SECURITIES AND EXCHANGE BOARD OF INDIA
ORDER
IN THE MATTER OF PROPOSED ACQUISITION OF SHARES OF AMTREX HITACHI APPLIANCES LIMITED – EXEMPTION APPLICATION UNDER REGULATION 3(1)(l) OF THE SEBI (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS, 1997
NO. : CO/263 /TO/10/2002
1.0 The Asman Investments Limited (hereinafter referred to as "the Acquirer") proposes to acquire / repurchase 38,58,565 equity shares constituting 26.31% of the equity capital of Amtrex Hitachi Appliances Limited formerly known as Amtrex Appliances Ltd. ( hereinafter referred to as "the Target company"). The aforesaid 26.31% equity shares initially belonged to the Acquirer and which pursuant to the invocation of the Pledge under the Share Pledge Agreement entered into between the Acquirer and ICICI Bank Ltd. (hereinafter referred to as "ICICI") now vests in ICICI. As a result of the proposed acquisition / repurchase , the Acquirer will have to make an open offer to the public shareholders of the Target company in terms of regulation 10 of SEBI (Substantial Acquisition of Shares and Takeovers ) Regulations ,1997(hereinafter referred to as "the Regulations" ).
2.0The Target company is a public company duly incorporated under the Companies Act, 1956, in July 1984. The Target company is engaged in the manufacture and sale of air-conditioners and other products. The Lalbhai Group consisting inter alia, of the Acquirer, Arvind Mills Ltd. and Arvind Products Ltd., has been in effective control of the Target company since its inception. The shares of the Target company are listed at The Stock Exchange, Mumbai, Ahmedabad Stock Exchange and National Stock Exchange.
3.0The Acquirer made an application dated 05.08.2002 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 making of public announcement under regulation 10 of the Regulations for the proposed acquisition / repurchase of the 26.31% equity shares of the Target company from ICICI.
4.0 In the aforesaid application, the Acquirer, inter alia , submitted the following:
4.1In or about the beginning of January 1999, the Lalbhai Group represented by Arvind Mills Ltd., and the Target Company considered strengthening their relationship with Hitachi Ltd. ("Hitachi"), a corporation organized and existing under the laws of Japan and being engaged in the business of manufacture and sale of room air-conditioners and possesses extensive and valuable know-how in that field, to have better access to the latest air-conditioning technology and to be a licensee of the Hitachi brand name in order to compete with incoming foreign giants of the industry. In this regard, equity participation by Hitachi was sought.
4.2A Management Agreement dated 22nd January, 1999 was entered into between Hitachi on one hand and Arvind Mills Ltd. and the Acquirer on the other, for a joint venture in the business of the Target company . Clause 3.1 of the Management agreement recited that at the time of execution of the said Agreement the issued and subscribed share capital of the Target company was Rs. 95,034,750/- which comprised of 9,503,475 shares of Rs 10/- each in which Lalbhai Group had 54.4% shares while the remaining 45.6% shares were held by the public. It was provided by Clause 3.2 of the Management Agreement that the Acquirer would make preferential allotment of 5,165,490 shares at par value of Rs. 10/- to Hitachi as per the price to be determined in accordance with Clause 3.5 and Hitachi agreed to subscribe for 4,665,490 shares in its own name and the balance 500,000 shares in the name of Hitachi India Pvt. Ltd. so that on the completion of this process Hitachi consisting of Hitachi and Hitachi India Pvt. Ltd. would have 35.2% shares. Lalbhai Group would have the same percentage of shares, namely 35.2% while the shareholding of the public would be reduced to 29.6%. Thus, Hitachi and Lalbhai Group were to have equal stake in the share capital of the Target company and Hitachi came in as the foreign collaborator of the Lalbhai Group and became a Co-promoter. The Management Agreement also provided in Clause 3.3.2 that the name of the Target company be changed from Amtrex Appliances Ltd. to the current name. Clause 16.1 of the Management Agreement provided that neither Hitachi nor Lalbhai Group would be entitled to pledge or otherwise encumber the shares of the Target company without proper written consent of the other and for a period of three years from the date of completion of the process, neither shareholder would be entitled to sell, assign, pledge, hypothecate, transfer or exchange any shares owned by it in the Target company . Clause 16.2 of the Management Agreement also provided the procedure to be followed if either shareholder desired to sell, assign or otherwise transfer any or all of the shares in the Target company held by it, after the aforesaid period of three years. This procedure provided for giving a right of first refusal to the other shareholder. The Management agreement also contained provision for joint management of the Target company by each of the two shareholders having three Directors on the Board and Lalbhai Group having the right to nominate the Chairman of the Board as well as Managing director while Hitachi having the right to nominate Joint Managing Director. The Lalbhai Group and Hitachi thereafter carried on joint management of the Target company in accordance with the provisions of the Management Agreement.
