In the matter of:

Shri Ch.Kiron
Margadarsi Financiers                                              Appellant

Vs.

Adjudicating Officer
Securities & Exchange Board of India                  Respondent
 

APPEARANCE:

Mr. Raghu Cidambi
Authorised Representative                                        for Appellant

Mr. Ananta Barua
Division Chief, SEBI

Mr. Vinay Chauhan
Legal Officer, SEBI                                                      for Respondent
 

(Appeal arising out of the order dated 3.4.2001 made by the Adjudicating Officer, Securities and Exchange Board of India)

Margadarsi Financiers, the Appellant herein, is a HUF of which Shri Ch.Kiron is Power of Attorney holder and the main contact person. The Appellant is, interalia engaged in the business of financing, bill discounting etc. Aurobindo Pharma Ltd (APL) whose shares are subjected to acquisition is a company registered under the Companies Act. It is one of the leading manufacturers of life saving antibiotic bulk drugs in India. APL�s issued capital is Rs. 4. 72 crores.
 

Securities and Exchange Board of India (SEBI) came to know from the APL�s Distribution Schedule drawn as on 29.8.1997 that the Appellant was holding 3, 32, 540 shares (7.037% of the paid up capital) and the acquisition was made for the first time in the year 1997. In the light of the said information, SEBI decided to inquire in to the matter, mainly with a view to ascertain the extent of compliance of the provisions of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations 1997 (the Regulations) by the Appellant.
 

As per further details collected by SEBI, it was noticed that as on 20.1.1997 the Appellant acquired 3, 87, 540 shares by way of pledge from the borrower. 3, 87, 540 shares constitute 8.2% of the paid up capital of APL. Subsequently on 14.5.1997 the Appellant acquired 3,80, 040 shares more, again by way of pledge. As a result thereof-total holding of the Appellant rose to 7, 67, 580 shares in APL (16.24% of the paid up capital). In this context SEBI prima facie felt that the said acquisition of shares attracted the provisions of regulation 10 and decided to appoint an Adjudicating Officer to inquire into the alleged contravention of the regulation read with section 15H of the Securities and Exchange Board of India Act, 1992 (the Act) and impose monetary penalty if considered necessary.
 

The Adjudicating Officer so appointed, after enquiry viewed that there was failure on the part of the Appellant to comply with the requirements of the regulation and consequentially levied a penalty of Rs. 3 lakhs on the Appellant vide order dated 3.4.2001.
 

Shri Raghu Cidambi, learned representative appearing for the Appellant submitted that the Appellant had not violated the provisions of regulation 10 as its holding never crossed the bench mark of 10% specified in the regulation. Shri Cidambi explained the circumstances and sequence of events involved in the acquisition. The position is summarised in the following chart,
 
 

The Appellant�s main submission is that as the shares were received by way of pledge the same cannot be considered as an acquisition for the purpose of the Regulation for the reason that the concept of pledge as per section 172 of the Indian Contract Act does not provide for vesting the legal ownership of the property in the pledgee, it is considered only as a security for payment of debt and the ownership of the goods pledged continue to remain with the debtor and the loan agreements in the instant case provide only for the acquisition of shares for recovery of loan in the event of the borrower committing default. According to him acquisition of shares is therefore, contingent upon default and this contingency is entirely outside the control of the Appellant. For an agreement to acquire shares to fall within the meaning of regulation 2(1) (b) it is necessary for the acquirer to have the unfettered right to acquire the shares and such right exercisable at his option. In a pledge, as in the instant case, the acquisition, if any, can only occur if the Appellant chooses to exercise its option to acquire shares on the happening of default and takes necessary steps for such acquisition. In this context the learned representative cited the following cases: (1) Balakrishna Gupta and Ors.V. Swadeshi Polytex and Others (1985) 58 Comp.Cases 563 (SC), therein the Supreme Court had held that the pledgee cannot be treated as the holder of the shares pledged in his favour and the holder continues to be the member in respect of the shares and can exercise his voting rights. (2) A.K.Menon vs. Fair Growth Financial Services Ltd & Anr. and Bank of India v. The Custodian and Anr. (1994) 81 Com.cases 508. (Spl.Court). Shri Cidambi had also cited two Andhra Pradesh High Court decisions (1) Md.Sultan & Others v. Firm of Ramprasad Kannayalal (1963 ALT 452) and (2) Narasayamma v. Andhra Bank Ltd (1960 ALT 66) in this regard.
 

