In the matter of: -

Fascinating Leasing & Finance Pvt. Ltd.              Appellant

Vs.

Securities and Exchange Board of India               Respondent

Present:

Shri K.G. Desai
Advocate                                                                  for the Appellant

Shri Ananta Barua and
Shri Shubhashish Sharma,
officers,
Securities and Exchange Board of India            for the Respondent
 
 

This appeal is directed against the order dated September 26, 1997 made by the Adjudicating Officer, appointed by the Securities and Exchange Board of India, holding the appellants guilty of contravening the statutory provisions relating to substantial acquisition of shares.
 

The appellant company viz. M/s. Fascinating Leasing & Finance Pvt. Ltd. is a private limited company registered under the Companies Act, 1956 with the main object of carrying on non-banking financial business. The appellants acquired about 67% in the equity share capital of a public limited company viz. Hindustan Finstock Ltd. (hereinafter referred to as HFL). Acquisition of these shares was enquired into by the Adjudicating Officer appointed by the Securities and Exchange Board of India. The Adjudicating Officer, after enquiry came to the conclusion that the appellants had violated regulation 10 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1994 (hereinafter referred to as the Takeover Regulations) and section 15H of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the SEBI Act) and imposed a sum of rupees five lakh as penalty against the appellants vide his order dated September 26, 1997. The said order is under challenge in the present appeal.
 

APPLICATION 3 OF 1998

In terms of rule 9 of the Securities Appellate Tribunal (Procedure) Rules, 1995 in the normal course an appellant is required to deposit the penalty amount along with the appeal as a pre-condition for entertaining the appeal. However, the rule empowers the Tribunal to waive the said requirement, for sufficient reasons. The appellants had accordingly filed application 2 of 1998 along with the appeal, seeking waiver of the requiring of depositing the penalty amount. When the said application was called, despite notice, the appellants did not turn up. The application was dismissed on February 16, 1998 after hearing the respondents present and perusing the available records. The appellants thereafter filed application 3 of 1998 inter-alia, stating that the notice of hearing of the application reached them belatedly and as a result they could not be present at the time of hearing and prayed for restoration of the application. The said restoration application was heard. The respondents objected to the restoration on the ground that the request was unfounded. I do not find any justification for acceding to the respondents� request for dismissing the application. Giving an opportunity to the appellants to present their case would not in any way adversely affect the interest of the respondents. I am convinced that in the interest of justice the application should be restored and heard. The exparte order of February 16, 1998 is accordingly recalled and set aside. The application 2 of 1998 restored to file.
 

APPLICATION 2 OF 1998

Shri K.G. Desaid, Id. Counsel for the appellants arguing the application submitted that the financial position as disclosed in the appellants� Balance Sheet as on 31.3.1995, on which reliance was placed by the respondents, is of no relevance now as it is the present financial position that need be taken into consideration. According to him the appellants are in a financial crisis due to setback in their business and not in a position to raise five lakh rupees to remit the penalty amount, at this juncture. He submitted that the appellants had not done any business during the last 3 years and even the Balance Sheet and Profit and Loss Accounts have not been drawn for the last 3 years. He submitted that the appellants� only asset is investment in shares and it is not possible to sell those shares now as there are no takers. He further submitted that in the given circumstances, unless the predeposit requirement is waived, the appeal itself would become dormant and effectively that would amount to denial of justice. He expressed his willingness to argue the appeal right at the moment. Shri Ananta Barua, an Officer of the Securities and Exchange Board of India representing the respondents objected to waiver of the statutory requirement on the ground that the appellants are financially strong and that remitting five lakh rupees, considering the volume of business, should not be a big problem. However, he also consented to take up the appeal for disposal.
 

I have carefully the submissions by the parties. In the light of the facts and circumstances of the case I am of the view that this is a fit case to waive the requirement of depositing the penalty amount especially in view of the fact that the parties have consented to take up the appeal itself for disposal. The requirement of depositing the penalty amount under rule 9 is waived and the appeal taken up for disposal as consented by the parties.
 

