IN THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No. 74/2002
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Date of Hearing
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31.1.2005
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Date of Decision
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23.2. 2005
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In the matter of:
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Chowgule & Co. Ltd.
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Appellant – Represented by
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Mr. Venkatesh Dhond, Advocate
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Versus
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Securities & Exchange Board
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Respondent –Represented by
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of India
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Mr. Kumar Desai, Advocate
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Coram:
Justice Kumar Rajaratnam, Presiding Officer
Per: Justice Kumar Rajaratnam, Presiding Officer
1. The appeal is taken up for final disposal with consent of the appellant and the respondent.
2. The appellant challenges the letter issued by the respondent dated 9.8.2002 directing the appellants to make a public announcement and to pay interest at 15% for delayed payment to the shareholders who wished to exit in accordance with the Securities & Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as the “Regulations”).
3. The Regulations in public interest are constantly changing and therefore the first thing to do is to find out the nature of the violation of the Regulation and to determine what was the Regulation at the relevant period when the code was triggered. Regulation 3(1)(c) is no longer on the books. It was omitted by an amendment with effect from 9.9.2002.
4. It is common ground that the code was triggered prior to 9.9.2002 (we shall deal with the facts of the case little later in the judgment). Regulation 3(1)(c) was what we may call an escape route with respect to adherence to Regulation 10, 11 & 12. We are here concerned with Regulation 11. The Regulation 3(1)(c) before it was deleted on 9.9.2002 reads as follows.
“(c) preferential allotment, made in pursuance of a resolution passed under Section 81(1A) of the Companies Act, 1956 (1 of 1956):
Provided that, —
(i) board resolution in respect of the proposed preferential allotment is sent to all the stock exchanges on which the shares of the company are listed for being notified on the notice board;
(ii) full disclosures of the identity of the class of the proposed allottee(s) is made, and if any of the proposed allottee (s) is to be allotted such number of shares as would increase his holding to 5 percent or more of the post issued capital, then in such cases, the price at which the allotment is proposed, the identity of such person(s), the purpose of and reason for such allotment, consequential changes, if any, in the board of directors of the company and in voting rights, the shareholding pattern of the company, and whether such allotment would result in change in control over the company are all disclosed in the notice of the general meeting called for the purpose of consideration of the preferential allotment.”
5. Regulation 3(1)(c) has to be read with Regulation 11. The relevant portion of the Regulation 11 as far as this case is concerned is Regulation 11(2). Regulation 11(2) reads as follows:
“(2) No acquirer who, together with persons acting in concert with him has acquired, in accordance with the provisions of law, 75% of the shares or voting rights in a company, shall acquire either by himself or through persons acting in concert with him any additional shares or voting rights, unless such acquirer makes a public announcement to acquire shares in accordance with the regulations.”
6. Admittedly at the relevant time the appellant had the exemption under 3(1)(c), provided full disclosures of the identity of the calls of proposed allottees is given. The other details required were the price, identity of the persons, purpose and reasons for such allotment, consequential changes in the Board of Directors of the company and whether such allotment could result in change in control of the company with respect to the preferential allotment should be disclosed by the acquirers, the appellant, within 21 days of the date of acquisition.
7. Although there was some delay in filing the report, we have carefully perused the report and resolution at the extra ordinary general meeting dated 21st October, 2000. It is clear from the details mentioned that the requirement under 3(4) of the then existing regulation was not complied with strictly. From the facts set out in the appeal, it is common ground that the shareholding of the appellant in the target company increased from 15.84% to 74.43% on 1.12.2000. The appellant did not take advantage of the exemption granted under clause 2 of proviso to Regulation 3(1)(c). The omissions in furnishing the details are:
(a) Price at which shares were proposed to be issued;
(b) Consequent changes in voting rights;
(c) Consequential changes in the Board of Directors;
(d) Consequential changes in the shareholding pattern of the company;
(e) Whether allotment would result in change in control.
8. Therefore there is a broad consensus between the parties that the code was triggered and it was incumbent on the appellant/ acquirer to make a public offer.
9. It appears to us that the appellant was fair in coming forward to make a public offer as required under the Regulations and lot of time of SEBI and this Tribunal could have been saved if the offer given by the appellant was accepted with certain conditions.
10. On the contrary, the respondent took an intransigent view and wanted to take action for violation of the code. When the appellant has come forward to submit himself to the Regulation by making an open offer it appears to us it does not augur well for the stability of the securities market and for the interest of the investors who wish to exit to further delay the open offer. We say this in view of the fact that the object of the exercise of SEBI should always be not to punish the violator when the violation is admitted but to give an opportunity under the Regulations for the shareholders to exit.
