ORDER OF THE ADJUDICATING OFFICER UNDER SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 AGAINST M/S.CLARIANT INTERNATIONAL LTD. FOR THE CONTRAVENTION OF REGULATION 10 AND 12 OF THE SEBI (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS, 1997 IN THE MATTER OF ACQUISITION OF THE SHARES OF M/S.COLOUR CHEM LTD.
I was appointed as Adjudicating Officer by SEBI vide order dated 13TH December, 2002 to inquire into and adjudge the alleged contravention of Regulation 10 & 12 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 by Clariant International Ltd. (hereinafter referred to as the acquirer) for the alleged failure to make the public announcement pursuant to the acquisition of control of M/s Colour Chem Ltd. on 21/11/1997(hereinafter referred to as “target company”).
NOTICE & REPLY
Notice dated 31/01/2003 was issued under Rule 4 of SEBI (procedure for holding enquiry and imposing penalties by Adjudicating Officer) Rules, 1995, seeking the reply of the acquirer on the alleged contravention of Regulations 10 and 12 of SEBI(Substantial Acquisition of Shares and Takeovers) Regulations, 1997 for acquisition of shares and control in Color Chem Ltd. (CCL) on 21.11.97.
Clariant International entered into a draft Stock Purchase Agreement with Hoechst on 21.11.97 to acquire 50.1% of the share capital of CCL held by it. Subsequently, Clariant applied to SEBI seeking exemption from making a Public Announcement for the proposed acquisition vide letter dated 26.11.97 which was rejected by SEBI vide its order dated 9.9.98.
The acquisition of shares of CCL by Clariant took place on 13.10.00 through an indirect method, more particularly described hereinafter. Although the acquisition of shares of CCL took place at a later date, it is alleged that Clariant had acquired control over CCL on 21.11.1997 itself i.e. the date on which it entered into Agreement with Hoechst.
In Clariant’s Annual Report for the year 1997, the financial statement of CCL is consolidated with that of Clariant, in accordance with International Accounting Standard 27. It further states that all the companies in which Clariant Ltd., Muttenz, holds majority equity investment and possesses the majority of the voting rights, are fully consolidated.
The Annual Report of 1997 further mentions that Clariant has two group companies in India viz. Clariant India Ltd., Mumbai and Colour Chem Ltd which were treated as part of the Clariant Group.
In the Annual Report of 1998, it is stated that in the past year the integration of the Specialty Chemicals Business acquired from Hoechst was completed successfully. Further, CCL was included under the heading of the most important companies of the Clariant Group affiliated companies. It also states that though the economic transfer of CCL has taken place, but it could still not be transferred to Clariant under National Civil Laws.
CCL’s Annual Reports reveal that :
Dr. R. Handte, who was the member of the Executive Committee of the Board of Management of Clariant, was appointed as Chairman of CCL on 21.11.97. Subsequently, he continued as Director in CCL from 4.4.00 to 24.5.01. (Annual Report 1999-00)
Mr. J. Mahler, who is a member of the Board of Management of Clariant, was appointed as a Director of CCL w.e.f 14.5.98 (Annual Report 1997-98)
Shares of CCL held by Hoechst are in the process of transfer in Clariant’s favour (Annual Report 1997-98).
CCL is now a part of Clariant Group born out of integration of Hoechst AG’s Specialty Chemical Business with Clariant AG. (Annual Report 1997-98)
CCL was a subsidiary of Clariant which is a leading fine and Specialty Chemicals Company (Annual Report of 1999-00)
In view of the above, it is alleged that Clariant was in control of CCL right from 21.11.1997.
METHODOLOGY OF INDIRECT ACQUISITION
Clariant and Hoechst entered into a Master Agreement for the transfer of Hoechst’s Specialty Chemical Business to Clariant and Hoechst was to become shareholder of with 45% stake.
Pursuant to the Master Agreement, The acquirer entered into a draft Stock Purchase Agreement with Hoechst on 21.11.1997 for transfer of Hoechst’s holding of 45.1% of the share capital in CCL to you. To effect this transaction, Hoechst transferred its German Specialty Chemical Business to a new subsidiary called EBITO.