4.3Under an agreement dated 2nd September, 1998, ICICI had lent and advanced to the Acquirer, a company forming part of the Lalbhai Group, a loan of Rs 400.00 million and this loan was outstanding in the last week of September 2000. ICICI had, under several agreements in 1996 and 1997, advanced diverse sums of money aggregating to US$ 16.42 million and Rs. 104.00 million to Arvind Products Ltd. which was also a member of Lalbhai Group and these loans were also outstanding from Arvind Products Ltd. in the end of September 2000. The Acquirer with a view to securing repayment of these amounts of the loans outstanding against Arvind Products Ltd. and itself, entered into a Share Pledge Agreement dated 29th September, 2000, pledging with ICICI 38,58,565 shares of the Target company as per particulars set out in Schedule II to the said Agreement.
4.4The Share Pledge Agreement contained an arrangement for the redemption of the shares by the Acquirer (pledgor) in the event of invocation of pledge by ICICI (pledgee) :
<!--[if !supportLists]-->(i)<!--[endif]-->The Share Pledge Agreement contained four recitals out of which the fourth recital reads as follows :
"(4)AND WHEREAS as one of the conditions for entering into this Pledge agreement, the Pledgor and Pledgee have executed Buyback Agreement. In the event ICICI invokes the Pledge of the Target company Shares to enforce the underlying security, the same would be subject to terms of the said Buyback Agreement."
Clause 9 of the Share Pledge Agreement provide for enforcement for the pledge. Sub-Clause (a) of Clause 9 stated that upon the occurrence of an event of default ICICI may by giving one day’s prior notice enforce the pledge by transferring the pledged shares in its name and Sub-Clause (b) of Clause 9 provided that such enforcement of the pledge by ICICI would be subject to Clause 16 of the Management Agreement. Sub-Clause (c) of Clause 9 again referred to the Buyback Agreement in the following words :
"(c)The Pledgor and the Pledgee agree that upon enforcement of the pledge in respect of the Pledged Shares under this Agreement, the terms of the Buyback Agreement dated September 2000 executed by and between the Pledgor and Pledgee shall apply, notwithstanding anything to the contrary contained herein."
<!--[if !supportLists]-->(ii)<!--[endif]-->It is seen from the fourth recital as also from Sub-Clause (c) of clause 9 that it was one of the conditions of the pledge of the shares that the Acquirer and ICICI executed a buyback Agreement providing that in the event of ICICI invoking the pledge of the shares to enforce the underlying security, such enforcement of the security created by the pledge would be subject to the terms of the Buyback Agreement. These provisions clearly and specifically established a link between the enforcement of the pledge under the Share Pledge Agreement and the terms of the Buyback Agreement and in terms provided that if the ICICI enforces the security created under the pledge, such enforcement would be subject to the Buyback Agreement.
<!--[if !supportLists]-->(iii)<!--[endif]-->Simultaneously with the execution of the Share Pledge Agreement, the Buyback Agreement was also executed between the Acquirer and ICICI on 29th September, 2000. The Buyback Agreement also contained four recitals and the fourth recital thereto read as follows:
"4. AND WHEREAS one of the conditions on which the Pledgor has agreed to Pledge the Shares of the Target company is that this Buyback Agreement be executed by and between ICICI and itself. In the event ICICI invokes the Pledge of the Target company Shares to enforce the underlying security, the same would be subject to terms of the Buyback Agreement."
This recital re-emphasized in the clearest possible terms that one of the conditions on which the shares of the Target company had been pledged by the Acquirer with ICICI was that the Buyback Agreement shall be executed by and between ICICI and the Acquirer and that in the event of ICICI invoking the pledge of the shares to enforce the underlying security, the same would be subject to the terms of the Buyback Agreement. The simultaneous execution of the Buyback Agreement was the condition on which the shares were pledged by the Acquirer with ICICI, so that if the pledge is enforced by ICICI it would be subject to the terms of the Buyback Agreement.
(iv)There was a clear intention on the part of both ICICI, as the pledgee and the Acquirer as the pledgor that the pledged shares were to be retained with the Acquirer and an attempt was made to document this. The arrangement was merely to enhance the security interest of ICICI.