APPEAL 2 OF 1998

Shri Desai gave a brief account of the background relating to the acquisition of shares in question. He submitted that the appellants were inclined to subscribe in the public issue of shares made by HFL. However, since the appellants were short of funds, they entered into separate Memorandum of Understanding with four members of one Khandwala family on April 15, 1995. Under the MOUs it was agreed that each of the Khandwala family members would apply for shares in the public issue of HFL and that on allotment of shares the appellants would buy over those shares from the said Khandwalas at the rate of Rs.10.50 against the issue price of Rs.10/- per share. The public issue was opened for subscription on April 20, 1995. The Khandwala family members were allotted a total number of 16,82,900 shares against 20 lakh shares applied for, by them. The shares were allotted on May 26, 1995. In terms of the MOUs the appellants bought over these shares from the Khandwalas.
 

Shri Desai submitted that the transactions between the appellants and the Khandwalas under the four MOUs were actually financing the mortgage transactions, that under the said MOUs the Khandwalas had agreed to advance money to the appellants and in consideration thereof, the shares of HFL were to be mortgaged as security. As at the time the said MOUs were entered into, the appellants were short of funds, but wished to acqurie shares, they requested the Khandwalas to give a loan for this purpose by directly paying the money to HFL, in the public issue. In view of the intended mortgage on allotment of shares, it was agreed that the Khandwalas apply for shares on behalf of the appellants and they did accordingly. According to Shri Desai, Khandwalas had made applications on behalf of the appellants and the shares allotted by HFL were being held by the Khandwalas as mortgages, with the appellants having the right of redemption. He submitted that according to settled law, there can be a mortgage of shares if the parties so desired. Under the mortgage of shares the shares stand transferred in the name of mortgage in the books of the company and the mortgagor has only the right of redemption till the shares are redeemed by the mortgagor and in the meanwhile all the benefits accruing on the said shares also accrue to the mortgagee either towards part satisfaction of the mortgage debt or otherwise. Patna High Court�s decision in Arjun Vs. Central Bank of India (1954) 34 ILR 8) was cited in support of this contention. Alternatively, he submitted that if for any reason it is held that mortgage of shares, as stated above was not possible in the absence of a validly executed mortgage deed, the transaction would also amount to a pledge of shares as held by the Andhra Pradesh High Court in Narasayyamma Vs. Andhra Bank Ltd. (AIR 1960 AP 273) that a pledger of shares can also get the shares pledged in his favour transferred to his name, and he holds the same till the redemption of the pledge by the pledger. While suggesting that the transactions is a mortgage or in the alternative a pledge, the Id. Counsel was found anxious to canvass in its letter and spirit, going beyond the literary meaning of the clauses. He cited the Supreme Court�s observations in Sundaram Finance Ltd. Vs. The State of Kerala (AIR 1966 SC 1178) in support.
 

The Counsel further contended that the appellants acquired the shares in a public issue and as such there was no violation of regulation 10, as the said acquisition is outside the ambit of Chapter III of the Takeover Regulations, in terms of regulation 3(a). Other grounds which he adduced to substantiate his contention were that the transaction is beyond the purview of regulation 10 and section 15H as the appellants were not holding any share in HFL at the time of acquisition or entering into the MOUs, that at the relevant point of time the shares were not listed on any stock exchange and hat the shares were not purchased from the open market. Shri Desai further submitted that the shares acquired by the appellants did not carry voting rights, in as much as the shares are yet to be registered in their name in the company�s register. According to him, on no count the appellants can be considered to have violated regulation 10 or section 15H as concluded by the Adjudicating Officer. Even for argument sake, if one is to admit the offence, he stated that imposition of rupees five lakh, the maximum penalty provided under section 15H, was grossly unjust and arbitrary, ignoring the guidelines provided under section 15J of the Act.
 