EBITO chemiebetelligungen AG was incorporated on 19.5.2000 as a Special Purpose Vehicle with Hoechst subscribing to 51% of share capital and The acquirer had subscribed to 49% of the paid up capital of EBITO. On 13.10.2000, EBITO acquired the entire shareholding of 50.1% of CCL’s equity from Hoechst and this acquisition was funded by Hoechst. Thus the acquirer had indirectly acquired 50.1% of CCL on the same date. EBITO had incurred losses in Oct-Dec 2000 and underwent financial restructuring as per the Swiss Laws. Accordingly, post restructuring the acquirer acquired 100% of EBITO’s equity on 23.2.01 and thereby indirectly acquired the entire shares of CCL held by it. The Annual Report for the year ending 31.12.2000, states that CCL had become an affiliate company, though 100% acquisition of EBITO took place subsequently on 23.2.2001.
For the aforesaid agreement to acquire 50.1% of shares of CCL on 21.11.1997 and acquisition of control over CCL on 21.11.1997, the acquirer was required to make a public announcement within 4 days of the relevant date, i.e. 21.11.1997 to acquire further shares of CCL in terms of Regulations 10 and 12 of SEBI (Substantial Acquisition of shares and Takeovers) Regulations, 1997 read with Regulations 14(1) & 14(3) of the said Regulations respectively.
It is alleged that the acquirer had not made the public announcement as aforesaid to acquire shares of CCL within the specified period of 4 days which is in violation of Regulation 10 and Regulation 12 of SEBI (SAST) Regulations, 1997 read with Regulations 14(1) and 14(3) of the said Regulation respectively and punishable under Section 15H(ii) of SEBI Act, 1992.
REPLY
A reply on behalf of the acquirer was received on 28.2.03. Shri R.A.Shah, and Shri Anoj Menon, Advocates, Crawford Bayley & Co., appeared on behalf of the acquirers and submitted that pursuant to the agreement entered into in mid 1997 between Hoechst and the acquirer, Hoechst German specialty Chemicals business was sold and transferred to Clariant for the non German specialty Chemicals business. This umbrella agreement provided that the intended transfer would be on a country to country basis in the form of asset or share transactions under separate local agreements.
Pursuant to the above umbrella agreement , Hoechst and the acquirer entered into negotiation for the purchase/ transfer of 5,83,708 equity shares of Rs.100/- each of M/s.Colour Chem Ltd. then held by Hoechst which constituted 50.1% of the paid up capital of Colour Chem Ltd. A draft stock purchase agreement for the proposed transaction was also prepared on 21/11/1997 for the Indian operations.
Based on legal advice, the acquirer had made an application dated 26/11/1997 to SEBI seeking exemption from making an open offer under the Takeover Regulations. Vide order dated 9/9/1998, SEBI while rejecting the application of the acquirer seeking exemption from making an open offer had directed the acquirer to make a public offer under the Regulations. The learned counsel submitted that this was in the nature of advance ruling since the draft agreement did not fructify into a final contract between the parties. Subsequently, during May 2000, EBITO, an SPV was incorporated as a Swiss Company and Hoechst subscribed to 51% of its paid up capital. On 13th October, 2000, Hoechst sold and transferred the Colour Chem shares to EBITO. EBITO, being a subsidiary company, the transaction was exempted under 3(1) (e )(i). In terms of Regulation 3(4), EBITO filed a report to SEBI on 31/10/2000 . Thereafter, on 23/2/2001, it became necessary under the Swiss laws to restructure the share capital of EBITO. It was, therefore, claimed that such type of reconstruction, reorganization in accordance with the Swiss Laws would be exempt under Regulation 3(1)(j)(ii) . The decision of SEBI in M/s. Digital Corporation and that of Securities Appellate Tribunal in Eaton Corporation was relied upon.