Shri Cidambi submitted that regulation 10 is attracted only in cases where the acquirer consequent to such acquisition of shares gets entitled to exercise 10% or more voting rights in the company, that in the instant case the voting right pertaining to the shares involved were never transferred to the Appellant but remained with the borrowers. In this context he further submitted that the pledged shares were all returned to the owners, when the loan amount was repaid, and till then the shares were held as security for repayment of the loan. This is indicative of the true nature of the transaction. He submitted that the shares in the instant case were held only in trust for borrowers and as security for repayment of debt.
 

Learned representative submitted that every person who comes within the definition of "acquirer" under regulation 2(1)(b), cannot be considered to have violated the regulation on acquisition of shares, and every acquisition of shares which is more than 10% of the paid up capital of the target company does not amount to violation of regulation 10, unless such acquisition entitles the acquirer to exercise 10% or more voting rights in the target company. According to him in terms of section 87 of the Companies Act only a person whose name appears in the members register of a company is entitled to voting right and in that view of the matter only a part of Appellant�s holding was entered in the register and that part holding was less than 10%. He said that the legal right to vote in a company vests in a member and the concept of member has been defined in section 41 of the Companies Act, and that in terms of the definition the Appellant is not a member.
 

As an alternate submission Shri Cidambi stated that even if it is admitted that the 3, 32, 540 shares transferred in the name of the Appellant are to be taken into account, its holding did not exceed the bench mark provided in the regulation requiring compliance of the requirements stipulated therein.
 

Shri Cidambi countered the Respondent�s version that all those pledges which are not exempted vide regulation 3 (1) (f) (iv) are covered under regulation 10, sating that in view of section 172 of the Indian Contract Act, the same being the substantive law governing pledge, no specific exemption is required to keep pledge of shares out of the purview of regulation 10 etc. He said in certain cases even in a pledge the shares held by the pledgee may be registered in its name if the agreement between the parties provides for the same and regulation 3 (1) (f) (iv) is meant to take care of such extraordinary cases.
 

Referring to the Respondent�s version that the Appellant had not filed any statement in terms of 187 C of the Companies Act, in respect of the shares held by it, Shri Cidambi submitted that the said section is applicable to benami holding and the Appellant being not a benamidar there was no need to file any returns under the said section.
 

Learned representative submitted that the Appellant has not violated the provisions of regulation 10 and that in any case imposition of penalty was not warranted in this case, as none of the factors referred to in section 15J existed, that the Adjudicating Officer had also endorsed the same as could be seen from his finding in the impugned order that "Acquisition, by way of pledge of shares by the promoters of APL, would not have resulted in any loss to any other shareholders as there is no material impact on the price of the scrip there is a change in the control of the company. The gain to MF (the Appellant) was only the interest they would have earned for the loan they have given. This is in the normal course of their business". The learned representative submitted that having recorded such a clear finding, the Adjudicating Officer should not have imposed Rs. 3 lakhs as penalty.
 

Shri Ananta Barua appearing for the Respondent explained the factual position leading to the conclusion that the Appellant had acquired shares beyond the bench mark provided in regulation 10 and failed to comply with the requirements of the said regulation. He stated that on 20.1.1997 the Appellant acquired 3, 87, 540 shares by way of pledge which constituted 8.20% of the paid up capital of APL. Subsequently on 14.5.1997 the Appellant acquired additional 3,80,040 shares of APL, also by way of pledge. The same day 55, 000 shares were returned to APL. As a result thereof the total share holding by the Appellant accounted for 15.08% of the paid up capital of APL
 

Shri Barua submitted that to constitute �acquisition� in terms of the regulation delivery of shares along with duly signed transfer deeds would be enough. In this context, he referred to the definition of the expression �acquirer� in regulation 2 (1) (b) that any acquisition would attract the provisions, that the only requirement is that the subject matter of the acquisition should be �shares� or �voting rights� or �control� over the company. He also referred to the definition of the expression �shares� in regulation 3 (1) (k) and stated that shares for the purpose means shares in the share capital a company carrying voting right and includes any security which would entitle the holder to receive shares with voting rights. According to him in the instant case the Appellant had acquired APL�s equity shares carrying voting rights and these shares though held as security entitled the Appellant to exercise voting rights at a later date.
 