Shri Ananta Barua, representing the respondents submitted that by no stretch of imagination, the transaction can be considered as a mortgage or pledge as was being made out by the appellants. According to him, the appellants themselves had admitted before the Adjudicating Officer in the inquiry proceedings and in their Memorandum of Appeal, that they had purchased the shares from the Khandwala family members. In support of this, he referred to the appellants� letter dated June 16, 1997 to the A.O. and admissions in paras 2.2, 2.4(c) and 3.7 of the Memorandum of Appeal. He submitted that the internal arrangements for raising funds, etc. between the appellants and the Khandwalas are of non-consequence for deciding the applicability of regulation 10 and section 15H of the Act. He submitted that facts are not in dispute that Khandwalas had applied for shares in their own name and the shares were allotted to them. The appellants thereafter purchased the shares from the Khandwalas by paying a premium of fifty paise per share, as predetermined by the MOUs. The total number of shares acquired by the appellants accounted for nearly 67% of the paid up capital of HFL against the 10% threshold limit provided in regulation 10.
 

Shri Barua, in an attempt to counter the contention that the appellants were not holding any share in the target company at the time of acquisition of shares so as to attract the statutory provisions, submitted that the appellants came under the definition of acquirer as provided under regulation 2(b) of the Takeover Regulations and that the definition does not require an acquirer to be an existing share holder. Referring to the provisions of regulation 10, he submitted that the qualification therein suffixed to the acquirer "who holds shares carrying ten percent or less of voting rights in the capital of the company" should be given a meaningful interpretation or be ignored as irrelevant, to be in tune with the object and spirit of the Takeover Regulations, otherwise the very legislative purpose for which the regulation was framed would be defeated. According to him, the expression �less� would also mean �nil�, thereby suggesting that acquisition of shares by even a non existing shareholder would come under the purview of regulation 10. The sum and substance of his submission was that acquisition of shares beyond 10% of the share capital by any person, irrespective of the fact that he is an exiting shareholder or not in the target company, would attract compliance of the statutory requirements. He further stated that compliance of the requirements of regulation 10 and section 15H is not contingent upon the registration of shares in acquirer�s name in the target company�s books. According to him the moment an agreement is entered into to acquire shares or in the absence of such an agreement, the share certificates along with transfer form signed by the seller are received by the acquirer, the acquisition is complete. Elaborating on the rights and obligations of a bonafide purchaser of shares, pending entry of his name in the register of members of the company, Shri Baru acted the Supreme Court�s decision in Life Insurance Corporation of India Vs. Escorts Ltd. (AIR 1986 SC 1370) and R. Mathalone Vs. Bombay Life Assurance co. Ltd. (AIR 1953 SC 385).
 

Shri Barua further submitted that the provisions of the Take Over Regulations would be applicable even to those shares which are not listed on any stock exchange. According to him, even if the shares are not listed, once the shares are issued by a company, these shares become marketable and as a result automatically an open market comes into existence and any purchase of these shares in any manner crossing the threshold limit would attract regulation 10 and section 15H. Shri Barua drew the Tribunal�s attention to the observation made by the Special Court (Trial of Offences Relating to Transactions in Securities) Bombay, in the case of AK Menon Vs. Fair Growth Financial services Ltd. (1994) 81 Comp. Cases 508 (Spl. Court), to support his view point that marketability of a security is independent of its listing, and the marketability was possible only if there is an open market. Shri Barua, when, it was pointed out that the Special Court�s decision on which he had placed reliance has been over ruled by the Supreme Court in BOI Finance Ltd. Vs. The Custodian (AIR 1997 SC 1952), submitted that the Special Court�s observation on the marketability of shares relied on by him has not been over ruled and can still be relied on. According to him acquisition of any share having marketability would attract regulation 10 and section 15H of the Act and the transaction made by the appellants squarely attracted the statutory provisions.
 

Shri Barua took an alternative plea that for any reason if the transaction is not covered under regulation 10, it should be treated as one falling under regulation 9 attracting the same penalty under section 15H of the Act. According to him this Tribunal has jurisdiction to substitute the offence and cited the Supreme Court�s decision in the case of Hazari Mal Kuthiala Vs. Income Tax Officer (AIR 1961 SC 200) in support.
 