4.5Purchase price for the transfer on redemption of the pledge is determined by the amounts outstanding under the loan and the interest accruing thereto. The true nature of the transaction evidenced by the Share Pledge Agreement and the Buyback Agreement is also emphasized in Clause 5 which provides that the Acquirer shall have an option to call upon ICICI at any time during the period of three years beginning with the date of enforcement of the pledge by ICICI to transfer to the Acquirer all or any of the shares held by ICICI at the market price stipulated in Clause 7. The price payable by the Acquirer to ICICI for redemption of the pledge on transfer of the shares is set out in Clause 7 and elaborated in Clauses 8,9 and 10. It is clear on a plain reading of these provisions that the transfer price per share payable by the Acquirer to ICICI for redemption and transfer of the shares is the cost at which ICICI acquired the shares on exercise of the pledge plus agreed yield for ICICI. The formula evolved by the parties, in effect and substance fixes the transfer per share at the cost at which ICICI acquired such shares together with interest thereon @15% per annum with quarterly rests from the date of exercise of the pledge upto the date of sale of the shares less dividend on shares received by ICICI during this period together with interest thereon @15% per annum with quarterly rests. This provision is extremely important for the purpose of determination of the true nature of the transaction embedded in the Share Pledge Agreement and the Buyback Agreement as it is clearly providing for interest on the outstanding loan amount.
4.6The Pledgor retained the voting rights when pledged shares were transferred to ICICI (pledgee). An Agreement entered into between ICICI, Arvind Mills Ltd., the Acquirer, the Target company and Hitachi on 12th October, 2001 is also being referred to. The only provisions of this Agreement which are relevant for the purposes are Clauses 6 and 8. Clause 6 provides that ICICI, during the period when it holds the shares shall consult Arvind Mills Ltd. and vote at any general meeting of the shareholders of the Target company "as per mutual agreement as may be arrived at between ICICI and Arvind", except in certain specific matters. Clause 8 imposes certain restrictions on ICICI in the matter of acquiring any further shares in the Target company and provides as to what is to happen if ICICI in fact acquires further shares in excess of 5%. Clause 9 of this Agreement gives precedence to certain provisions of the Management Agreement over the Buyback Agreement in case of conflict.
4.7In light of above submissions, it is clear that the transfer of the pledged shares from the Acquirer, to ICICI as pledge was not an absolute transfer in the ownership interests in the shares as there was no transfer of voting rights and ICICI could exercise such rights only after consultation with them. Further, ICICI was obliged to retransfer the shares to them, the pledgor, as under the Buyback Agreement. Hence, there was no real transfer of the pledged shares as contemplated under the Code as the pledgor continued to have control over the voting rights of the shares.
4.8Without prejudice to the above submissions, it is further submitted that the effect of the Share Pledge Agreement and Buyback Agreement is to provide for redemption of the shares of the Target company pledged by them (Acquirer) with ICICI. It is now wished to redeem the pledge by exercising their right of repurchase under the Buyback Agreement. That such repurchase of the pledged shares under the Buyback Agreement would not trigger a public offer to the other shareholders of the Target company.
4.9In the present case, the shares remaining with them, the Acquirer and the Lalbhai Group Companies after the pledge with ICICI constitute about 9.42% of the total number of shares of the Target company and consequently if the pledged shares are acquired by the Acquirer from ICICI under the Buyback Agreement, it would increase the shareholding, of the Acquirer beyond 15%and if Regulation 10 were applicable it would trigger public offer to the other shareholders of the Target company. However, it is submitted that regulation 10 would have no application in the present case since the Share Pledge Agreement and the Buyback Agreement are interlinked and form part of the same transaction of pledge with a financial institution they cannot be treated as distinct and independent agreements.
4.10As already mentioned above, the fourth recital, Sub-Clause (c) of Clause 9 of the Share Pledge Agreement and the fourth recital of the Buyback Agreement and the Share Pledge Agreement clearly illustrate that the two agreements are interrelated and interconnected forming indivisible parts of one single transaction. Clause 9 Sub-Clause (c) of the Share Pledge Agreement clearly states that on the enforcement of the pledge by ICICI under the Share Pledge Agreement, the Buyback Agreement executed simultaneously with the Share Pledge Agreement would apply notwithstanding anything to the contrary contained in the Share Pledge Agreement. The same provision is reiterated more emphatically in the fourth recital of the Buyback Agreement which states clearly and unequivocally that one of the conditions on which the pledge has been created by the Acquirer in favour of ICICI is the execution of the Buyback Agreement between ICICI and the Acquirer and that upon ICICI enforcing the security created by the pledge the same would be subject to the terms of the Buyback Agreement. It is submitted that the Share Pledge Agreement and the Buyback Agreement are two segments of one entire indivisible agreement and the Buyback Agreement cannot be read as a distinct and independent agreement from the Share Pledge Agreement. What is clearly intended by the parties is that though the transaction is in form divided into two segments, namely Share Pledge Agreement and Buyback Agreement, it is one entire transaction and in effect and substance the interest of ICICI in the pledged shares continues as Pledgee and when the Acquirer buys back the pledged shares, it would in reality and substance be redeeming the pledge.