Learned representative stated that as per the clear provisions of the Regulation it can be safely concluded that the instant transaction was an acquisition. He stated that regulation 3 (1) (f) expressly excludes acquisition of shares in the ordinary course by banks and public financial institutions as pledgees, that this limited exclusion clearly confirms that acquisition of shares by way of pledge by persons other than banks and public financial institutions is to be considered as acquisition for the purpose of the Regulation, that if transfer of pledged shares, as a class was to be excluded or exempt from the purview of the Regulations, no exemption would have been specifically carved out for banks and public financial institutions. According to him the limited exclusion in regulation 3 (1) (f) therefore clearly confirms that acquisition of shares by way of pledge by persons other than banks and public financial institutions will come under the purview of the Regulation. Shri Barua submitted that if the Appellant�s version that transfer of shares during the subsistence of pledge should not be treated as acquisition for the purpose of the Regulation is accepted, the same would totally nullify the Regulation and render it powerless as parties would subvert the Regulation with impunity by resorting to the simple device of acquiring shares in the garb of pledge. In this context Shri Barua referred to the decision of the Supreme Court in Bhavesh D Parikh & Ors.v. Union of India (2000) 5 SCC 471) and stated that the takeover regulation being an economic legislation, its provisions need be interpreted in such a way so as to meet the mischiefs rather than for providing loopholes. He also cited the decision of the Tribunal�s decision in the VLS Finance v.SEBI (2000) 39 CLA 257).
 

Shri Barua submitted that a loan agreement between the parties combined with physical delivery of shares alongwith duly signed transfer deeds clearly amounted to an agreement to acquire shares within the meaning of regulation 2 (1) (b). According to him the agreement referred to in the regulation will also cover any agreement including pledge agreement whereby shares are acquired. He stated that any persons who acquires or agrees to acquire shares or voting rights or control in a company is an acquirer and the conduct of such an acquirer attracts regulation 10 on holding 10% or more of the shares.
 

Referring to section 172 of the Indian Contract Act, Shri Barua submitted that, the actual delivery of goods referred to therein encompasses delivery of shares and as such even if the shares are given as security, by virtue of the fact that the possession is transferred to the lender, delivery of shares could be construed as acquisition. Shri Barua pointed out that a total of 7, 67, 580 shares were acquired by the Appellant as pledgee by means of an agreement, and that out of the said acquisition 3, 32, 540 shares were transferred in the name of the pledgee and in respect of the remaining 4, 35, 040 shares the borrower directors of APL had submitted duly discharged transfer deeds along with the share certificates, that the acquisition therefore is complete in all respects and the Appellant became an acquirer in terms of regulation 2 (b), the acquisition having crossed the bench mark attracted regulation 10. He stated that it is not necessary that shares need be transferred in the name of the acquirer to attract the regulation.
 

Shri Barua submitted that Rs. 3 lakhs levied as penalty is against the maximum penalty of Rs. 5 lakhs provided in section 15H (ii) that the Adjudicating Officer has viewed the matter leniently and arrived at a lesser amount, after taking into consideration all the relevant factors. He submitted that therefore, there was no need to reduce the quantum of penalty.
 

I find that the facts are not in dispute in this case. The Appellant had received 7, 67, 580 shares of APL (16.24%) by pledge against loan given by it to the Directors of the said company. Out of the said shares, 3, 32, 540 (7.037%) shares were transferred in the name of the Appellant and the remaining 4, 35, 040 (9.207%) shares though handed over to the Appellant, continued to remain in the name of the borrowers on the register of members of APL. It is also seen that the entire shares so received as security against the loan were returned to the borrowers by 25.9.1998 on repayment of the loan amount.
 

In the context of the admitted fact that the acquisition was in the context of shares pledged with the Appellant and that total shares involved constituted 16.24% of the paid up capital of APL, the only question that is to be considered is that as to whether the shares so held by the Appellant amounted to acquisition in terms of regulation10, requiring to make a public offer.
 