11. The cost of making an open offer is enormous and in this case the public offer is only to an extent of 2.51% of the target company. The rest of the scrips were anyway held by the appellant. It is in these circumstances we hold that when an offer is given by the appellant to make a public offer SEBI should grasp it with both hands and act in public interest by avoiding unnecessary litigations. On 17th July 2002 the appellant wrote a letter to SEBI asking SEBI not to initiate action against the appellant since they were ready and willing to make a public offer of the remaining 2.51% shareholding of the public in accordance with the Regulation. The letter dated 17th July, 2002 reads as follows:
“Reg: Report filed u/r 3(4) of SEBI (Substantial Acquisition of shares and Takeovers) Regulations, 1997 – {Regulation} Acquisition of shares of MANDOVI PELLETS LIMITED in terms of Reg. 3(1)(c).
Dear Sirs,
Further to our letter dated 23rd April, 2002 this is to inform you that the Company will make public offer for acquiring 19,65,530 equity shares of Rs. 10/- each (constituting 2.39% of share capital) of Mandovi Pellets Limited from general public at face value subject to required compliances under the Companies Act, 1956 and SEBI (Substantial acquisition of Shares and Takeovers) Regulations, 1997.
In view of the above, you are requested not to initiate any action against the Company in the matter. We request you to treat the matter as closed.” (Emphasis by Court)
On 9th of August, 2002 SEBI insists on payment of interest. The letter written by SEBI on 9th August, 2002 reads as follows:
“Sub: Violation of Regulation 11 of the SEBI (Substantial Acquisition of Shares and Takeovers), Regulations, 1997 {Regulations} by Chowgule and Company Limited in the matter of acquisition of shares of Mandovi Pellets Ltd. (MPL)(target company)
Please refer to your letter dated 17.07.2002 on the captioned subject and other correspondence exchanged on the subject, including the personal hearing held on 19/7/02.
2. It is observed that the pre and post allotment/acquisition shareholding pattern of MPL pursuant to the preferential allotment of 5,72,89,100 shares (69.62% w.r.t to the post issued capital) on 01/12/2000, is as under:
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Shareholder
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Pre acquisition
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Post Acquisition
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(A) PROMOTER GROUP
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No.
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%
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No.
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%
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Chowgule Group
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16,93,40,700
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67.74
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74,22,31,700
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90.20
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NMDC
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6,00,00,000
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24.00
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6,00,00,000
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7.29
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TOTAL of (A)
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22,93,40,700
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91.74
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80,22,31,700
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97.49
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(B)
NON PROMOTER (PUBLIC)
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2,06,59,300
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8.26
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2,06,59,300
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2.51
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TOTAL (A+B)
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25,00,00,000
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100
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82,28,91,000
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100
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3. As the acquisition made on 1/12/2000 through preferential allotment is in violation of Regulation 11 and since you have vide your letter dated 17/07/02, proposed to make an open offer to buy out the public shareholding of 2.51% in terms of the captioned Regulations, you are directed as under:
(a) Determine the frequency of trading i.e. whether the shares are frequently traded in terms of explanation (i) to Regulation 20(3) and the reference month for determining the frequency of trading must be taken as December 2000, as the date of acquisition under the preferential allotment was 01.12.2000.
(b) Depending upon whether the shares are frequently or infrequently traded, justify the offer price in terms of Reg. 20(6) read with Reg. 20(2) or Reg. 20(3), as may be applicable.
(c) To pay the interest @ 15% p.a. for the delayed period i.e. from 01.04.2001 {01.12.2000 + 120 days, which is the timeframe by which the shareholders would have received the consideration had the PA been made on 01.12.2000} till the actual date of payment of consideration to the shareholders in the open offer to be made.
(d) To make the public announcement for the said open offer within a period of 45 days from the date of this letter.
(e) You shall also comply with the other applicable provisions of Chapter III of the captioned Regulations.
Please acknowledge receipt and confirm compliance.”
12. On 30th August, 2002 the appellant wrote a letter, the operative portion of the letter reads as follows:
“Having submitted as above, without prejudice to above we may submit that instead of SEBI directing our Company to make a public offer coupled with payment of interest, any of the following four options may be considered.
1) SEBI directing our Company to offer (at par a portion of the newly acquired number of shares) to the public shareholders in the ratio of their holding in MPL so that along with our Company the public shareholders will also have had the opportunity of participating in the issue.
