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MUMBAI APPEAL NO. 12/2001 In the matter of: Mr.Naagraj
Ganeshmal Jain
Vs. Shri
P. Sri Sai Ram
APPEARANCE: Shri
P.G.Kinikar
Mr.
Ananta Barua
Mr.
KRCV Seshachalam
(Appeal arising out of the adjudication order dated 28.2.2001 made by Shri P.Sri Sai Ram, Adjudicating Officer, Securities and Exchange Board of India) ORDER This appeal
is directed against the order dated 28.2.2001 made by the Adjudicating
Officer appointed by the Securities and Exchange Board of India (SEBI).
By the said order the Adjudicating Officer had imposed monetary penalty
of one lakh and twenty five thousand rupees on the Appellants on the ground
that they had failed to comply with the requirements of the provisions
of regulations 3(4) and 3(5) of the SEBI (Substantial Acquisition of Shares
and Takeovers) Regulations, 1997 (the Regulations), read with section 15A(a)
of the Securities and Exchange Board of India Act, 1992 (the Act)
The Appellants
are the promoters of M/s. Canaan International Infotech Ltd (formerly known
as Canaan International Credicap Ltd) (the company). They were holding
52.95% of the equity capital of the company. On 15th September
1997, they were allotted 20 lakhs equity shares (18.82%) on preferential
basis. As a result of the said allotment promoters� holding in the company's
capital increased to 71.77%. The company's shares are listed on stock exchanges
at Hyderabad, Chennai and Mumbai. In the context of the said preferential
allotment and consequential rise in the promoter holding in the company�s
capital, SEBI appointed an Adjudicating Officer to enquire into the alleged
contravention of section 15A of the Act read with regulations 3(3), 3(4)
and 3(5) of the Regulations and adjudge monetary penalty, if so considered
necessary. The Adjudicating Officer, after enquiry, viewed that though
the requirements of regulation 3(3) have been substantially complied with,
the Appellants had failed to comply with the requirements of the provisions
of regulations 3(4) and 3(5) and imposed a sum of Rs.1, 25, 000/- as monetary
penalty.
Shri Prabhakar
Govind Kinikar, authorised representative of the Appellants explained briefly
the background of the case and stated that the Regulations are not applicable
to the case and as such imposition of monetary penalty was untenable. According
to Shri Kinikar, the Appellants are the promoters of the company. Their
share holding prior to the preferential allotment on 15.9.1997 accounted
for 52.95% of the company�s paid up capital and as a result of the preferential
allotment, their holding increased to 71.77%. According to the learned
representative, preferential allotment of 20 lakhs shares of Rs.l0 each
was made to the Appellants in their capacity as promoters to infuse funds
to meet the fund requirements of the company in its business activities,
that it was not a case of substantial acquisition of shares or take over
of control, so as to attract the Regulations.
Referring
to the definition of the expressions "acquirer", "target company" and "person
acting in concert", provided in the Regulations, Shri Kinikar stated that
they are inter related that the definition of "acquirer" also refers to
the concept of the 'target company' and 'person acting in concert'. According
to him to fall within the definition of "acquirer" as also "person acting
in concert", the person must act for the common objective or purpose and
that common objective or purpose must be of "substantial acquisition of
shares or voting rights or gaining control over the target company, that
target company means a listed company whose shares or voting rights or
control is directly or indirectly acquired or is being acquired. According
to the learned representative the Appellants are neither acquirers nor
persons acting in concert but promoters, and the objective or purpose of
the acquisition was infusion of funds for the felt need of the company,
that the company was already under the management and control of the Appellants
with 52.95% of the equity capital in their hands on 15.9.1997.
Countering
the Adjudicating Officer's observation that in the instant case the promoters
are also the acquirers, Shri Kinikar stated that the very fact that the
expressions 'acquirer' and 'promoter' have been separately defined in the
Regulations, would show that the two concepts are exclusive of each other,
that the same person cannot be an acquirer and promoter at the same time;
either he is an acquirer aspiring for control of the target company or
a promoter already in control. According to Shri Kinikar whether the person
is an acquirer or promoter at any given point of time, is a question of
facts and circumstances of each case. Learned representative submitted
that an acquirer ceases to be so, on his acquiring control over the company
and on acquiring control he assumes the status of a promoter and acquisition
of shares by such a promoter is not subject to the provisions of regulations
10, 11 and 12.