Thereafter, a show cause notice dated 20/2/2002 was issued by SEBI alleging that the decision taken on 26/11/1997 by the acquirer to acquire shares / voting rights/ control of CCL as expressed in the draft share purchase agreement had triggered the provisions of Regulations 10 and 12 of SEBI(SAST)Regulations, 1997 and that the reorganization or scheme of arrangement involving EBITO is only a cloak or devise to avoid the requirement to make a public announcement to acquire further shares in terms of the Regulations. After following the procedure, SEBI has passed an order on 16/10/2002 directing the acquirer to make a public announcement to acquire further shares from the shareholders of the Indian Listed company i.e. Colour Chem Ltd. taking the reference date as 21/11/1997 and also to pay interest @ 15%.
The learned counsel submitted that there was no change in control or management and no change in the constitution of Board of Directors and that The acquirer was under the bonafide belief as legally advised that there was no requirement to make an open offer in terms of SEBI Regulations. There was also no element of “mens rea” or criminal intention. The learned counsel submitted that the order dated 16.10.2002 by SEBI Chairman had directed them to make an open offer if they wished to proceed further with the transaction in terms of the draft purchase agreement and that the client had not proceeded with the same till February 2001 and the circumstances leading to the formation of EBITO, a SPV in May 2000 and consequential restructuring of the capital of EBITO in terms of Swiss Laws was done in February 2001 when it became a wholly owned subsidiary of the acquirer.
The learned counsel submitted that their clients having not pursued the draft purchase agreement were under the bonafide belief that there was no requirement to make an open offer. The learned counsel submitted that none of the factors contemplated in Section 15J of the SEBI Act, 1992 are attracted so as to impose a penalty. It was submitted that their client is faced with a liability of Rs.130 crores. The learned counsel has also relied upon the decision of M/s. Hindustan Steel case and submitted that there was no conduct which was contumacious so as to impose a penalty.
APPRECIATION OF EVIDENCE AND FINDINGS
Pursuant to the agreement entered into in mid 1997 between Hoechst and the acquirer, Hoechst German specialty Chemicals business was sold and transferred to Clariant for the non German specialty Chemicals business. This umbrella agreement provided that the intended transfer would be on a country to country basis in the form of asset or share transactions under separate local agreements.
Pursuant to the above umbrella agreement , Hoechst and the acquirer entered into negotiation for the purchase/ transfer of 5,83,708 equity shares of Rs.100/- each of M/s.Colour Chem Ltd. then held by Hoechst which constituted 50.1% of hthe paid up capital of Colour Chem Ltd. A draft stock purchase agreement for the proposed transaction was also prepared on 21/11/1997 for the Indian operations.
When the acquirer expressed its intention to acquire the 50.1 per cent shares of the target company by way of entering into Purchase Agreement with Hoechst on 21.11.97, it constituted an intention to acquire albeit indirectly the control over the target company and triggered the regulations necessitating the obligation to make a Public Announcement in terms of the Regulations. The Public Announcement was to be made within four working days of 21.11.97, the date of entering into the said agreement.
The acquirer had violated regulations 10 and 12 read with sub-regulations (1) and (3) of regulation 14 as the acquirer had acquired 50.1 per cent shares/voting rights and control in the target company, without making public announcement to acquire shares/voting rights or control of the target company in accordance with the said regulations.
The Order dated 10.10.2002 of Chairman, SEBI reads as under :
“In terms of sub-regulation (12) of regulation 22, the payment of consideration to the shareholders of the Target company has to be made within 30 days of the closure of the offer. The maximum time period provided in the said regulations for completing the offer formalities in respect of an open offer, is 120 days from the date of public announcement. The public announcement in the instant case ought to have been made taking 21.11.97 as reference date and thus the entire offer process should have been completed latest by 21.3.98. Since no public announcement for acquisition of shares of the Target company was even made, there was violation of the SEBI (SAST) Regulations, 1997 which adversely affected the interest of the shareholders of Target Company……….”
It is pertinent to note that the acquirer although challenged the order of SEBI dated 16.10.02 directing it to make the PA, the appeal was limited to the rate of interest directed to be paid. The submissions of the acquirer before the Tribunal were that (i) the rate of interest is on the higher side (ii) the dividends having been paid in the meantime the same should be set off from the amount of payable interest ; and (iii) the interest is payable only to those shareholders who held the shares on the triggering date namely 24.02.1998.
