SECURITIES AND EXCHANGE BOARD OF INDIA ORDER
IN THE MATTER OF ACQUISITION OF SHARES/ VOTING RIGHTS OF HINDUSTHAN NATIONAL GLASS & INDUSTRIES LTD. – EXEMPTION UNDER REGULATION 11(1) FROM MAKING PUBLIC ANNOUNCEMENT UNDER THE SEBI (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS, 1997
NO. : CO/474/TO/01/2003
1.0 BACKGROUND
1.1 Ace Glass Containers Ltd. is a group company of C K Somany Group. (hereinafterShri C K Somany and Ace Glass Containers Ltd. collectively referred to as "the Acquirer"). The Acquirer proposes to acquire 806,192 equity shares (7.3%) of Hindustan National Glass and Industries Ltd. (hereinafter referred to as "the Target Company") from S K Somany Group @ Rs 40/- per share in terms of Memorandum of Understanding signed on 07.10.02.
1.2 The shares of the Target company are listed at the Mumbai Stock Exchange and the Calcutta Stock Exchange. In the Target Company, C K Somany Group holds 73.05% equity shares, S K Somany Group holds 7.75% equity shares (prior to the proposed acquisition), H L Somany Group holds 7.72 % equity shares, R K Somany Group holds 10.83 % equity shares and the balance 0.65% equity shares are held by public shareholders being 136 in number.
1.3 As a result of the proposed acquisition, the Acquirer would have to make an open offer to the public shareholders of the Target company in terms of sub regulation (1) of regulation 11 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as "the Regulations").
2.0 APPLICATION
2.1 The Acquirer made an application dated 14/09/02 under sub-regulation (2) of regulation 4 of the Regulations to the Securities and Exchange Board of India (hereinafter referred to as "SEBI") seeking exemption from compliance of the provisions of regulations 12,14, 15, 16, 18, 21, 22(3), 22(4), 22(5) and 22(8) for making public announcement under sub regulation (1) of regulation 11 of the Regulations.
3.0 SUBMISSIONS
3.1 In the aforesaid application, the Acquirer , inter-alia, submitted the following:
3.2 The Target company was promoted by the Somany family. The Somany family, comprising the groups of Mr. H.L.Somany, Mr.S.K.Somany, Mr. C.K.Somany and Mr. R.K.Somany arrived at a family settlement in the year 1994. As a part of this settlement, around 40% of the then paid-up capital of the Target company was retained / transferred by others groups to the C.K.Somany group and hence the ownership rights and management control of the Target company was acquired by the C.K.Somany group, the present promoter group of the Target company from 29th December 1994.
3.3 In the year 1997, the groups of Mr. H.L.Somany, Mr.S.K.Somany and Mr. R.K.Somany filed a suit before the Hon’ble Calcutta High Court [ suit no. 35 of 1997] for purchase of their shareholdings in the Target company by the C.K.Somany group as a result of which the Calcutta High Court vide an interim order dated 4th February 1997 restrained the C.K.Somany group from dealing in, disposing of or creating any third party rights in respect of their shareholding [1410273 equity shares] in the Target company until the disposal of the suit.
3.4 The C.K.Somany group also approached the court and obtained a similar order of injunction dated 25.02.97 against the groups of Mr. H.L.Somany, Mr.S.K.Somany and Mr. R.K.Somany restraining them from selling, transferring or pledging any of the 29,70,926 equity shares of the Target company held by them and their relatives and associates, being the subject matter of the aforesaid suit until disposal of the suit.
3.5 The S.K.Somany group, holding 8,56,192 equity shares in the Target company offered to sell 8,06,192 equity shares in the Target company to the C.K.Somany group vide their letter dated 22nd August 2002 at a price to be mutually agreed upon and subject to the C.K.Somany group getting the said order dated 25th February 1997 vacated to the extent of 8,06,192 equity shares held by the S.K.Somany group.