With reference to the Respondent's observation that the intention of acquisition does not have any relevance to the act of acquisition per se, Shri Kinikar submitted that the Regulations need be interpreted taking into consideration the objective proposed to be achieved by it. In this context he referred to the following observations in Justice Bhagwati Committee report (para 2.22): To be
acting in concert with an acquirer, persons must fulfill certain "bright
line" tests. They must have commonality of objectives and a community of
interests which could be acquisition of shares or voting rights beyond
the threshold limit, or gaining control over the company and their act
of acquiring the shares or voting rights in a company must serve this common
objective. Implicit in the concerted action of these persons must be an
element of cooperation. And as has been observed, this cooperation could
be extended in several ways, directly or indirectly, or through an agreement
- formal or informal."
Shri Kinikar's
another submission is that regulations 11(2), 3(4) and 3(5) are applicable
to acquirers and not to promoters, that the Adjudicating Officer has failed
to put forward any reasons justifying his finding that the instant acquisition
attracted the provisions of regulation 11(2). Shri Kinikar submitted that
the said regulations have to take into account (i) the acquisition of shares/voting
rights (ii) the existing entitlement and (iii) the threshold, that it is
the way the provisions of the regulations are structured that makes the
difference as to whether or not the regulations would be applicable to
the cases of existing entitlement exceeding the threshold limit. Regulations
3(4), 10 and 11(2) (prior to amendment) are similarly structured and designed
on the same pattern except for variance in the threshold limits. Referring
to these regulations he submitted that these regulations as stood on 15.9.1997
were applicable to situations where the threshold is crossed by the acquisitions
and that if there is no crossing of the threshold, because of the acquisition,
these regulations do not apply to such acquisitions. According to the learned
representative, the word "entitled" used in these regulations is of considerable
significance, that the dictionary meaning of the word entitlement is to
give a person a right or legal title to; in other words, that which would
enable a person to qualify for. When a person, already possesses the qualification
to which one is entitled to, regulation 11(2) would not be applicable.
According to him if the acquirer is already holding more than 51% shares,
he is already entitled to exercise more than 51% of the voting rights and
he cannot acquire the same legal rights again on further acquisition, that
the benchmark can be crossed only once and not repeatedly. Any acquisition
which does not result in crossing the threshold would, therefore, logically
be beyond the purview of the Regulations. In this context he referred to
the 1998 amendment to the regulations and explained the drastic changes
brought thereunder and stated that the instant acquisition covered under
the pre-amended Regulation, that the expression 'entitle' was deleted from
regulation 11(2) by the amendment effected in 1998. Shri Kinikar citing
the finding of the Adjudicating Officer that regulation 10 is not applicable
to the Appellants stated that, by the same logic regulation 11(2) also
would not be applicable as the Appellants held 52.95% shares/voting rights
in the company prior to the instant acquisition. He submitted that but
for the difference in the stipulated percentage, regulation 10 and 11(2)
are identical. He argued against the Adjudicating Officers reliance on
the expression "more" used in regulation 11(2), stating that the words
"more than" in the regulation are not used in the context of the threshold
stipulated in the regulation. Shri Kinikar submitted that the use of the
word "which" makes the regulation acquisition oriented, that it is applicable
to acquisition and the acquisition together with the existing holding must
entitle the acquirer to exercise more than 51% of the voting rights. According
to the learned representative in order to make the regulation 11(2) applicable,
in the first instance there has to be acquisition, the acquisition together
with the entitlement has to cross the threshold of 51%, that in the instant
case, the said 51% bench mark had crossed before 15.9.1997. He submitted
that as a result of further acquisition of 18.82% shares on 15.9.97 the
Appellants have not become entitled to voting rights "more than 51%" as
the acquisition of 18.82% has resulted only in augmenting the existing
voting rights from 52.95% (i.e. more than 51%) to 71.77%, that the status
of "holding more than 51%" can come only once, when the threshold of 51%
is crossed for the first time. According to the learned representative
in a case if the existing entitlement is "more than 51%", further acquisitions
will not attract regulation 11(2) as in such a situation any acquisition
together with the existing entitlement would not be in a position to cross
the threshold of 51%, that this being the position in law, because of the
word "more" in regulation 11(2) it cannot be constructed that the regulation
11(2) become applicable to existing entitlement of voting rights of more
than 51%. Shri Kinikar submitted that interpretation of regulation 11(2)
made by the Adjudicating Officer is far fetched, that it is relatable to
the new regulation brought into effect in 1998 and that the said new regulation
cannot be effected retrospectively.