4.11That such interpretation is reinforced by the provision in Clause 6 of the Agreement dated 12th October, 2001 where it is clearly provided that during the period of three years which is really the period for redemption, ICICI as the nominal shareholder would be bound to consult Arvind Mills Ltd. and vote at any general meeting of the shareholders of the Target company as per mutual agreement between the parties. If ICICI had become the real and absolute owner of the pledged shares by exercising its right as Pledgee, there could be no question of ICICI being required to consult Arvind Mills Ltd. in regard to the exercise of voting rights in respect of the pledged shares. This is completely inconsistent with the rights of a full owner of shares. This circumstance is of crucial importance and demonstrates beyond doubt that in effect and substance the pledge was to continue for a period of three years during which time the Acquirer could redeem the pledge by exercising its right to "repurchase" the pledged shares under the Buyback Agreement.
4.12Further, when the Acquirer exercises the option to have retransferred the pledged shares from ICICI under the Buyback Agreement, the price which is payable by the Acquirer to ICICI is significantly, not the market price prevailing as on that date but it is the cost at which ICICI acquired the shares, namely the amount lent and advanced by it to the borrower companies together with accrued interest, namely agreed yield for ICICI, which would be 15% per annum on the purchase price with quarterly rests from the date of enforcement of the pledge to the date of sale of the pledged shares to the Acquirer after deducting dividend received during the meantime. What the Acquirer is, therefore, required to pay is not the market price of the pledged shares as on the date of the buyback but the original amount lent and advanced to the borrowers together with interest thereon @ 15% per annum with quarterly rests from the date of enforcement of the pledge upto the date of sale of the pledged shares minus the dividend received by ICICI in the meantime. This provision is consistent only with the theory that when the Acquirer buys back pledged shares under the Buyback Agreement it would in effect and substance be redeeming the pledge by paying back to ICICI the amounts of the loans taken by the borrowers together with accrued interest upto the date of enforcement of the pledge along with further interest thereon @15% per annum with quarterly rests from the date of enforcement of the pledge upto the date of sale of the pledged shares.
4.13That it is a well settled rule of interpretation that in ascertaining the true nature of a transaction regard must be had to the substance and not to the form of the transaction.
4.14Regulation 3, Clause (1) of the Takeover Code provides for various exemptions from the applicability of Regulations 10, 11 and 12 in its various sub-clauses, Sub-clause (f)(iv) of Clause (1) of regulation 3 provides that nothing in regulations 10, 11 and 12 shall apply in relation to acquisition of shares in the ordinary course of business by banks and public financial institutions as pledgees. Therefore, the pledge of the shares of the Acquirer in favour of ICICI was exempt from the applicability of regulations 10, 11 and 12, since ICICI is admittedly a public financial institution and as the pledge of shares by a shareholder in favour of a public financial institution is exempt from the applicability of Regulations 10, 11 and 12 it follows a fortiorari that the redemption of such a pledge by the shareholder would equally be exempt from applicability of these regulations. Moreover, it may be noted that when there is a pledge created by a shareholder in favour of a public financial institution, the shareholder does not cease to be the owner of the shares even in a case where the shares are transferred by the public financial institution as its own name by way of security for the loan given by it to the shareholder and the shareholder would have the rights to redeem the pledge. The pledge would continue to subsist despite the transfer of the shares to the name of the public financial institution and consequently, when the pledge of the shares is redeemed, there is no acquisition of the shares by the pledgor within the meaning of Regulations 10, 11 or 12.
4.15that on the realization of the pledge by ICICI and the retransfer of the shares to the Acquirer under the Buyback Agreement, neither Regulation 10, 11 or 12 of the SEBI Takeover Regulations would be attracted and the public offer would not be triggered.
