IN THE SECURITIES APPELLATE TRIBUNAL

MUMBAI

 

 Appeal No.72/2004

 

Date of Hearing	15.12.2004
Date of Decision	12.01.2005

 

In the matter of:

 

	Appellant – Represented by
Nath Seeds Ltd.	Mr. Janak Dwarkadas, Senior Advocate Mr. Prashant Beri, Advocate
Versus
	Respondent –Represented by
1. Securities & Exchange Board of India   2. The Stock Exchange, Mumbai   3. Nath Royal Ltd.	Mr. Sunip Sen, Senior Advocate Mr. V.N. Shingnapurkar, Advocate   Mr. Sagar Divekar, Advocate   None

 

*******

Appeal No. 250/2004

 

	Appellant – Represented by
Nath Royal Ltd.	Mr. Janak Dwarkadas, Senior Advocate Mr. Prashant Beri, Advocate
Versus
	Respondent –Represented by
1. Securities & Exchange Board of India   2. The Stock Exchange, Mumbai 3. Nath Seeds Ltd.	Mr. Sunip Sen, Sr. Advocate Mr. V.N. Shingnapurkar, Advocate Mr. Sagar Divekar, Advocate   None

 

Coram:

          Justice Kumar Rajaratnam, Presiding Officer

          Dr. B. Samal, Member

          N.L. Lakhanpal, Member

 

Per:  Justice Kumar Rajaratnam, Presiding Officer

 

 

  1.            The appeals were taken up for final disposal through this common order with the consent of parties.

  2.            The uncontested facts underlying these appeals are that on 30.12.2000 the Annual General Meeting of the shareholders of Nath Seeds Ltd. (NSL) passed a special resolution under Section 81(1a) of the Companies Act, 1956 according sanction to the Board of Directors to issue 25 lakh Optional Fully Convertible Debentures (OFCDs) of Rs. 100/- each to another group company namely, Nath Royal Ltd. (NRL) in consideration for acquisition of its business.  The resolution provided that the relevant date for deciding the pricing of shares arising out of conversion of the OFCDs would be 30 days prior to the date on which the holders of the OFCDs would become entitled to apply for the said shares.  Accordingly, the Board of Directors also passed a resolution on the same date i.e. on 30.12.2000 for issuing 25 lakh OFCDs to Nath Royal Ltd.  In terms of these resolutions of the Annual General Meeting and of the Board of Directors, NRL had an option exercisable at any time within 18 months from the date of issue of the OFCDs to decide to convert OFCDs in full or any part thereof into equity shares.  On 14.1.2002, NRL exercised its option and decided to convert 11 lakh OFCDs out of a total of 25 lakh into equity shares.  The Board of Directors of NSL passed  a resolution on 15.2. 2002 for conversion of 11 lakh OFCDs into equity shares.  The conversion price for this purpose was calculated by treating the relevant date as 30 days prior to 14.1.2002 i.e. 14.12.2001.  This 11 lakh OFCDs were accordingly converted into 44 lakh equity shares for which listing permission was granted by the BSE on 4.12.2002, the NSE on 2.1.2003 and the ASE on 8.1.2003.

  3.            Similarly on 31.5.2002 NRL once again exercised its option to convert a further 7.80 lakh OFCDs out of the balance 14 lakh OFCDs into equity shares.  Once again the relevant date for deciding the conversion price was taken to be 30 days prior to 31.5.2002, i.e. 1.5.2002. Once again the Board of Directors of NSL passed a resolution of 6.9.2002 for conversion of 7.8 lakh OFCDs into 40 lakh equity shares.  However, since this resolution by the Board of Directors was passed on 6.9.2002 i.e. beyond the period of 18 months from the date of allotment of the OFCDs even though the option was exercised by NRL within the time limit, which expired on 30.6.2002, the BSE advised NSL to obtain no objection/relaxation from SEBI before granting the listing permission.  When NSL applied to SEBI for its no objection SEBI took the view that as per its Disclosure and Investor Protection Guidelines, 2000 the conversion price should have been fixed by taking the relevant date as 30 days prior to the date of the Annual General Meeting of NSL which authorized the issue of such OFCDs i.e. 30 days prior to 30.12.2000 and not 14.12.2001 and 1.5.2002 as had been done by NRL.  Some correspondence was exchanged between NSL and SEBI on the subject but SEBI held on to its interpretation of the Disclosure and Investor Protection Guidelines, 2000 and advised the stock exchanges to act accordingly.