After the order of the Hon’ble Tribunal dated 21.2.03, the acquirer made a PA dated 7.4.03 to acquire upto 20% of the share capital of CCL under the Takeover Regulations. Subsequently, vide another PA dated 6.5.03, it was informed that in view of the civil appeal No.3183/2003 pending before the Hon’ble Supreme Court as also the appeal by SEBI No.3701/2003 in the Supreme Court, the time schedule for the major activities in the offer as disclosed in Para 10 of the PA will be required to be altered and the offer will now proceed as per the final orders of the Hon’ble Supreme Court.
The Hon’ble Supreme Court vide its judgement dated 25.8.04 directed the acquirers to pay interest @ 10% to those persons who were holding shares of the target company on 24.2.98 and continue to be shareholders on the closure day of public offer to be made in terms of the directions given by SEBI. The Review Petition filed by SEBI was dismissed by the Hon’ble Supreme Court on 15.3.05.
As the acquirer had earlier made a PA on 7.4.03 subsequent to the order of the Hon’ble SAT dated 21.2.03 and the entire process could not be completed in view of the disputes relating to the rate of interest, shareholders who are eligible to be paid interest etc., which was finally set at rest by the Hon’ble Supreme Court vide its judgement dated 25.8.04 and the subsequent dismissal of the Review Petition on 15.3.05, it cannot be said that the acquirer had deliberately avoided making a PA. As the acquirer is liable to pay interest to the shareholders for the delayed period in terms of the judgement of the Hon’ble Supreme Court, the interest of investors is protected. The revised letter of offer was filed by the Merchant Banker on behalf of the Acquirer furnishing the revised time table for acceptance of shares from the public and the Public Announcement to this effect is hosted on the SEBI Website. The offer has opened on June 8, 2005. Hence, none of the factors laid down under Section 15J of the SEBI Act, 1992 are attracted in the instant case so as to levy a penalty.
It is also useful to refer to the following observations of the Hon’ble Bombay High Court in Cabot International Ltd vs SEBI [2004] 51 SCL 307(BOM).
“Though looking to the provisions of the statute, the delinquency of the defaulter may itself expose him to the penalty provision yet despite, that in the statute, minimum penalty is prescribed, the authority may refuse to impose penalty for justifiable reasons like the default occurred due to the bonafide belief that he was not liable to act in the manner prescribed by the statute or there was too technical or venial breach etc.“
In Contact Consultancy Services Pvt. Ltd. Vs. SEBI (Appeal No.138/2004) vide its order dated 17.11.04, the Hon’ble SAT has observed as under :
“Rightly, SEBI in appeal No. 61/2003 took the stand that the ends of justice will be met if action is taken either to make a public offer or to impose a penalty but not both. This is in consonance with fair play, justice and equity. We commend this approach of SEBI which is in keeping with the spirit of Article 20 of the Constitution of India. The present case is not the one warranting a departure from this salutary practice. In the circumstances we have come to the conclusion that no specific penalty is called for under Section 15H(ii) of SEBI Act, 1992, in the facts and circumstances of this case since the earlier order directing a public offer has been fully complied with thus safeguarding the interests of the minority shareholders, which is the main objective of SEBI (SAST) Regulations, 1997”.
ORDER
As the acquirer had made a PA pursuant to the order of the Chairman dated 16.10.2002 and also agreed to pay interest to the shareholders of the target company as finally determined by the Hon’ble Supreme Court vide its judgement dated 25.8.04 and as the interest of the shareholders of the target company have been addressed with the payment of interest for the delayed period, none of the factors contained in Section 15J of SEBI Act, 1992 are attracted in the present case. Therefore, following the judgement of the Hon’ble Bombay High Court in Cobot International case and also the order of the Hon’ble SAT in Contact Consultancy case cited supra, it would not be fair, just and proper to impose any penalty under Section 15H(ii) of SEBI Act, 1992 on the acquirer.
Accordingly, no penalty is imposed for the aforesaid reasons.
Date :June 09, 2005 S V Krishna Mohan
Place : Mumbai Adjudication & Enquiry Officer