5.0The said application dated 05.08.2002 was forwarded to the Takeover Panel on 07.08. 2002, in terms of sub-regulation(4) of regulation 4 of the Regulations. The Takeover Panel vide its report dated 14.08.2002 has recommended, inter alia, as under:
"On the facts stated in the application, the exemption is sought under Regulations 3(1)(f)(iv) and 3(1)(l) of the Takeover Code. Regulation 3(1)(f)(iv) of the Takeover Code has no application since it applies to acquisition of shares in the ordinary course of business by banks and financial institutions as pledgees. No case is made out to recommend grant of exemption under Regulation 3(1)(l) of the Takeover Code. Hence, grant of exemption as sought is not recommended."
6.0HEARING
As the Panel did not recommend grant of exemption as sought by the Acquirer, the Acquirer was given a hearing in terms of sub regulation (6) of regulation 4 of the Regulations, on 16/9/2002. During the course of hearing, the Acquirer reiterated the submissions made in the exemption application.
7.0ISSUES
I have taken into consideration the application dated 05.08.2002, the facts of the case and documents available on record and also the recommendations of Takeover Panel. In the facts of the case, the following issue arises which needs consideration:
Whether the proposed repurchase of 38,58,565 pledged equity shares constituting 26.31% of the equity capital of the Target company, by the Acquirer from ICICI is exempt under regulation 3(1)(f)(iv) or under regulation 3(1)(l) of the Regulations, as claimed.
8.0CONSIDERATION OF ISSUES
Whether the proposed repurchase of 38,58,565 pledged equity shares constituting 26.31% of the equity capital of the Target company by the Acquirer from ICICI is exempt under regulation 3(1)(f)(iv) or under regulation 3(1)(l) of the Regulations, as claimed.
From the facts on record, it is observed that the Acquirer vide Share Pledge Agreement dated 28.09.2000 had pledged as a secuirity for loan, 38,58,565 equity shares constituting 26.31% shares of the Target company with ICICI. Subsequently , as a result of default in repayment of the loan by the Acquirer, the pledge was enforced by ICICI in terms of Pledge Agreement dated 28.09.2000. The Acquirer proposes to acquire / repurchase said 38,58,565 (26.31%) shares from ICICI. The Acquirer is currently holding 13,81,500 shares (9.42%) in the total paid-up share capital of the Target company. Consequent to such proposed repurchase, the Acquirers’ shareholding will increase form 9.42% to 35.73%. The Acquirer vide the abovesaid application has claimed exemption for such acquisition under regulations 3(1)(f)(iv) and 3(1)(l).
It would be relevant to advert to the regulation 3(1)(f)(iv) and regulation 10 and relevant clauses of Share Pledge Agreement dated 28.09.2000, Buy Back Agreement dated 29.09.2000 and Agreement dated 12.10.2001, before arriving at any finding -
Regulation 10 (Acquisition of 15% or more of the shares or voting rights of any company)
"No acquirer shall acquire shares or voting rights which (taken together with shares or voting rights, if any, held by him or by persons acting in concert with him), entitles such acquirer to exercise fifteen per cent or more of the voting rights in a company, unless such acquirer makes a public announcement to acquire shares of such a company in accordance with the regulations."
Regulation 3(1) "Nothing contained in regulations 10, 11 & 12 of these regulations shall apply to :-
<!--[if !supportLists]-->(f)<!--[endif]-->acquisition of shares in the ordinary course of business by –
<!--[if !supportLists]-->(i)<!--[endif]-->……….
<!--[if !supportLists]-->(ii)<!--[endif]-->……….
<!--[if !supportLists]-->(iii)<!--[endif]-->……….
<!--[if !supportLists]-->(iv)<!--[endif]-->by banks and financial institutions as pledgees."
From the above it is clear that in case banks and financial institutions in the ordinary course of their business receive shares as security by way of pledge, then, in case the bank or the financial institution enforces the pledge and resultantly acquire the shares so pledged, then in that case the bank or financial institution shall not be required to make an open offer in terms of regulations 10, 11 & 12, if the said regulations are triggered in view of the specific exemption being provided under regulation 3(1)(f)(iv)
SHARE PLEDGE AGREEMENT
It is pertinent to refer to clauses 5.1(b), 8 and 9 of the Share Pledge Agreement dated 28.9.00 between the Acquirer and ICICI Ltd -
<!--[if !supportLists]-->(i)<!--[endif]-->Clause 5.1 (b) states that :
"The Pledgor shall not, at any time during the continuance of the security created hereunder, instruct the DP to stop the transfer of the Pledged Shares in ICICI’s name or in the name of the purchasers of the same in the event of ICICI exercising right of sale of the Pledged Shares under this Agreement or otherwise."