Coming to the quantum of penalty, Shri Barua submitted that the contravention of regulation 10 and section 15H is of a serious nature. The transaction lacked transparency and fairness required to be followed in the acquisition of shares. By giving goodbye to these principles, the interests of the minority shareholders have been adversely affected. He stated that the transaction involved nearly a sum of one hundred and seventy four lakh rupees. He urged that in view of the gravity of the offence, the penalty of rupees five lakh cannot be considered unjust or unreasonable, warranting any remission.
 

I have carefully considered the various rival contentions in this appeal. The facts remain undisputed. Only the perception of the parties on the scope of the statutory provisions differs.
 

One of the contentions of the appellants is that the shares were purchased by them from out of the public issue made by HFL as the Khandwalas had made application on behalf of the appellants and that the said Khandwalas were holding the shares as mortgagees with the appellants having the right of redemption, that in reality the transaction with Khandwalas was in the nature of a mortgage / pledge of shares. To appreciate the nature of the transaction it is necessary to have a look at the MOUs dated April 15, 1995 entered into by the appellants with the four members of the Khandwala family viz. (1) Shri Paramanand G. Khandwala (2) Smt. Kinnari J. Khandwala (3) Shri Vimal P. Khandwala (4) Smt. Sonal R. Khandwala. The terms and conditions of all these MOUs are substantially identical. The standard clauses, from one of the MOUs, considered relevant in the context are contracted below:

Before we proceed further, let us have a look at the following statutory provisions relied on by the parties.

Regulation 3 Nothing contained in Chapter III of these regulations shall apply to acquisition of shares:

Since the Takeover Regulations came into force with effect from November 11, 1994 and on that date the appellants were not holding any share in HFL, sub-regulation (2) of regulation 10 has no application to the instant case. So the applicability of the provisions of regulation 10(1) read with section 15H in the given set of facts alone need be looked into for deciding the appeal.

On a perusal of regulation 10(1) as it exists, it is clear that the provisions are applicable to acquisition of "further" shares from the "open market" by an existing share holder, beyond the prescribed ten percent limit. It is on record that the appellants were not holding any share in the capital of HFL at the time of entering into MOUs or on the date on which the shares were taken possession from the Khandwalas. Shri Barua�s contention that the definition of the expression "acquirer" in the Takeover Regulations does not suggest that the person should be an existing shareholder, is not contentious. In terms of regulation 2(b) of the Takeover Regulations "acquirer" means any person who acquires or agrees to acquire shares in a company either by himself or with any person acting in concert with the acquirer. But regulation 10(1) is not confined to an acquirer simplicitor, but to an acquirer "who holds shares carrying ten percent or less of voting rights in the capital of the company". The said qualification to the acquirer does not appear to be an inadvertent addition in the regulation as is evident from the various other provisions of the Takeover Regulations. Regulation 10(1) refers to acquisition of "further" shares. The word "further" means additional or extra. So, when we refer to "further" it is referable to some thing already in existence. So, when we refer to "further" shares it is referable to some thing already in existence. This view is further strengthened from the same regulation as it requires to take into consideration the "existing share holdings" of the acquirer for computing the ten percent outer limit. The requirement of holding shares as a pre-requisite to attract the Takeover Regulations is found not only in regulation 10(1) but also in regulation 9 dealing with acquisition of further shares through negotiation and in regulation 14 mandating a public announcement of intention to acquire shares referred to in regulation 10 which would increase the "existing share holdings of the person" making the announcement. It is, therefore, impossible to interpret the expression �less� used in regulation 10(1) to mean �nil� and ignore the rest of qualificatory portion following the expression �acquirer� in the said regulation 10, as submitted by Shri Barua. Accepting Shri Barua�s suggestion would mean re-writing not only the provisions of regulation 10, but also some of the other core-provisions of chapter III of the Takeover Regulations, which I am afraid, is not within the powers of this Tribunal. In the context of the proposition put forth by Shri Barua, I am reminded of the observations made by Lord Green M.R, that "if there is one rule of construction for statutes, it is that you must not imply anything in them which is inconsistent with the words expressly used (Re A Debtor (1948) 2 All ER 533). Supreme Court in Kanailal Sur Vs Paramnidhi Sadhukhan (AIR 1957 SC 907) had observed that "the intention of the legislature must be found in the words used by the legislature itself". In another case the Apex Court had observed that "when the words of the statute are clear, plain or unambiguous, the courts are bound to give effect from that meaning irrespective of consequences (Nelson Motis Vs. Union of India - AIR 1992 SC 1981). This observation is infact a reiteration of what was stated by the Apex Court in M.V. Joshi V. M.U. Shimpe (AIR 1961 SC 1494) that "the primary test is the language employed in the Act and when the words are clear and plain the Court is bound to accept the expressed intention of the legislature". The words used in regulation 10(1) are very clear, plain and unambiguous and as such the proper course would be to go by the literal meaning. Regulations 9, 14, etc. lend support for taking such a view. It is, therefore, difficult to read the regulation in the manner suggested by the Id.representative to give an altogether different meaning which does not flow from the words used. "The spirit of law" as the Supreme Court observed may well be an elusive and unsafe guide and the supposed spirit can certainly not be given effect to in opposition to the plain language of the sections of the Act (Rananjaya Singh Vs. Baijnath Singh (AIR 1954 SC 749). One cannot over look the fact that the Takeover Regulations are meant for compliance by persons acquiring shares. Their understanding of the statutory requirements would normally be based on a plain reading of the provisions giving plain meaning to the words used therein as is commonly understood. Interpretation of regulation 10(1) on the lines suggested by the Id. Representative cannot sustain.
 