Learned
representative submitted that provisions of regulation 3 are applicable
only to the acquisitions attracting the provisions of regulations 10, 11
and 12, that none of these regulations is attracted in the instant case.
However, as an alternative submission he stated that the obligation to
submit report under regulation 3(4) is on the acquirer, that the Appellants
are neither acquirers nor persons acting in concert with the acquirers;
they are only promoters. Referring to the concept of persons acting in
concert, the learned representative stated that the main components of
the definition on the basis of the most natural grammatical construction,
are - (i) persons who (ii) for a common objective or purpose of (iii) substantial
acquisition of shares or voting rights or gaining control over the target
company (iv) pursuant to an agreement or undertaking (formal or informal)
directly or indirectly (v) co-operate by acquiring or agreeing to acquire
(vi) shares or voting rights in the target company or gaining control over
the target company. He submitted that the common objective or purpose referred
to in the definition should be common amongst all the persons acting in
concert with the acquirer. The word �common� is the common adjective for
both the words viz. �objective� and �purpose� and �objective� means something
sought or aimed at and �purpose� means an object to be attained, that as
per the Allahabad High Court in Sridhar Misra v. Jaichandra (AIR 1959,
All 498) purpose and object are synonymous words. Shri Kinikar stated that
the Adjudicating Officer has truncated the regulation and interpreted the
same ignoring its very purpose to reach at a pre-meditated conclusion.
In this context he also cited the Supreme Court decision in Raja Satyendra
Narayan Singh v. State of Bihar (AIR 1987 SC 1390) to emphasise the need
for giving plain meaning to the statutory provisions while interpreting
the same. According to the learned representative, no person is a person
acting in concert, bereft of the common objective or purpose as stipulated
in the regulation. He submitted that in the instant case, the purpose of
acquiring shares was to infuse funds, which purpose is not stipulated in
the definition of "person acting in concert", that none of the Appellants,
therefore, can be considered as person acting in concert and their collective
shareholding cannot be accounted for the purpose. He further submitted
that since none of them has acquired 10% or more shares or voting rights
individually, the provisions of regulation 3(4) are not attracted as the
same applies only to acquisition which taken together with shares or voting
rights, if any held by the acquirer or person acting in concert with him
would entitle the acquirer to exercise 10% or more of the voting rights
in a company. In the absence of specific provisions with regard to the
applicability of regulation 3(4) to an acquirer already holding more than
10% of the shares/voting rights, regulations 3(4) and 10 do not cover any
acquisition by an acquirer who prior to the acquisition held more than
10% of the shares/voting rights of the target company. According to Shri
Kinikar regulation 3(4) does not therefore apply to the instant acquisition
since the acquirer held more than 10% of the shares/voting rights in the
company prior to 15.9.1997. Since regulation 3(4) is not attracted regulation
3(5) is also not attracted.
Shri Kinikar
submitted that compliance of the regulations had the approval of the Respondent
with reference to listing of the shares of the company on the Hyderabad
Stock Exchange in 1998 and as such the present adjudication and imposition
of penalty are not called for. He pointed out that SEBI had issued a Show
Cause Notice (SCN) on 13.7.1999. In response to the said SCN written submissions
were made. Oral submissions were also made before the Chairman, SEBI on
20.6.2000. Chairman did not issue any order therein. But another SCN was
issued in August, 2000 by the Adjudicating Officer making inter alia the
same allegations covered in the SCN dated 13.7.1999. The Appellants responded
to the same also. The Adjudicating Officer has now made an order levying
monetary penalty, without meeting the Appellants� contentions. According
to the learned representative the order lacks logical and convincing reasons.
