Order in the matter of acquisition of Equity Shares of Seahorse Hospitals Limited

SECURITIES AND EXCHANGE BOARD OF INDIA 

ORDER

WTMO/39/CFD/08/2006

1.0 BACKGROUND

1.1 M/s Seahorse Hospitals Ltd. (hereinafter referred to as ‘the target company’) is a company limited by shares incorporated under the Companies Act, 1956, having its registered office at No 6, Royal Road, Cantonment, Tiruchirapalli – 620 001. The equity shares of the target company are listed on the Bombay Stock Exchange Ltd.  (BSE)  and Madras Stock Exchange Ltd. (MSE).

1.2 M/s Seahorse India Pvt. Ltd. (hereinafter referred to as ‘the acquirer’) belong to the promoter group of the target company and (together with persons acting in concert), holds 24.34% of the total equity capital of the target company.

2.0 APPLICATION SEEKING EXEMPTION

2.1 Vide letter dated December 13, 2004, the acquirer filed an application with the Securities and Exchange Board of India (SEBI) under regulation 4(2) read with regulation 3(1) (l) of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997, (hereinafter referred to as “the Takeover Regulations’).

2.2 In the application, the acquirer has submitted inter alia the following:-

2.2.1       The target company is in the business of establishing and running hospital. The advancement in technology in the medical field has necessitated the up-gradation of the existing equipment and purchase of new equipment.

2.2.2       The target company has been in default of the repayment of its dues to Financial Institutions namely, IDBI, IFCI & ICICI Bank for many years and all its earlier efforts to reach a settlement had failed.

2.2.3       The target company has entered into a comprehensive One Time Settlement (OTS) with the said Financial Institutions. The OTS has helped the target company to settle the debts of Financial Institutions. The proceedings initiated by the Financial Institutions before the Debts Recovery Tribunal at Chennai were withdrawn by the said Financial Institutions on the basis of the OTS entered into between the target company and the said Financial Institutions.

2.2.4       The acquirer is purchasing 12,30,000 equity shares representing 9.81% shareholding in the target company from Financial Institutions for completing the comprehensive One Time Settlement of the dues of the target company with the said Financial Institutions.

2.2.5       The priority of the promoters of the target company is to upgrade the existing equipment and to raise the necessary finances for the said purpose. In the circumstances, the public offer and the related expenses would be an additional burden to the target company.

2.2.6       Pursuant to the aforesaid acquisition, the holding of the acquirer together with the persons acting in concert, would increase from 24.34% to 34.15% of the total equity capital of the target company.

2.2.7       The shareholding pattern of the target company before and after said acquisition is as under:

Shareholders category	Number of registered shareholders as on date of application	Before the proposed acquisition		After the proposed acquisition
		No. of shares/ total voting rights held	% of shares total voting capital held	No. of shares/ voting rights	% of shares / voting rights
Promoter group	4	426050	3.40	426050	3.40
Acquirers	1	2628085	20.94	3858085	30.75
FIs/Banks	4	1230900	9.81	900	0.00
FIIs/NRIs/ OCBs	2978	1401800	11.17	1401800	11.17
Public	53937	7637455	54.68	7637455	54.68
Total	56924	12545000	100	12545000	100

 

2.3 The acquirer sought exemption from the requirements of regulation 11(1) of the Takeover Regulations.

2.4 Vide letter dated December 22, 2004, the acquirer forwarded the details of acquisition of the shares of the target company in terms of regulation 7(1A) of the Takeover Regulations. In the said disclosure, it is stated that the acquirer had already acquired 12,30,000 shares of the target company.