The appellants� contention that the shares acquired by them have not been registered in their name in the company�s register and as such the shares did not carry voting rights is unfounded. The Companies Act, 1956 recognises two kinds of shares - Equity or Ordinary shares, and Preference Shares. Section 87 of the Companies Act deals with the voting rights. Equity share by its very nature carry voting rights, whereas a preference share does not have such built in voting rights though in certain exceptional circumstances for limited purposes preference shares will also have voting rights. It is well recognised in the corporate legal circle that shares carrying voting rights mean only equity shares. The fact that equity share carry with it the voting rights does not mean that its holder can automatically exercise such voting rights. For exercising the voting rights by a person holding the shares, his name should appear in the register of members of the company, required to be maintained under section 150 of the Companies Act. In this context it is pertinent to mention that the regulation in question is not linked to the right of the holder to exercise the voting rights but on the nature of the share he holds - i.e. share carrying voting rights. Since the appellants had acquired equity shares, it can not be said that the shares acquired by them did not carry voting rights.
 

The appellants� submission that when they purchased, the shares were not listed on any stock exchange and that the purchase was not from open market cannot be ignored in the light of the undisputed facts of the case. It is on record that the shares were allotted to the Khandwalas on May 26, 1995 and the Khandwalas delivered the share certificates along with the share transfer forms duly signed by them to the appellants on June 13, 1995 in terms of th MOUs. The shares were listed for the first time on June 14, 1995 on the Ahmedabad Stock Exchange and thereafter on June 15, 1995 on the Bombay Stock Exchange. These facts clearly indicate that on the date of acquisition of shares by the appellants, the shares were not listed on any stock exchange. That being the case, exemption in terms of regulation 3(d) is available and the transaction is beyond the purview of regulation 10. Further, regulation 10 is applicable to acquisition of shares from the open market. As it is seen, the shares were acquired by the appellants on the basis of MOUs entered into between the parties based on negotiations and further that the shares were delivered to the appellants before listing, it cannot be said the appellants had purchased shares from the open market. The respondents� contention that the shares of public limited companies, by the very nature are marketable and since they are marketable, the moment the shares are issued an open market automatically springs up and listing on the stock exchange is not necessary to attract regulation 10, is not legally tenable. What is required to be looked into in this case is the statutory provisions relating to the transaction. As mentioned earlier, the legal provisions are very clear and one need be guided by the same. Regulation 3(d) is very clear in as much as, it specifically excludes the unlisted shares of companies from the purview of the Takeover Regulations. The observations of the Special Court in AK Menon�s case cited is not of any help to the respondents in this case in view of the distinct set of facts. In AK Menon�s case the Court was considering the legality of the ready forward transactions with reference to two notifications issued by Central Government under sections 13 and 16 of the Securities Contract (Regulation) Act, 1956. Shri Barua had relied on the observations made by the Court "�. that these two notifications relate not only to securities which are listed but also to securities which may not be listed on any stock exchange. All that is required is that they must be marketable. It cannot be said that any security, which is not listed on any recognised stock exchange is not marketable. Marketability implies ease of selling and includes any security, which is