<!--[if !supportLists]-->(ii)<!--[endif]-->Clause 8 (General) states that :
"(a)So long as no Event of Default shall have occurred and be continuing the ICICI shall exercise voting rights in respect of the equity shares held in the Target company after consulting the pledgor."
"(c)The pledgor hereby irrevocably authorizes ICICI to attend any general meeting of members or meeting of any class of members or meeting of creditors of AHL and to exercise the voting rights in respect of the pledged shares as given in clause 8(a) herein above and in the event of a default ICICI reserves the right to vote in its absolute discretion. To enable ICICI to exercise voting rights as aforesaid the Pledgor shall register this agreement with AHL with the instructions that as and when any intimation is received from ICICI in this behalf, ICICI should be permitted to attend and exercise the voting rights in respect of the pledged shares on any matter at any meeting of AHL. The pledgor shall also arrange with AHL for forwarding copies of the notices of the meeting to ICICI as and when such notices are issued to the shareholders.
The Pledgor shall also furnish a letter from AHL confirming the arrangement set out in this clause 8(c)"
(iii) Clause 9 (Enforcement of Pledge) states that :
"(a)Upon the occurrence of an Event of Default, ICICI may, subject to one (1) day’s prior notice to the Pledgor, enforce the pledge in respect of the Pledged Shares by transferring the Pledged Shares in its name whereupon it shall hold the same absolutely, free from any claim or right of whatsoever kind, ICICI may cause its interest to be noted in the records of the Depository Participant."
From the combined reading of the above clauses of the Share Pledge Agreement it is clear that so long as there is no default (in terms of the Share Pledge Agreement), ICICI shall exercise voting rights in respect of shares of the Target company in consultation with the Acquirer.
However, as is evident from the agreement, upon the occurrence of the default, ICICI may subject to one day’s prior notice to the Acquirer enforce the pledge by transferring the pledged shares in its name, thereby it will hold the shares in its own name, free from any claim whatsoever of the Acquirer. That is, in the event of the default, the legal ownership of pledged shares of the Target company will get transferred to ICICI and it shall exercise voting rights in respect of equity shares of the Target company in its absolute discretion.
BUYBACK AGREEMENT
It is pertinent to refer to clauses 1, 6 and 15 of the Buy Back Agreement dated 29.9.00 between the Acquirer and ICICI Ltd.
<!--[if !supportLists]-->(i)<!--[endif]-->Clause 1 (Rights of Lender / ICICI to call upon the Acquirer to purchase the Shares) states that :
"In the event of the Lender / ICICI exercising its right and enforcing the Pledge in terms of the Pledge Agreement dated September, 2000 entered into between the Acquirer and the Lender / ICICI, the Acquirer does hereby agree and confirm that the Lender / ICICI shall have the right to call upon the Acquirer any time during the period of 3 (three) years beginning with the date of enforcement of Pledge by the Lender / ICICI, to purchase / procure the sale / placement of the Equity Shares in such number and in such lots as the Lender / ICICI may in its absolute discretion call upon the Acquirer to do so (hereinafter referred to as "the Shares")."
From the reading of the above provisions of the Buy Back Agreement it is clear that once the default has occurred & ICICI has enforced the pledge, in the event of the ICICI shall have the right to call upon the Acquirer at any time during the period of 3 years beginning with the date of enforcement of pledge by ICICI, to purchase / procure the same / placement of equity shares in such number and in such lots as ICICI may in its absolute discretion call upon the Acquirer to do so.
It is seen that clauses 5 & 6 of the Buy Back Agreement as referred to by the Acquirer only enables the Acquirer to call upon the ICICI to subsequently sell the said shares to them (Acquirer) in case of pledge having been enforced by ICICI. This right can be exercised by the Acquirer upto a period of 3 years beginning with the date of enforcement of pledge. It further mentions that if said right is not exercised within the specified period, by the Acquirer then ICICI shall not further be obliged to sell the said shares to the Acquirer.
AGREEMENT DATED 12.10.2001
The relevant clauses of agreement dated 12.10.01 between ICICI, Arvind Mills Ltd, the Acquirer, the Target company and Hitachi Ltd., read as under -
Clause 4 :All the parties acknowledge that pursuant to an Event of Default as defined in Pledge Agreement having been committed by Acquirer, the pledge of Shares are to be enforced by ICICI as per Pledge Agreement and the Shares are to be transferred to ICICI, notwithstanding provisions in Article 16 of the Management Agreement.