3.0 GROUND FOR SEEKING EXEMPTION

3.1 The acquirer has inter alia made the following submissions: -

a)     The said OTS was subject to certain terms and conditions and one of the terms is the acquisition of shares of the target company by the acquirer from the said Financial Institutions. Therefore, the acquirer has purchased the shares of the target company from the Financial Institutions for completing the comprehensive settlement.

b)     But for the completion of the OTS including completion of the acquisition, the target company would have become defunct. The OTS has helped the target company to settle the debts.

c)      The OTS completed by the target company is necessary for its survival and therefore is in the interests of the target company and its shareholders. The acquisition of shares of the target company by the acquirer being a part of the OTS and also is in the interests of the target company and its shareholders.

d)     The shares of the target company are infrequently traded in terms of Explanation (i) to regulation 20(5) of the Takeover Regulations. The minimum offer price of shares of the target company is Rs. 2.50/- per share is the negotiated price under the proposed agreement and also the highest price proposed to be paid by the acquirer for acquisition of shares of the target company during the preceding 26 weeks of the date of the application.

4.0 RECOMMENDATION OF THE TAKEOVER PANEL

4.1 The aforesaid application dated December 13, 2004 with its letter dated December 22, 2004, were forwarded by SEBI to the Takeover Panel in terms of sub-regulation (4) of Regulation 4 of the Takeover Regulations. The Takeover Panel vide its report dated December 23, 2004 has observed that the acquisition has already taken place therefore, the question of making any recommendation for grant of exemption does not arise.

5.0 FURTHER SUBMISSIONS

5.1  Vide letter dated February 01, 2005, the acquirer clarified that the transfer of 9.81% of equity shares of the target company from the Financial Institutions to the acquirer was not completed and the shares were continued to stand in the name of Financial Institutions in the records of the target company. It has also stated that the shares in respect of the present application has been made to SEBI, has not been acquired by the acquirer.

5.2 In view of the above submissions of the acquirer and the disclosure made by it vide letter dated December 22, 2004, SEBI remitted the case back to the Takeover Panel for its consideration. The Takeover Panel vide its report dated March 10, 2005, observed that acquisition of the shares having already taken place, the occasion for Panel to make recommendation did not arise.

5.3 SEBI vide its letter dated April 06, 2005, sought information from  Industrial Development Bank of India Ltd. (IDBI), ICICI Bank Ltd., IFCI Ltd., as to whether the aforesaid 12,30,000 equity shares of the target company had been handed over to the concerned parties and also requested them to confirm the date of such handing over. SEBI had also vide letter dated April 06, 2005, advised the acquirer to inform about the entity which has the possession of said 12,30,000 equity shares of the target company and their relationship with the acquirer.

  5.4 IDBI, IFCI and the ICICI Bank vide their letters dated April 26, 2005, May 03, 2005 and March 17, 2006 respectively, had informed that the said 12,30,000 equity shares of the target company alongwith the duly signed share transfer forms were handed over to the acquirer in December 2004. The IDBI and ICICI Bank have also confirmed that the Financial Institutions are not entitled to exercise any voting rights in respect of the said shares.

5.5 The acquirer, through its Chartered Accountant vide their letter dated April 15, 2005, submitted that in the Register of members of the target company, the said 12, 30,000 equity shares continue to be registered and held in the name of the Financial Institutions and the acquirer is in physical possession of the share certificates in respect of the said equity shares. It was further submitted that till the exemption under the Takeover Regulations is granted the said equity shares would continue to be in the name of the Financial Institutions in the register of members of the target company and the voting rights thereon would be exercisable only by the Financial Institutions.  Vide letters dated September 21, 2005 and June 05, 2006, it is reiterated on behalf of the acquirer that the said equity shares are still to be transferred in the name of the acquirer and the share transfer forms executed by the Financial Institutions had already expired. The transfer of said equity shares of the target company can be completed only after the transfer is registered in the books of the target company. Since only a registered shareholder of the company is entitled to receive notice from the company and is entitled to vote in a meeting, the acquirer would not be able to exercise voting rights in respect of those shares until such transfer.  The acquirer has further submitted that the Financial Institutions might have decided not to exercise the voting rights having sold the said equity shares to the acquirer, the voting rights is yet to accrue in favour of the acquirer.

6.0 FINDINGS

6.1       I have carefully considered the application dated December 13, 2004, the submissions of the acquirer, the information furnished by the Financial Institutions, the recommendations of the Takeover Panel and the relevant material available on record.