3.6 The Calcutta High Court vide its order dated 13th September 2002 modified its earlier order dated 25th February 1997, thus permitting the C.K.Somany group 8,06,912 equity shares of the Target company held by the S.K.Somany group.
3.7 On receipt of the copy of the aforesaid order of the Calcutta High Court, the C.K. Somany group proposes to enter into a Memorandum of Understanding with the S.K.Somany group to purchase their shareholding of 8,06,912 equity shares in the Target company at a price to be mutually agreed upon between the parties.
3.8 Due to the operation of the order of the Hon’ble High Court restraining them from transferring or disposing their holding in the Target company, the groups of Mr. R.K.Somany and Mr. H.L.Somany [holding 10.83 % and 7.75% respectively in the Target company] will not be eligible to participate in the open offer. As such the mandated public offer can be made only to other public shareholders holding 0.65% of the share capital of the Target company.
3.9 The procedural requirements for making an open offer are quite elaborate and involve much effort, time and costs. In view of the small number of shareholders involved, complying with all the formalities involved in the open offer would impose unjustified costs and efforts on the acquirers.
3.10 The exemption may be granted to the Acquirer from the provisions of Regulation 12, 14, 15, 16, 18 21, 22(3), 22(4), 22(5) and 22(8). Further, the requirement of making a public announcement, preparation of Letter of Offer and filing the same with SEBI may be waived.
3.11 The Acquirer will make an offer to all 136 shareholders to buy their shareholding at the price determined in accordance with the provisions of the Regulations.
3.12 The Acquirer will make an offer by sending individual offer letters disclosing all material facts as may be required. Such offer letters shall be sent by registered post acknowledgement due to each of the individual shareholders.
3.13 The Acquirer would be fully complying with the provisions of Regulation 28 regarding creation of an escrow account in respect of the consideration to be paid to such 136 public shareholders.
3.14 The offer to the shareholders shall be made at a price which shall not be less than the negotiated price paid by the acquirers for acquisition of 8,06,912 equity shares from the S.K.Somany group.
3.15 The shares of the Target company are infrequently traded within the meaning of regulation 20(5) and the offer price is proposed to be based on the negotiated price as per the MOU proposed to be entered into by the Acquirers with the S K Somany group.
4.0 PANEL RECOMMENDATION
4.1 The abovesaid application for exemption dated 14/09/02 was forwarded to the Takeover Panel on 23.09.20022002 in terms of sub-regulation(4) of regulation 4 of the Regulations. The Takeover Panel vide its report dated 17.10.2002 has recommended, inter alia, as under:
"The Acquirer C K Somany along with the persons acting in concert holds 73.05% of the equity shares capital of the target company. The control and management of the target company is already with the acquirers group. The acquirers seek to acquirer 7.3% equity shares held by the S K Somany Group. In the facts of the case, grant of exemption as sought is recommended subject to the acquirer –
(i) making individual offers to each of the remaining shareholders who are not restrained by any Order of the Court from selling their shareholdings by directly addressing offer letters offering to buy the shares held by such shareholders in the target company;
(ii) sending such letters to each of such shareholders at the recorded addresses by registered acknowledgement due post;
(iii) submitting of Certificate of auditor / independent Chartered Accountant to the effect that the offer letters were so posted;
(iv) offering the minimum price per share calculated in accordance with Regulation 20 of the Takeover Code but in any event not less than Rs. 40/- per share."
5.0 HEARING
5.1 The Acquirer was given a hearing in terms of sub regulation (6) of regulation 4 of the Regulations, on 28.12.2002. In view of the ongoing litigation between C K Somany group, S K Somany group, R K Somany group and H L Somany group in the Calcutta High Court, the persons belonging to H L Somany group and R K Somany group were also called for the hearing since the grant of exemption as sought by the Acquirer would affect their interest. During the course of hearing, the Acquirer reiterated the submissions made in the exemption application and requested for making further written submissions. The representatives belonging to H L Somany group opposed the grant of exemption inter alia on the ground of offer price offered by the Acquirer. They also requested for making further written submissions in support of their contentions which have been reproduced in the subsequent paragraphs. R K Somany group vide letter dated 25.12.02 submitted that they have no objection to the proposed acquisition by the Acquirer from S K Somany group.