2) SEBI directing our Company to make an open offer to the public shareholders to buy their shares in MPL at par (without payment of interest since MPL has received the subscription money) which will also comply with the requirement of Clause 40A of the Listing Agreement of Stock Exchange since the public shareholding has fallen below 10%
3) SEBI directing the preferential allotment made by MPL to be held as null and void ab initio and cancel the same and restore the pre-allotment position.
4) To levy a token (since MPL has directly benefited out of the subscription by our Company) penalty for the technical default, if any. We are suggesting this course of action without prejudice to other submissions and voluntarily so as to enable SEBI to close the matter.
Please consider the above and advise us the course of action to be followed by us to enable us to take further action in this regard.”
13. The respondent by letter dated 18th September, 2002 once again directed the appellant to make an open offer and stated that serious view will be taken if not done. These suggestions made by the appellant could have been considered by the respondent by inviting the appellant for a meeting. But it was not done.
14. We have carefully perused the regulations as it was then in force and we have had occasion to look at the Regulation 21 as it then was. It was deleted with effect from 09/09/2002.
15. Regulation 21(1) and the proviso therein reads as follows:
“(1) The public offer shall be made to the shareholders of the target company to acquire from them an aggregate minimum of 20 per cent of the voting capital of the company:
Provided that where the open offer is made in pursuance of sub-regulation (2) of regulation 11, the public offer shall be for such percentage of the voting capital of the company as may be decided by the acquirer”
(Emphasis by Court)
16. It is common ground that the violation alleged against the appellant is only under sub-regulation (2) of Regulation 11. Therefore on a careful perusal of the proviso to Regulation 21(1), it appears to us that the acquirer can make a public offer for such percentage of the voting capital of the company as may be decided by the acquirer. In other words, the minimum of 20% has also been given up and the discretion was left with the acquirer and that is perhaps why this proviso was deleted w.e.f. 09/09/2002. But certainly at the relevant time, it appears to us, that the appellant had the choice of making an open offer for less than 20% of the voting capital of the company in spite of it the appellant chose to make a public offer for the whole of 20%.
17. Therefore we feel that it cannot be ruled out that the respondent was insensitive of both the requirements of law and the interest of the investor public and the shareholders of the target company in not putting an end to the litigation.
18. The appellant, acquirer has agreed before us to make an open offer without seeking protection under the then existing proviso to Regulation 21.
19. The main concern of the appellant is the enormous cost the appellant would have to incur in making a public offer. Even if he were to claim exemption under the then existing proviso under Regulation 21(1) the appellant would have to spend a sum of Rs. 20 lakhs to the Merchant Banker under the following headings:
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1. Inspection Fees along with mandate
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Rs. 6 lakhs plus service taxes
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2. On Opening of the offer
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Rs.10 lakhs plus service taxes
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3. On submission of 45-day Report of the Offer
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Rs.4 lakhs plus service taxes
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20. Apart from this, the public announcement under Regulation 15 to be made in one English national daily with wide circulation, one Hindi national daily with wide circulation and a regional language daily with wide circulation at the place where the registered office of the target company is situated and at the place of the stock exchange where the shares of the target company are most frequently traded. This will also entail heavy financial burden on the appellant. It is estimated that compliance of Regulation 15 will be not less than Rs. 5 to 6 lakhs since all the information mentioned under Regulation 16 will have to be included in the newspapers mentioned in Regulation 15. Regulation 17 contemplates brochures. The Regulation also contemplate the letter of offer to be sent to all the shareholders who are members of the company on the specific date mentioned in the public announcement. This requirement is apart from the announcement in the newspaper under Regulation 15.
21. According to a conservative estimate by the appellant, the total exercise would amount to about Rs. 30 to 35 lakhs for a mere 2.51% of the equity share in the hands of the public.
22. But of course, we are not in a position to reduce the rigour of the process of public offer since it is enshrined in the Regulations starting from Regulation 13 onwards. It is time for SEBI to look at the matter afresh and see if a simpler method can be adopted in such procedures which is at the cost of the acquirer and this amount could easily have been spent on the shareholders who wish to exit.
23. Having said that, we shall deal with the ground reality. It is submitted by the counsel for the appellant that the impugned letter is no order and therefore is liable to be set aside. But at the same time, the appellant was fair enough to state that the appellant will make a public offer. The learned counsel for the respondent has also submitted that the impugned letter is not appealable under Regulation 15T of the SEBI Act. In its reply SEBI has stated as follows on this aspect of the matter.