6.2 It is observed that in the case submitted by the acquirer, 12,30,000 equity shares of the target company have been handed over by the Financial Institutions alongwith duly signed share transfer form to the acquirer during November / December 2004. I find that regulations 10, 11 and 12 of the Takeover Regulations are attracted when an acquirer acquires or agrees to acquire shares or voting rights in the target company or acquires or agrees to acquire the control over the target company. It is not necessary that the acquirer should actually acquire the shares or voting rights. It is settled position that the registration of shares acquired by an acquirer in his name is not the condition of applicability of regulations 10, 11 and 12 of the Takeover Regulations. These regulations are not linked to the right of the holder to exercise voting rights but to the nature of the shares he acquires or agrees to acquire i.e. shares carrying voting rights. The triggering point is the acquisition of shares carrying / entitling voting rights. In view of this settled legal position, I find that the actual registration of transfer of shares in the Register of members of the target company, as submitted by the acquirer, is not relevant for the purpose of the applicability of regulation 11. In the present case, the acquirer has acquired the 12,30,000 (9.8%) equity shares of the target company on November 16, 2004, December 16, 2004 and December 20, 2004 when the said shares have been sold by the Financial Institutions to the acquirer.  

 6.3 The acquirer made the application vide its letter dated December 13, 2004, when the shares from the two Financial Institutions were not acquired. However, the said shares have been acquired by the acquirer when the application was pending with SEBI. I note that an application under regulation 4(2) of the Takeover Regulations can be made in respect of a proposed acquisition. In this regard, I agree with the observations of the Takeover Panel that the Panel could not recommend exemption in view of the fact that the acquisition had already taken place. I find that the case could not be considered by the Panel for the purpose of making recommendation under regulation 4(5) of the Takeover Regulations since the acquisition has taken place and therefore the Panel left the facts of the case for the consideration of SEBI.

6.4 I find that though the case may not be covered under regulation 4 of the Takeover Regulations as the acquisition has already taken place, the facts of the case has to be examined on its merits. I note that the acquirer belong to the promoter group of the target company and is in control over the target company. The target company could not repay its dues to the Financial Institutions for many years and the said Financial Institutions filed recovery proceedings before the Hon’ble Debts Recovery Tribunal at Chennai. The OTS made by the target company and the Financial Institutions was necessary for survival of the target company and is in the interest of the shareholders of the target company. The recovery proceedings initiated by the Financial Institutions were disposed of as withdrawn on the basis of the said OTS. The acquirer has to buy the shares of the target company held by the Financial Institutions, as per the terms and conditions of the aforesaid OTS.

6.5 I note that the Financial Institutions had handed over the said 12,30,000 shares to the acquirer in terms of the OTS and the acquirer had taken steps for seeking exemption under the Takeover Regulations. However, the exemption could not be examined by the Takeover Panel since the Financial Institutions, except one of them, had handed over the share certificates to the acquirer when the request seeking exemption was under consideration.

6.6 The peculiar facts and circumstance of this case as mentioned above suggest that had the Financial Institutions not handed over the said equity shares to the acquirer before the grant of exemption, the exemption application filed by the acquirer could have been allowed.

6.7 In view of the above, taking into account all the mitigating facts and circumstances, as mentioned above, in my view, under the facts and circumstances of the present case, insisting the acquirer to make public announcement in accordance with the provisions of regulation 11 of the Takeover Regulations may not be desirable.

7.0 ORDER

 

7.1  In view of the above findings, I, in exercise of the powers conferred upon me by virtue of section 19 of the Securities and Exchange Board of India Act, 1992 read with sub - regulation (6) of regulation 4 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 dispose of the application dated December 13, 2004, filed by Seahorse India Private Ltd.

 

 T. C. NAIR

 WHOLE TIME MEMBER

SECURITIES AND EXCHANGE BOARD OF INDIA 

 

Place:  Mumbai

Dated: August 18, 2006