6.0 SUBMISSIONS OF H L SOMANY GROUP
H L Somany group vide their letter dated 28.12.02 inter alia made the following submissions :
6.1 The proposed offer price is not in conformity with the regulations The Book value of the shares is Rs.126.60 per share as shown in the Annual Report for the year ended 31st March 2002, whereas it is shown as Rs.76.27 per share in the Application for exemption made to SEBI. Further, as per the consolidated Balance Sheet of the Target company prepared under the new guidelines of The Institute of Chartered Accountants of India, the correct Book value is Rs.134.42 per share as appearing on page 47 of the Balance Sheet. Further, the Valuation Report prepared by Price Waterhouse also shows Book value of the said Company at Rs.625.06 per share on 31st March 1993. Therefore, it appears that the Acquirer is not showing the correct Book value of the shares so as to deprive of the minority shareholders by offering lower price.
6.2 The proposed exemption application filed by Shri C.K. Somany Group should be rejected.
6.3 As per family arrangement made in 1994, Shri C.K. Somany Group should be asked to make an open offer @ Rs.267/- per share, because the above price was calculated by Price Waterhouse in the year 1994 and agreed by Shri C.K. Somany Group during the family settlement.
6.4 The two Brothers i.e., Shri H.L. Somany and Shri R.K. Somany should not be debarred from participation in the proposed Public Offer, which may be made by the Acquirer. Further, Shri H.L. Somany and Shri R.K. Somany group may be asked to take the consent of Calcutta High Court so as to enable them to participate in the proposed offer.
7.0 Complaint from ShriPradeepDhelia
SEBI received a complaint dated 27.12.2002 from ShriPradeepDhelia, one of the shareholders of the Target company inter alia stating that the proposed open offer price is not in conformity with the provisions of the Regulations.
8.0 Consideration of issues
I have taken into consideration the application dated 14/09/02 the facts of the case, documents available on record and also the recommendation of Takeover Panel.
8.1 It is observed that the Target company was promoted by four Somany groups, viz., Mr. H.L.Somany, Mr.S.K.Somany, Mr. C.K.Somany and Mr. R.K.Somany. These Groups arrived at a family settlement in the year 1994. As a part of this settlement, around 40% of the then paid-up capital of the Target company was transferred by others groups to the C.K.Somany group, the present promoter group of the Target company. After the said family settlement, a dispute arose amongst the four Somany groups regarding the price to be paid for the transfer of the shares of the Target company. In the year 1997, the groups of Mr. H L Somany, Mr. S K Somany and Mr. R K Somany filed a suit being suit no. 35 of 1997 before the Hon’ble Calcutta High Court for purchase of their shareholding in the Target company by the C K Somany group.
8.2 C.K.Somany group also stated to have approached the Hon’ble Calcutta High Court and obtained a similar order of injunction dated 25.02.97 against the groups of Mr. H.L.Somany, Mr.S.K.Somany and Mr. R.K.Somany restraining them from selling, transferring or pledging any of the 29,70,926 equity shares of the Target company held by them and their relatives and associates, being the subject matter of the aforesaid suit until disposal of the suit.
8.3 Thereafter, the C K Somany group stated to have approached the Calcutta High Court for modification of its earlier order dated 25.02.1997 so as to enable C K Somany group to purchase 8,06,192 equity shares of the Target company held by S K Somany group. It was stated that the Calcutta High Court vide its order dated 13th September 2002 modified its earlier order dated 25th February 1997, thus permitting the C.K.Somany group to purchase 8,06,912 equity shares of the Target company held by the S.K.Somany group.
8.4 It is observed this litigation is in progress amongst C K Somany group, S K Somany group, H L Somany and R K Somany group since 1997 and the final decision of the Court is still awaited.