Clause 6 :ICICI agrees that, during the period when it holds Shares, ICICI shall consult Arvind Mills Ltd. and vote at any general meetings of the shareholders of Target company as per mutual agreement as may be arrived at between ICICI and Arvind Mills Ltd. except in respect of resolutions pertaining to following matters, where ICICI shall vote independently :
<!--[if !supportLists]-->(a)<!--[endif]-->Dissolution, liquidation or merger of the Target company
<!--[if !supportLists]-->(b)<!--[endif]-->Payment of remuneration to any non-whole-time director by way of a commission being a percentage of net profit;
<!--[if !supportLists]-->(c)<!--[endif]-->Any variations of rights of holders of any class of shares;
<!--[if !supportLists]-->(d)<!--[endif]-->Any reduction of capital of the Target company; and
<!--[if !supportLists]-->(e)<!--[endif]-->Any increase of capital of Target company except when such capital increase is by way of rights issue to existing shareholders or issue of shares pursuant to Article 4 – clause 4.5 of the Management Agreement.
ICICI further agrees that in order to fulfill the quorum as stated in Articles of Association it attends general meetings of shareholders of the Target company in person or by proxy, and, in case it is unable to attend at such meetings in person, it assigns Arvind Mills Ltd. as a proxy to attend at such meeting on behalf of ICICI.
Clause 10 :"This Agreement shall be binding upon the parties from September 29, 2000 retroactively and shall remain in force and effect until terminated pursuant to the provisions of this Agreement.
Immediately after the execution of this Agreement, Lalbhai Group and Hitachi shall procure the Directors of the Target company to resolve and approve the transfer of shares from the Acquirer to ICICI pursuant to the Hitachi Approval Letter."
From the combined reading of the above clauses of Agreement dated 12.10.2001, it is clear that the default in terms of the Share Pledge Agreement, dated 28.09.00 has already occurred. It is observed from the record that pledge has already been enforced by ICICI and the said shares stand transferred in favour of ICICI as per the agreement. That is, ICICI has already acquired voting rights with regard to the said shares in the Target Company.
It appears that vide abovesaid agreement, ICICI has merely agreed to exercise the voting rights, in respect of the said equity shares of the Target company in consultation with Arvind Mills Ltd, that too only with regard to certain matters as mentioned above. Further, ICICI does not need to consult the Acquirer and shall vote independently with regard to matters pertaining to dissolution, liquidation or merger of the Target company, payment of remuneration to any non-whole-time director by way of a commission being a percentage of net profit, any variations of rights of holders of any class of shares, any reduction of capital of the Target company and any increase of capital of the Target company except when such capital increase is by way of rights issue to existing shareholders or issue of shares pursuant to Article 4 – clause 4.5 of the Management Agreement.
In view of the aforesaid, it is clear that the pledge in terms of Share Pledge Agreement has been enforced by ICICI on occurrence of event of default and it has consequently become the legal owner of the aforesaid pledged shares along with all the rights attached thereto, viz., voting rights, rights to receive dividend, etc. Therefore, the ICICI has acquired 38,58,565 equity shares constituting 26.31% shares of the equity capital of the Target company and has triggered the provisions of the regulation 10 of the Regulations. However, the aforesaid acquisition by ICICI is exempt under regulation 3(1)(f)(iv), ICICI being a financial institution and it having acquired the pledged shares in the ordinary course of its business.
Thus, it can be concluded that the Acquirer had pledged the shares of the Target company with the ICICI. As a result of default, the pledge was enforced by ICICI and consequently the ownership and voting rights of the pledged shares was transferred to ICICI, i.e., ICICI became the owner of 26.31% % shares of the Target company.
Therefore, repurchase of the said shares by the Acquirer, from ICICI subsequently will amount to fresh acquisition of shares of the Target company as per the Regulations. Further, in case such acquisition of shares of the Target company exceeds the threshold limit as specified under regulation 10, the Acquirer shall be under an obligation to make public announcement for acquisition of such shares.
I have noted the contention of the Acquirer that the pledge of the shares by the Acquirer in favour of ICICI was exempt from the applicability of regulations 10, 11 & 12 since ICICI being a public financial institution and it follows a fortiorari that the redemption of such a pledge by the shareholder would equally be exempt from applicability of these regulations. The Acquirer further submitted that when there is a pledge created by a shareholder in favour of a public financial institution, the shareholder does not cease to be the owner of the shares even in a case where the shares are transferred by the public financial institution in its own name by way of security for the loan given by it to the shareholder and the shareholder would have the rights to redeem the pledge. In this regard, it may be mentioned that the benefit of exemption under regulation 3(1)(f)(iv) is available only to the banks or the public financial institutions that too in case the shares are acquired under pledge in the ordinary course of their business.