“At the outset, it is submitted that it is submitted that the present appeal is not maintainable and is untenable under law on the ground that the respondent has not passed any order dated 09.08.02 as alleged by the appellant against which an appeal can lie under Section 15T of the Securities & Exchange Board of India Act, 1992 (hereinafter referred to as “the Act”). It is submitted that under Section 15T of the Act any person aggrieved by an order of the Board made under the Act or the rules or regulations made thereunder may prefer an appeal to the Hon’ble Tribunal. In the instant case, the impugned letter dated 9.8.02 is not an order made by the Board under the Act or the rules or regulations made thereunder. The alleged letter dated 09.08.02 is a letter issued by SEBI advising the appellant to comply with the requirements of the Securities & Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as “the Regulations”). The respondent craves leave of the Hon’ble Tribunal to set out the background under which the said advise dated 09.08.02 has been issued.”
24. Accordingly, there was consensus that the letter is not an enforceable order directing the appellant to make a public offer. Notwithstanding this, the appellant has far back on 17.7.2002 agreed to make a public offer. This letter has been extracted in the earlier part of the judgment. In that view of the matter, we hold that the impugned letter dated 9.8.02 is liable to be set aside, and is accordingly set aside. The letter dated 17.4.2002 agreeing to make a public offer is binding on the appellant and accordingly we direct the appellant to make a public offer.
25. The next question that arises for consideration is what is the rate of interest to be paid by the appellant to the successful shareholders in the facts and circumstances of this case. Regulation 44 deals with this aspect of the matter. Regulation 44 was substituted with effect from 9.9.2002. Prior to 9.9.2002, no specific rate of interest was mentioned. After the amendment, regulation 44(i) reads as follows:
“44. Without prejudice to its right to initiate action under Chapter VIA and section 24 of the Act, the Board may, in the interest of securities market or for protection of interest of investors, issue such directions as it deems fit including:-
(a) -----------------
to
(h) -----------------
(i) directing the person concerned, who has failed to make a public offer or delayed the making of a public offer in terms of the regulations, to pay to the shareholders, whose shares have been accepted in the public offer made after the delay, the consideration amount along with interest at the rate not less than the applicable rate of interest payable by banks on fixed deposits.”
(Emphasis by Court)
26. It was submitted by the learned counsel for the appellant that the prevailing rate of interest offered by various banks on FDs for a period of one year or above are 5.25%, 5.50% and 6%.
27. The Supreme Court in Clariant International Ltd. & Anr. Vs. SEBI reported in (2004) 62 CLA 96 dealt with Regulation 44. The Supreme Court pronounced at paragraph 33, 34 & 35 as follows:-
“33. When a bench-mark is fixed by a statute, the question as to whether a discretion has been judicially or properly exercised or not will have to be determined in the context of the facts of the particular case. (See Irrigation Department v. G C Roy [1992] 1 SCC 508). When a bench-mark is fixed or the court grants interest at the agreed rate, it may not be necessary to give reasons but where interest is granted at a higher or lessor rate, some reasons are required to be assigned.
34. By reason of regulation 44, as substituted in 2002, the discretionary jurisdiction of the Board is curtailed. It in terms of Regulation 1997 could award interest by way of damages but by reason of Regulations 2002, its power is limited to grant interest to compensate the shareholders for the loss suffered by them arising out of the delay in making the public offer. The courts of law can take judicial notice of both inflation as also fall in bank rate of interest. The bank rate of interest both for commercial purpose and other purposes had been the subject-matter of statutory provisions as also the judge-made laws. Even in cases of victims of motor vehicles accidents, the courts have upon taking note of the fall in the rate of interest held that 9 per cent interest would be reasonable. [See Kaushnuma Begum (supra), and H S Ahammed Hussain (supra) and Patricia Jean Mahajan (supra)].
35. The statutory changes brought about must be noticed by the court keeping in view the fact that the nature of jurisdiction by the Board has been changed. The mischief rule also in this case should be applied. Furthermore, while construing such provisions, the courts must take into consideration the provisions of law as had been interpreted by courts prior thereto.”
28. We therefore hold that in the facts of the present case, it would be appropriate to direct the appellant to pay interest at 10% per annum from the date it falls due as per the Regulation as agreed by them. We accordingly direct the appellant to make a public offer 2.51 percent within two weeks from the date of the receipt of the order and proceed with the public offer in accordance with Regulation.
29. The learned counsel for the appellant submitted that a representation was given to SEBI to exempt the appellant from certain rigours of public offer in view of the fact that the public offer was only 2.51% of the equity shares. It is entirely up to SEBI to exercise its inherent power if in accordance with law in the peculiar facts and circumstances of this case to pass appropriate orders in the interest of justice and equity, if such a representation is given, as expeditiously as possible.
30. The appeal is disposed of accordingly.
Justice Kumar Rajaratnam
Presiding Officer
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Place: Mumbai
Date: 23.2.2005
//sr20522