Before we proceed further in the matter it is felt that the concept of pledge need be clearly understood as the parties herein have viewed the scope of the same differently. There is no dearth of authorities in this regard. According to section 172 of the Indian Contract Act "The bailment of goods as security for payment of a debt or performance of a promise is called pledge. The bailor is in this case called the �pawner� and the bailee is the �pawnee�". It is seen from the definition that there are three essential ingredients of a pledge (1) there must be a bailment of goods as defined in section 148 of the Contract Act, that is, delivery of goods (2) the bailment must be by way of security (3) the security must be for payment of a debt or performance of a promise. It is thus clear that a pledge is the delivery of goods by the pledger to the pledgee by way of security upon a contract that they shall, when the debt is paid or the promise is performed, be returned or otherwise disposed of according to the directions of the pledger. A pledge would, therefore create an estate, which vests in the pledgee, which is distinguishable from ownership. The title of ownership of the pledged property remains with the pledger.
 

The Respondent while defending the order had attempted to analyse the provisions of regulations 2 (1) (b) and 10, to bring home the point that the Appellant is an acquirer and the acquisition attracted the requirement of making public offer, as provided in the regulation. According to regulation 2 (1) (b) �acquirer means any person who directly or indirectly acquirers or agrees to acquire shares or voting rights in the target company, or acquires or agrees to acquire control over the target company, either by himself or with any person acting in concert with the acquirer�
 

In terms of regulation 10 "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) entitle such acquirer to exercise ten percent (15% with effect from 28.10.1998) or more of the voting rights in a company, unless such acquirer makes a public announcement to acquire shares of such company in accordance with the Regulations�. (emphasis supplied)
 

On a perusal of regulation 2 (1) (b) it is clear that a person is an acquirer who acquires or agrees to acquire shares or voting rights/control in the target company. The mode of acquisition of shares or the purpose of acquisition is of not much significance to identify the acquirer. As has been held in the case of Joshi Jayantilal v. State of Gujarat (AIR 1962 Gujarat 297) and as per the Blacks Law Dictionary acquisition is the act of becoming the owner of certain property, the act by which one acquires or procures the property in any thing. In this context it is to be noted that the act of acquisition of shares or voting rights by itself will not attract the provisions of regulation 10, though the person who acquired the shares or voting rights may fall within the definition of the expression �acquirer�. Each and every acquisition by an acquirer need not necessarily attract the provisions of regulation 10. What attracts the regulation is the acquisition of shares/voting rights which will entitle the person acquiring the shares to exercise voting rights beyond certain limits specifically provided in the regulation, say ten percent in regulation10. Thus it is clear that a plain acquisition even if it exceeds 10% of the paid up capital of the company will not attract regulation10, unless the acquisition entitle the acquirer to exercise ten percent or more of the voting rights in the company.
 

In this context it is considered necessary to look at the legal provisions, which entitles a person to exercise voting rights in a company. Section 87 (1) of the Companies Act, inter alia states that every member of a company limited by shares and holding any equity share capital therein shall have a right to vote, in respect of such capital on every resolution placed before the company. The expression �member� has been defined in section 41 as follows:

As discussed earlier, the legal ownership in the property, which is pledged, vests with the pledger and does not pass automatically to the pledgee. What passes is merely the possession of the property. It is well settled that if blank transfer forms along with share certificates are delivered with the intention of sale, then the transferee gets a right to fill in his name and to get his name transposed in the records of the company. However, in all cases where blank transfer forms along with share certificates are handed over to the transferee, the same position will not apply. Thus for example if a pledger hands over to the pledgee share certificates along with blank transfer forms as and by way of pledge, the transaction still remains a transaction of pledge. Mere receipt of share certificates along with blank transfer forms will not give to the pledgee any right, title or interest in the shares. The right, title and interest and ownership of the shares will continue in the pledger. The only right, which the pledgee will have, will be on non-payment to have the shares sold after notice. Such sale can only take place after a notice to the pledger. This is one instance where, even though blank transfer forms have been handed over along with share certificates, there is still no transfer of ownership. Another instance may be where the shares along with blank transfer forms are kept as security towards repayment of a debt. If they are merely kept as security, then again by such deposit no right is created in favour of the creditor. It is only after the agreed time of repayment is over that the security can be enforced and it is only at that stage that the creditor gets a right to fill in his name in the transfer forms and get his name transposed in the records of the company.
 

