agreement dated 19.4.1999 to which he was a signatory. During the course of the enquiry the Board also enquired from the Corporation as to the purpose for which the payment was made by Dahiya by post dated cheques. The reply sent by the Corporation reads as under:-
“We hereby categorically deny that the cheques in question submitted to us by Sh. A.R. Dahiya & associates on 15.4.1999 were given as comforts and as such we again reiterate our stand that these cheques were deposited with HSIDC towards the purchase consideration of the shareholding held by the corporation in the equity of M/s. Polo Hotels Ltd.”
In view of all this material on the record we have no hesitation in holding that Dahiya had bought back the shares from the Corporation on 15.4.1999 and made the payment by issuing post dated cheques towards the consideration. Had the amount been deposited by way of comfort or security as is now sought to be urged, the same would have been a lump sum figure and not the exact amount of Rs. 71,25,466/- which was payable for the repurchase of the shares according to the formula prescribed in clause 24(c) of the agreement dated 4.1.1993 entered into with Garg in whose shoes Dahiya had stepped in. The same clause has been incorporated as clause 15 in the tripartite agreement dated 19.4.1999. It is thus clear that Dahiya had paid Rs. 23.75 per share to the Corporation on 15.4.1999 and having done so it was incumbent upon him to have disclosed the same in the public announcement and also in the letter of offer made to the other shareholders. Not having done so, the Board is right in directing Dahiya to go in for a fresh public announcement and offer to the remaining shareholders of the target company the price of Rs. 23.75 per share.
7. It was then urged by the learned counsel for the appellant that the post dated cheques issued by Dahiya had been dishonoured and therefore no payment could be said to have been made to the Corporation for the buy back of the share. The other limb of the argument is that the shares held by the Corporation have not been transferred in favour of Dahiya and his associates and therefore this acquisition of buy back did not fructify and the price offered to the Corporation could not be taken into consideration in terms of Regulation 20(2)(b) of the Regulations to determine the minimum offer price. In order to decide these issues it is necessary to refer to the relevant provisions of Regulation 20 of the Regulations as it stood prior to its amendment with effect from 9.9.2002 which are reproduced hereunder for facility of reference.
“20. Minimum Offer Price – (1) The offer to acquire the shares under regulation 10, 11 or 12 shall be made at a minimum offer price which shall be payable –
(a) in cash; or
(b) by exchange and/or transfer of shares of the acquirer company, if the person seeking to acquire the shares is a listed body corporate; or
(c) by exchange and/or transfer of secured instruments with a minimum of “A” grade rating from a credit rating agency;
(d) a combination of clause (a), (b) or (c):
Provided that …………
(2) For the purposes of sub-regulation (1), the minimum offer price shall be the highest of –
(a) the negotiated price under the agreement referred to in sub-regulation (1) of regulation 14;
(b) the highest price paid by the acquirer or persons acting in concert with him for any acquisitions, including by way of allotment in a public or rights issue, if any, during the 26 weeks period prior to the date of public announcement;
(c) the price paid by the acquirer under a preferential allotment made to him or to persons acting in concert with him at any time during the twelve months period up to the date of closure if the offer;
(d) the average of the weekly high and low of the closing prices of the shares of the target company as quoted on the stock exchange where the shares of the company are most frequently traded during the 26 weeks preceding the date of public announcement.
Explanation - …………………….”
A reading of Regulation 20(2) would make it clear that it prescribes four different methods of determining the minimum offer price and the highest of the four is the minimum offer price which has to be offered to the remaining shareholders of the target company. We are concerned with clause (b) only. This clause provides that highest price paid by the acquirer for any acquisition including allotment in a public or rights issue if any, during the 26 weeks period prior to the date of public announcement has to be taken into account while determining the minimum offer price. In other words, the highest price paid by an acquirer for any acquisition will be taken into consideration for determining the minimum offer price. In the case before us Dahiya had paid Rs. 23.75 per share to the Corporation on 15.4.1999 for carrying out his buy back obligation and since this transaction took place within 26 weeks prior to the date of public announcement, it had to be considered for determining the minimum offer price. The acquisition may fructify or not is not the concern of clause (b) so long as to the amount was paid for the acquisition. We are, therefore, of the view that the price offered by Dahiya to the Corporation on 15.4.1999 being the highest during the 26 week period prior to the public announcement as no other transaction took place had to be offered to the remaining shareholders as well. In this view of the matter we have no hesitation in rejecting the contention of the learned counsel for the appellant.
8. Lastly, it was contended that the buy back of shares from the Corporation was exempt from the applicability of Regulations and, therefore, the price offered to the Corporation in regard to an exempt transaction could not be taken into consideration for determining the minimum offer price. The learned counsel for the appellant referred to the opening words of Regulation 3 in support of his contention and urged that nothing contained in Regulations 10, 11 and 12 shall apply to the transfer of shares from a State level financial institution to the co-promoters of the company. We have given our thoughtful consideration to this submission but do not find any merit therein. There is no gainsaying the fact that buy back of shares by Dahiya from the Corporation being a transfer of shares from a State level financial institution to a co-promoter of the target company was exempt under Regulation 3(1)(i) of the Regulations from the applicability of Regulation 10. The effect of this exemption is that on the transfer of these shares Regulation 10 did not get triggered and Dahiya was absolved from his obligation to make a public announcement. Had this transfer not been exempt, Dahiya would have had to make a public announcement to acquire shares of the target company in accordance with the Regulations. This exemption, however, does not mean that the price paid by Dahiya to the Corporation for the acquisition of shares is not to be considered for determining the ‘minimum offer price’ to be offered to the remaining shareholders of the target company in pursuance to the public announcement made on 24.4.1999. As already mentioned above, this public announcement was made when Dahiya acquired the shareholding of Garg on 20.4.1999. Notwithstanding the exemption, the fact is that Dahiya paid on 15.4.1999 a sum of Rs. 71,25,466/- to the Corporation for acquiring its shares at the rate of Rs. 23.75p per equity share and since this payment was made during the 26 week period prior to the date of public announcement, clause (b) of Regulation 20(2) requires that it has to be considered for determining the minimum offer price to be offered to the other shareholders of the target company. We are, therefore, of the opinion even though the transaction regarding buy back of shares did not trigger the Regulations yet the price paid by Dahiya to the Corporation had to be considered for the purpose of determining the minimum offer price for the public announcement made by Dahiya on 24.4.1999.
9. No other point was raised.
10. In the result the appeal fails and the same stands dismissed leaving the parties to bear their own costs.
Justice N.K. Sodhi
Presiding Officer
C. Bhattacharya
Member
R.N.Bhardwaj
Member
Date:19.04.2006