  4.            Being aggrieved, the appellants NSL and NRL have filed the present appeals.  The outcome of these appeals hinges on the interpretation of the term “becomes entitled to apply” as appearing in Regulation 13 of the SEBI (Disclosure and Investor Protection) Guidelines 2000 (Guidelines for short) and the resolutions passed by the AGM and the Board of Directors of NSL on different occasions.  For a better understanding of the context in which the term “becomes entitled to apply” the relevant Clause 13 of the Guidelines is reproduced below in full.

“13.0 The preferential issue of equity shares/Fully convertible Debentures (FCDs)/Partly Convertible Debentures (PCDs) or any other financial instruments which would be converted into or exchanged with equity shares at a later date, by listed companies whose equity share capital is listed on any stock exchange, to any select group of persons under section 81(1A) of the Companies Act, 1956, on private placement basis shall be governed by these guidelines.

13.1         Such preferential issues by listed companies by way of equity shares/Fully Convertible Debentures (FCDs)/Partly Convertible Debentures (PCDs) or any other financial instruments which would be converted into/exchanged with equity shares at a later date, shall be made in accordance with the pricing provisions mentioned below:

13.1.1  Pricing of the Issue

13.1.1.1  The issue of shares on a preferential basis can be made at a price not less than the higher of the following:

(i)     The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the six months preceding the relevant date; or

(ii)  The average of the weekly high and low of the closing prices of the related shares quoted on a stock exchange during the two weeks preceding the relevant date.

Explanation:

(a)          “relevant date” for the purpose of this clause means the date thirty days prior to the date on which the meeting of the general body of shareholders is held in terms of section 81(1A) of the Companies Act, 1956, to consider the proposed issue.

(b)          “stock exchange” for the purpose of this clause means any of the recognized stock exchanges in which the shares are listed and in which the highest trading volume in respect of the shares of the company has been recorded during the preceding six months prior to the relevant date.

13.1.2         Pricing of shares arising out of warrants, etc.

13.1.2.1           (a)  Where warrants are issued on a preferential basis with an option to apply for and be allotted shares, the issuer company shall determine the price of the resultant shares in accordance with Clause 13.1.1.1 above.

(b)  The relevant date for the above purpose may, at the option of the issuer be either the one referred to in Explanation (a) to Clause 13.1.1.1 above or a date 30 days prior to the date on which the holder of the warrants becomes entitled to apply for the said shares.

13.1.2.2           The resolution to be passed in terms of Section 81(1A) shall clearly specify the relevant date on the basis of which price of the resultant shares shall be calculated.

13.1.2.3           (a)  An amount equivalent to at least ten percent of the price fixed in terms of Clause 13.1.1.1 above shall become payable for the warrants on the date of their allotment.

(b) the amount referred to in sub-clause (a), shall be adjusted against the price payable subsequently for acquiring the shares by exercising an option for the purpose.

(c)                    The amount referred to in sub-clause (a) shall be forfeited if the option to acquire shares is not exercised.

13.1.3         Pricing of shares on conversion

13.1.3.1  Where PCDs/FCDs/other convertible instruments, are issued on a preferential basis, providing for the issuer of allot shares at a future date, the issuer shall determine the price at which the shares could be allotted in the same manner as specified for pricing of shares allotted in lieu of warrants as indicated in Paras 13.1.2.1 & 13.1.2.2 above.”