In the instant case it is seen that 3, 32, 540 shares (7.04%) were transferred in the name of the Appellant and its name was entered in the members register maintained by APL, thereby entitling the Appellant to exercise voting rights attached to those shares. For computing the entitlement for exercising voting rights in APL, for the purpose of regulations, the said holding has to be taken into consideration in view of the legal position that a member is entitled to exercise voting rights. In view of the clear words in the regulation regarding entitlement to exercise voting rights, the shares standing in the name of pledgee, though acquired by way of security need be taken into account. However, it is not so in the case of the remaining shares which were only held by the Appellant, but not registered in its name. The voting rights in respect of the said shares remained with the pledgers. Even the loan agreement in the instant case does not authorise the Appellant to exercise the voting rights attached to the said shares, on their behalf. Shareholding, irrespective of the quantum, which does not entitle the person concerned to exercise voting rights in the company, is to be discarded for computing the 10% benchmark in regulation 10.
 

The Appellant�s submission that the entire quantum of shares received by it by way of pledge need be excluded for the purpose of regulation 10 is untenable for the reason that in respect of 7.04% of the share capital it had become entitled to exercise voting rights. However that is not the case with regard to the remaining portion of the shares held by it since these shares were only "held" by it and the Appellant was not entitled to exercise voting rights attached to those shares, it cannot be said that holding those shares amounted to acquisition to decide the bench mark provided in regulation 10. Once the said holding is not taken into consideration, the Appellant�s holding remains at 7.04% which is well below the threshold limit provided in regulation 10 and therefore it was not required to make any public announcement to acquire shares in accordance with the regulations.
 

The Respondent�s argument that since pledge has been specifically excluded from the scope of the regulation in the case of banks and financial institutions and not in other cases and therefore the instant case is covered by the Regulation is not acceptable. If the acquisition entitles an acquirer to exercise ten percent or more of the voting rights in a company, then only the regulation would be attracted. It is not the manner in which the shares are acquired. It is the effect that triggers action. If the acquisition has no impact on the voting rights, regulation is not attracted. In the light of the factual position discussed above, the Appellant had not become entitled to exercise voting rights in the company over and above the said limit for the reason that its holding of 435040 shares was not registered in the company�s register of members in its name. Therefore, the regulation cannot be said to attract in this case. The Respondent's apprehension that if "pledge" is not treated as acquisition, it would negate the purpose of the Regulation is baseless as a �mere pledge' as such does not affect the management or control of the company. It will not even affect the market quotation as the pledged shares are kept on hold and not traded in the market. Change in possession of share certificates by itself, without transferring attendant rights, will not affect the ownership or management control of a company. The moment those shares are registered in the company�s register automatically the acquirer will become entitled to voting rights and depending on the quantum of shares involved and its attendant voting rights acquired regulation 10 also would attract.
 

Shri Barua had cited the case of Bhavesh Parekh and VLS Finance (Supra). Bhavesh Parekh�s case was relied to show that in matters of economic policy Court should not interfere with the decision of the expert bodies which have examined the matter VLS Finance case was relied to show that simple shareholding would attract the regulation. But in VLS�s case the applicable regulation was the one under the 1994 Regulations, which was replaced by the 1997 Regulations. These two cases are therefore of no relevance to the matter under consideration.
 

Section 15H (ii), which the Adjudicating Officer has invoked for the purpose of imposing penalty, is applicable only if a person, who is required under the Act, rules or regulations made thereunder, fails to make a public announcement to acquire shares at a minimum price. The Adjudicating Officer has imposed monetary penalty on the ground that the Appellant had violated the provisions of regulation10, based on his finding that it acquired 15.04% shares of APL without making an open offer. The said finding does not sustain for the reason that the Appellant�s acquisition entitling it to exercise voting rights was below the 10% benchmark provided in regulation10. Therefore imposition of penalty cannot be sustained.
 

For the reasons stated above the appeal is allowed and the impugned order is set aside.