capable of being sold in the market. The definition of the word "security" under section 2(h) of the Securities Contracts (Regulation) Act, 1956 is an inclusive definition. It is very wide. Thus all securities which are marketable and which have an ease or facility of selling in a market i.e. stock exchange, are included" the issue before us is not the question whether shares of a public company are marketable or not. The issue is rather limited as to whether the shares involved in the transaction wer3e purchased from open market or not. The question is about the nature of the market. The expressions "market and open market" are not synonymous. A market can sometimes a restricted one also. An open market is an unrestricted market, which envisages large umber of buyers and sellers allowing the market forces to interplay in a free competitive manner. The prefix `open� is to distinctly indicate the operational wide spectrum. However, I do not feel any need in this case to examine the larger question as to an open market automatically emerges or when the shares are issued or it comes into existence only after listing. Suffice to say that even if there is an open market for a �security�, it is no necessary that every transaction involving that security would be an open market transaction. Even if there is an open market, nothing prevents the purchaser and seller making an off market deal through private negotiations. Private negotiated deals cannot be considered as open market deals. The transaction in the instant case was on the basis of MOUs entered into between the parties by way of negotiation well before listing the shares and not by way of purchase from the open market even if it existed. Hence it can be safely concluded that the transaction is outside the purview of regulation 10(1).
 

Shri Barua�s alternative submission to consider the default under regulation 9, in case the same does not come under the purview of regulation 10 is not acceptable. HazariMal Kuthiala�s case cited by him is of no help to persuade me to accept the suggestion. In the said case, the Supreme Court was considering a case where the Commissioner of Income-Tax, when transferring an assessment case from Patiala to Ambala had acted under sections 5(5) and (7A) of the Indian Act, while he should have acted under section 5(5) of the Patiala Act. In that context the Apex Court had observed that the fact that reference to the Indian Act in the order does not make the action of the Commissioner without jurisdiction under which it will be nugatory. The facts of the said case are clearly distinguishable and as such the ratio is not applicable to the instant case. It may be remembered that this Tribunal is an appellate forum and that is jurisdiction is confined to deciding appeals arising out of the orders made by the Adjudicating officer as is being made out by the Id. Representative of the respondents. Regulation 9 and regulation 10 are distinct from the point of view of their application and meant for compliance in different situations. Regulation 9 is on the acquisition of shares through negotiation, whereas regulation 10 is on the acquisition from the open market. This Tribunal has no jurisdiction to investigate the transaction and decide afresh the applicability of regulation 9 as suggested by Shri Barua.
 

Section 15H of the act comes into operation only if a person who is required under the act or any rules or regulations made thereunder fails to make the requisite disclosure or of the mandatory public announcement. Since the acquisition of shares in the instant case itself being beyond the purview of the Takeover Regulations, section 15H has no application.

In the light of the finding that the appellants were not holding any share in HFL at the relevant time and that the shares acquired were not listed on any exchange and further that the purchase was not from the open market, I hold the appellants not guilty of contravening the provisions of regulation 10 read with section 15H of the Act. Accordingly, the appeal is allowed and the adjudication order dated September 26, 1997 is set aside.