Shri Kinikar stated that the Appellants� request to grant a personal hearing
before concluding the enquiry, made in their letter dated 8.11.2000, was
not granted in defiance of the rules of the natural justice. Shri Kinikar
submitted that infact the instant acquisition was beneficial to the shareholders
as it resulted in gain to them, particularly the minority shareholders
and loss to the promoters and this aspect has been ignored by the Adjudicating
Officer. Shri Kinikar further submitted that the Adjudicating Officer has
not considered the Appellants� submission that they had not done anything
illegal warranting imposition of penalty and the order has been made ignoring
the well established principle of sentencing policy that any offence must
be punished after taking into consideration all attendant circumstances
and also the motive and magnitude of the offence. In this context he cited
Supreme Court decision in Adamji Umar v State of Bombay (AIR 1952 SC 14)
and Modi Ram v State of MP (AIR 1972 SC 2493).
Shri Ananta
Barua, representing the Respondent, in his attempt to defend the impugned
order, made the following submissions. Since the Appellants acquired 18.82%
equity, over and above their holding of 52.95% in a preferential allotment
made on 15.9.1997, they were required to submit a report to SEBI within
21 days from the date of such acquisition under regulation 3 (4) alongwith
the fee prescribed in regulation 3 (5), that having failed to do so, the
penal provisions contained in section 15A of the Act, are applicable to
them. Shri Barua explained the requirements of regulations 3(3), 3(4) and
3(5). He submitted that the regulation 10 requires any acquirer who acquires
shares or voting rights which entitles him to exercise more than 10% (as
it was then) of voting rights in the target company to make a public announcement,
unless the acquisition passes through any one or more of the categories
exempted vide regulation 3. Regulation 11(2) requires the acquirer to make
a public offer when such acquisition entitle him to exercise more than
51% of the voting rights in a company. Here again, the acquirer enjoys
exemption under regulation 3 provided the acquisition falls in any one
of the categories mentioned therein. Acquisition of shares in a preferential
allotment is one of such exempted categories, provided the conditions stipulated
for availing such exemption are fulfilled. Shri Barua submitted that the
appeal is based on the mistaken premises that in view of the Appellants
holding 52.95% of the capital of the company and the Appellants being the
company's promoters the mandatory requirements of the regulations requiring
reporting to the authorities would not be applicable to them. He refuted
the contention that the company is not a target company, on the ground
that the subject matter of the acquisition was the equity shares of the
company.
Shri Barua
submitted that notwithstanding the contention of the Appellants that they
are promoters of the company, they are acquirers as they had acquired shares.
They had admittedly crossed the threshold limit of 51% laid down under
regulation 11(2) and upon acquisition of 18.82% equity of the company on
15.9.1997, they increased their total holding in the company�s capital
to 71.77%. Shri Barua further stated that the spirit of the regulatory
requirement is to ensure that even in case of preferential allotment of
shares the shareholder having a significant stake in the target company
shall not be allowed to acquire further shares of the said company without
making necessary disclosures and reporting to the concerned stock exchange
and the SEBI. According to Shri Barua, the Appellants� contention that
they being the promoters of the company and holders of shares accounting
for more than 51% threshold limit stipulated in regulation 11(2), and as
such there was no question of their making a public announcement on account
of crossing the threshold limit specified therein has no basis in view
of the fact that the regulations do not distinguish between a promoter
and an acquirer per se, that any person who acquires shares/voting rights
or control of another company would be an acquirer. In this context he
cited the definition of the expression �acquirer� in regulation 2(1)(a)
and stated that it is an inclusive definition and does not exclude promoters
from its purview. Shri Barua stated that though promoter and acquirer are
two distinct entities under the definitions, the two terms are mutually
exclusive to the extent, that it is possible that a promoter can also be
an acquirer. He further submitted that the act of acquisition of shares
or control of the Target Company or entering into an agreement for the
purpose would be the sole criterion for identifying the acquirer, that
a promoter could also be deemed to be an acquirer in the event of acquiring
shares or voting rights or control of a company in excess of the specified
limits by him. He submitted that objective or intention of acquisition
does not have any relevance and what matters is the act of the acquisition.