 

  5.            On the basis of this Clause 13 of the Guidelines, the learned Senior Counsel for the appellant Mr. Dwarkadas argued before us at the time of hearing that NRL could, by no stretch of imagination, be considered to have become entitled to apply for the equity shares as soon as the OFCDs were allotted to it on 30.12.00.  According to the learned Senior Counsel for the appellant, NRL were given the option to decide about the conversion of OFCDs at any time within a period of 18 months and unless and until NRL exercised this option, it did not become entitled to apply for the equity shares.  It was argued that it was open to NRL not to exercise this option at all and in such an event, NRL would never become entitled to apply for the equity shares. 

  6.            Shri Dwarkadas argued that the very idea of issuing “Optional” Fully Convertible Debentures is to give an “Option” to the holder to opt for the conversion and to decide to convert the OFCDs into equity shares anytime within a period of 18 months depending upon the price of the equity shares prevailing from time to time.  According to the learned Senior Counsel, the relevant date for fixing the conversion price and consequently, the conversion price itself should be variable so as to make the option meaningful because that was the entire purpose and object of issuing “optional” fully convertible debentures.  He thus argued that if the relevant date was to be reckoned with reference to the date of OFCDs the option would be rendered illusory and meaningless leading to absurd situation, unless of course the shareholders deliberately decided to fix a particular relevant date.  SEBI’s interpretation of the Guidelines, according to the learned Senior Counsel amounted to frustrating the will of the shareholders and the purpose of issuing OFCDs and that such an interpretation was not in accordance with the settled principles about interpretation of statutes.  As against this, the learned Senior Counsel for the respondent, SEBI Mr. Sunip Sen argued that in terms of the board resolution dated 30.12.2000 NRL had the right to convert the OFCDs into equity shares of the company any time within 18 months from the date of allotment of the OFCDs which means that the OFCDs holders had become entitled to apply for the shares immediately on allotment i.e. on 30.12.2000 itself.  The learned Senior Counsel therefore argued that irrespective of when the holders exercised the option to convert the OFCDs into equity shares the relevant date would  have to be 30 days prior to 30.12.2000 i.e. 30.11.2000.  According to the learned Senior Counsel, the NRL had therefore violated the DIP guidelines and SEBI was right in bringing it to the notice of the stock exchanges for taking an appropriate decision on the listing of the resultant shares.

  7.            We have carefully gone into the facts of the case, the arguments of the learned Senior Counsel on both sides and the provision of Clause 13 of the Guidelines reproduced above.  On a careful reading of this Clause 13 we find that the main thrust of the guideline is on pricing of preferential issue of equity shares/fully convertible debentures/partly convertible debentures or other similar financial instruments.  The pricing of such issues is discussed in the sub-clauses 13.1.1, 13.1.2 and 13.1.3.  Thus while sub-clause 13.1.1 lays down the principles for pricing of the issue of shares on a preferential basis, paragraph 13.1.2 deals with pricing of shares arising out of warrants etc. while 13.1.3 deals with pricing of shares on conversion.  The present case can be said to be covered under sub-clause 13.1.2.2.  On careful reading of these three sub-clauses, we find that there are subtle differences in the method prescribed for pricing of the issue in these three different situations.  Thus while sub- clause 13.1.1.1 prescribes that “the issue of shares on a preferential basis can be made at a price not less than the higher of the following,” sub-clause 13.1.2.1 (b) states that the relevant date for the above purpose may, “at the option of the issuer be either the one referred to in explanation (a) to clause 13.1.1.1 or a date 30 days prior to the date on which the holder of the warrants becomes entitled to apply for the said shares.”  In the same vein, sub-clause 13.1.3 stipulates that it is the issuer who shall determine the price at which the shares could be allotted.  The subtle difference we find herein is that the emphasis in 13.1.2 and 13.1.3 is on vesting the decision making power regarding pricing in the hands of the issuer while 13.1.1 is prescriptive in nature laying down that the price has to be not less than the higher of the two methods of the calculation prescribed therein.  Against this scheme of things as laid down in these guidelines, we are in favour of upholding the interpretation adopted by the appellants for the following reasons:

1)            the instrument used in the present instance is “Optional fully convertible debentures”, which is not specifically mentioned described anywhere in these guidelines which deal only with equity shares/fully convertible debentures/partly convertible debentures etc. which means that so far as the option to the issuer as well as to the holder is concerned, it is on a higher footing than even the shares arising out of warrants discussed in clause 13.1.2.  This would imply that the option to convert or not to convert as well as to convert on a particular date depending on the market situation with reference to these shares was entirely with the holder of the OFCDs and this option had been given to it by the shareholders in the AGM of the issuer company.

2)            Clause 13.1.2.1 (b) clearly envisages possibilities of two distinct “relevant dates” namely either the one defined in clause 13.1.1.1 (a) i.e. 30 days prior to the holding of the AGM or a date 30 days prior to the date on which the holder of the warrants becomes entitled to apply for the said shares.  During the hearing we repeatedly put it to the learned counsel for SEBI Mr. Sen that if his interpretation of the relevant date was accepted, what were the situations in which he could contemplate another relevant date as envisaged by 13.1.2.1 (b) The only explanation which Mr. Sen could offer was that there could be a time gap of possibly one or two months between the date of the AGM and the date of actual allotment of warrants or OFCDs and that the second situation envisaged in this sub-clause could be possibly meant to cover that contingency.  We find it difficult to accept this explanation because a statute is never framed so as to have a distinct provision just to meet the inefficiency or casual delays of a month or two in the functioning of the companies in allotting these instruments pursuant to the resolutions passed at the AGM.

3)            We further find that clause 13.1.2.1 (b) uses the term “becomes entitled to apply for the said shares”.  The wording necessarily implies that the holder has to become entitled to apply or in other words he has to take some decision or undertake some act to earn the entitlement to apply for these shares.  In the context of this case, NRL became entitled to apply by taking the decision to go in for conversion rather than retaining the debentures without conversion.  The relevant date thus would be the date on which such a decision was taken by NRL as rightly contended by the appellants.

4)            The learned Senior Counsel for the respondent SEBI invited our attention to the Clause 13.1.2.3 which requires payment of at least 10% of the price fixed in terms of Clause 13.1.1.1 to argue that the relevant date therefore for all purpose is a fixed date and not a flexible date because otherwise it would be impossible to calculate the 10% amount for payment at the time of allotment.  We are unable to accept this argument because 13.1.2.1(b) refers to two methods of fixing the relevant date and Clause 13.1.1.1 is only one of those two methods.  In the present case the shareholders of NSL have opted for the second method of fixing the date on which the NRL would become entitled to apply for conversion. 13.1.2.3 is therefore not applicable in the facts of the present case.

5)            We also find that in the present case the conversion of 7.80 OFCDs into 40 lakh equity shares on 31.5.2002 by NRL was approved along with the conversion price in the extra ordinary general meeting on 24.8.2002 by the shareholders of NSL and by the Board of Directors of 6.9.2002.  Since the guidelines vest full authority in the issuer, regardless of whether it is exercisable before or after, there is no aggrieved party.   The restructuring and amalgamation of companies should not therefore be held hostage to the post facto interpretations of these guidelines by the regulatory authorities.

  8.            We are also guided by the fact that as many as three stock exchanges had interpreted the guidelines in the normal course in favour of the appellants and had not raised any objection while listing these shares after conversion on the stock exchanges.  This only goes on to show that the plain grammatical meaning of the guidelines is also in favour of the appellants.

  9.            For all these reasons, we allow these appeals and set aside the instructions conveyed by respondent no. 1, SEBI to the Stock Exchanges on 21.7.2003, 8.10.2003 and 18.3.2004. 

10.            There shall be no order as to costs.

 

Justice Kumar Rajaratnam                           Presiding Officer
N.L. Lakhanpal Member	Dr. B. Samal Member

 

 

Place: Mumbai

Date:  12.01.2005

 

//sr05112