8.5 It is observed that SK Somany Group has agreed to sell part of its shareholding to the acquirer @ Rs. 40/- pursuant to which the application under consideration was made to SEBI by the Acquirer.
8.6 It is observed that in the Target Company, C K Somany Group holds 73.05% equity shares, S K Somany Group holds 7.75% equity shares, H L Somany Group holds 7.72 % equity shares, R K Somany Group holds 10.83 % equity shares and the balance 0.65% equity shares are held by public shareholders being 136 in number. Thus the Acquirer holds 73.05% shares of the Target company. Now the Acquirer proposes to acquire 7.3% shares of the Target company from S.K.Somany Group, which will trigger regulation 11(1) of the Regulations. The Acquirer has therefore made this exemption application seeking exemption from making formal Public Announcement and other procedural formalities as given in Chapter III of the Regulations.
8.7 It is observed that in the application for exemption the Acquirer has stated that in view of the operation of the Hon’ble High Court’s order restraining Mr. R K Somany and Mr. H L Somany groups from transferring or disposing their shareholding in the Target company, the aforesaid groups will not be eligible to participate in the open offer.
8.8 It is observed that the Acquirer has proposed the offer price of Rs 40/- per share being the negotiated price. In the exemption application, the Acquirer has stated that the book value of the shares of the Target company is Rs 76.27 as on 31/03/02. On the other hand, H L Somany Group has vide letter dated 28.12.02, claimed that the book value of the shares is higher than the book value as stated in the exemption application by the Acquirer.
8.9 I have noted that the Panel has granted exemption to the Acquirer subject to fulfillment of certain conditions. It is observed that the Takeover Panel was not aware of the nature of dispute regarding the price of shares of the Target company amongst the four Somany Groups at the time of consideration of the exemption application. This information was given by Acquirer and HL Somany Group subsequently on further inquiry by SEBI vide their letter dated 20.11.2002 and in submission made by the parties after the recommendation by the Panel.
8.10 I have carefully gone through all the facts and submissions made before me. I find that the information pertaining to the dispute amongst the Acquirer and the other shareholder group regarding the shares of the Target company is important for the shareholders of the Target company to take a informed decision regarding participating in the proposed offer. The facts regarding the transfer of shares as per the family settlement stated to have been entered into between the Acquirer and the other shareholder groups are complicated in nature. As the offer price has also been disputed, the same is also required to be justified in terms of the Regulations. The contention of the Acquirer that H L Somany Group and R K Somany Group are not entitled to participate in the offer also needs to be looked into. Therefore, though the number of shareholders in public category are few it is desirable that in the interest of shareholders of the Target company, these facts may be verified by an independent agency and it is desirable that such agency carries out due diligence. In fact, in terms of the Regulations it is the responsibility of the merchant banker to the offer to carry out due diligence by making true and material desirable in draft letter of offer to enable the investors to take a informed decision. In view of the aforesaid, the contention of the Acquirer that the procedural requirements for making an open offer would involve much effort, time and costs cannot be accepted and will not in the interest of the shareholders of the Target company.
9.0 DIRECTIONS / ORDER
9.1 Taking into consideration all the above facts and circumstances of the case, I in exercise of the powers conferred upon me under sub section (3) of Section 4 of the Securities and Exchange Board of India Act 1992 read with sub regulation (6) of regulation 4 of the Regulations for the reasons recorded hereinabove, I hereby , reject the exemption application of the Acquirer inter alia seeking exemption from provisions of regulations 14, 15, 16, 18, 21, 22(3), 22(4), 22(5) and 22(8) from making public announcement under sub-regulation (1) of regulation 11 of the Regulations.
9.2 Consequently, I hereby direct that the Acquirer will have to comply with Regulation 11(1) of the Regulations alongwith the provisions of Chapter III of the Regulations, if it proposes to acquire the 8,06,192 shares of the Target company aggregating to 7.3% as envisaged in the Memorandum of Understanding dated 7/10/02 from the SK Somany Group .
Date: January 28, 2003 G.N. BAJPAI
Place: Mumbai CHAIRMAN