The Acquirer is neither a bank nor a public financial institution nor is it acquiring said shares by way of security (pledge) in ordinary course of its business. Therefore the benefit of exemption under regulation 3(1)(f)(iv) is not available to the Acquirer as contented.
I have also noted the contention of the Acquirer that it retained the voting rights in respect of the pledged equity shares of the Target company when the same were transferred to ICICI in view of the Agreement dated 12.10.2001 entered into between ICICI, the Acquirer, the Target company and Hitachi. The relevant clauses have already been discussed hereinbefore. It may be mentioned that the aforesaid Agreement was entered into between the parties after the occurrence of default. Further, it was stipulated that ICICI was to enforce the pledge in terms of the Share Purchase Agreement and the shares were to be transferred to ICICI. In view of the aforesaid, it is clear that subsequent to enforcement of pledge, ICICI became the absolute owner of the pledged shares. The averment in the aforesaid Agreement that ICICI shall consult Arvind Mills in respect of certain matters has no bearing on the acquisition of shares by ICICI. Once ICICI acquires shares and if thereafter it agrees to exercise voting rights in consultation with the Acquirer, the same does not in any manner mean that the Acquirer still retains the voting rights of the pledged shares since on enforcement of the pledge, the voting rights have been transferred from the Acquirer to ICICI. It may also be mentioned as discussed earlier, that ICICI was not to consult Arvind Mills Ltd. on all the matters but only with respect to certain matters as enumerated hereinbefore. Except for those matters, ICICI was to take exercise voting rights independently.
It is noted that the Acquirer has also contended that repurchase of the pledged shares under the Buy Back Agreement would not trigger a public offer and regulation 10 would have no application in the present case since the Share Pledge Agreement and the Buy Back Agreement are interlinked and form part of the same transaction of pledge with the financial institutional and they cannot be treated as distinct and independent agreements. In this regard, it may be mentioned that if the contention of the Acquirer were to be accepted, the same may open a floodgate for the Acquirers to devise agreements in such a manner so as to circumvent the provisions of the Regulations. Irrespective of any mutual agreement between the Acquirer and ICICI, repurchase of shares by the Acquirer from ICICI will attract the provisions of the Regulations as ICICI has acquired the shares and is the shareholder in the books of the Target company and ICICI is exercising all rights of a shareholder. Therefore, the proposed repurchase of the said shares by the Acquirer will amount to an acquisition of shares by the Acquirer and the same will trigger the provisions of the Regulations.
I have also noted the contention of the Acquirer that the Acquirer is not required to pay the market price of the pledged shares as on the date of the buy back but the original amount lent and advanced to the Acquirer together with the interest thereon @ 15% per annum with quarterly rests from the date of enforcement of the pledge up to the date of sale of the pledged shares minus the dividend received by ICICI in the mean time. In this regard it may be mentioned that in view of the fact that the ICICI has become absolute owner of the pledged shares of the Target company any transfer of the shares by ICICI to the Acquirer will be a fresh acquisition by the Acquirer and will attract the provisions of the Regulations, in case the Acquirer acquires shares beyond the threshold limit as stipulated in the Regulations. In view of the same, the aforesaid contention of the Acquirer has no relevance.
In view of the above, the proposed repurchase of 38,58,565 pledged equity shares constituting 26.31% of the equity capital of the Target company by the Acquirer from ICICI is not exempt under regulation 3(1)(f)(iv) or under regulation 3(1)(l) of the Regulations.
9.0DIRECTIONS / ORDER
Taking into consideration the above, the recommendations of the Takeover Panel and the interest of the public shareholders of the Target company, 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 application of the Acquirer seeking exemption from making public announcement under regulation 10 of the Regulations for the proposed acquisition / repurchase of 38,58,565 equity shares constituting 26.31% of the Target company from ICICI.
The Acquirer is also directed that if it proposes to acquire 38,58,565 equity shares constituting 26.31% of the Target company from ICICI, then it will acquire the same in compliance with the provisions of the Regulations.
Date: October 16, 2002
Place: Mumbai
G. N. BAJPAI
Chairman
Securities and Exchange Board of India