Therefore the Appellants' contention that it was not their intention to
acquire the shares as an investing proposition and ultimately to gain control,
but to infuse funds in the company, cannot be a ground to take them out
of the scope of regulation11(2). Shri Barua submitted that regulation 11(2)
brings within its ambit any further acquisition by an acquirer who holds
51% or more of the voting rights in the target company and therefore acquisition
of 18.82% shares in addition to the 52.95% already held by the Appellants
would attract regulation 11(2).
With reference
to the Appellants' contention that none of them is a person acting in concern,
Shri Barua re-iterated his version that the intention of acquisition does
not have any relevance to the act of the acquisition, the contention that
the purpose of infusion of funds has not been stipulated in the definition
of persons acting in concert does not in any way mitigate the Appellant
s action of collectively acquiring 18.82%in the company, beyond the threshold
limit. According to Shri Barua, the concept of common objective referred
to in the definition is exhaustive and the objective need not necessarily
be limited only to substantial acquisition of shares or control of the
target company that any common objective would do, such as the objective
of providing funds to the company. Shri Barua further submitted that the
Appellants contention that regulations 3(4) and 3(5) are not applicable
to them as they held 10% shares even prior to the said acquisition and
regulation 3(4) is only applicable when the acquirer crosses the threshold
of 10% for the first time is not tenable as regulation 3 lays down the
instances of acquisition which would not attract the provisions of regulation
10, 11 and 12 despite crossing the threshold limits stipulated under those
regulations, that where exemption is available the benchmark figure of
10% in regulation 3 (4) should be read with the threshold limits provided
in the said regulations 10, 11 and 12. According to Shri Barua regulation
3(4) is applicable to all the cases wherever the acquisition exceeds the
limit prescribed in the regulations irrespective of the existing holding
of the acquirer and regulations 3(5) would follow automatically to all
cases attracting regulation 3(4).
Referring
to the Appellants' version that they were served with two Show Cause Notices,
inter alia stating the same allegations, Shri Barua explained the procedure
followed by SEBI, that in case of a suspected violation of the regulation
by the parties before the initiation of any inquiry proceedings, following
the principles of natural justice, a notice is issued asking them to show
cause as to why action should not be initiated against them, for the alleged
violations, and thereafter on receipt of the reply, an opportunity for
hearing is also given, to the affected parties and in the event of a prima-facie
case of a violation is made out for levy of monetary penalty, an order
is issued for adjudication. The Adjudicating Officer in turn initiates
proceedings again by issuing a Show Cause Notice to the persons concerned
to explain their viewpoint in the matter, that in the instant case also
the same procedure was followed. Shri Barua stated that the Appellants
were given enough opportunities to make written and oral submissions in
the proceedings and the Adjudicating Officer has dealt with their submissions
in detail in the impugned order and a reasoned order based on the findings
has been passed, that it cannot be said that the Adjudicating Officer passed
the order without following the principles of natural justice. Shri Barua,
referring to the Appellants statement that there was gain to the investing
public due to acquisition and loss to the Appellants, stated that increase
in the stake of promoter in the company means lesser role for the public
shareholders, and non disclosure of material facts virtually amounts to
denial of information to the public shareholders to take appropriate decision
as to continue in the company as a shareholder or exit from it, in the
context of the change in the quantum of ownership holdings, that the requirement
of submitting a report in respect of the acquisition which entitles an
acquirer to exercise 10% or more voting rights in a listed target company
is a very important material information having a bearing on the investment
or dis-investment decision of the remaining shareholders of the company.
Referring to the quantum of penalty imposed by the Adjudicating Officer,
Shri Barua pointed out that the Adjudicating Officer has imposed only a
sum of Rs. 1.25 lakhs as penalty collectively against 13 Appellants, taking
into consideration the provisions of section 15J as well. Shri Barua submitted
that sum of Rs. 1.25 lakhs imposed as penalty in this case cannot be considered
unwarranted or unduly harsh in the light of the facts and circumstances
of the case.
I have
very carefully considered the rival contentions putforth by the parties
in their respective pleadings and oral submissions.
SEBI is
mandated to protect the interests of investors in securities and to promote
the development of and to regulate the securities market by such measures,
as it thinks fit. One of such specific measures is regulating substantial
acquisition of shares and take over of companies (Section 11(2)(h). To
accomplish this mission, SEBI had put in position a set of regulations
titled the Securities and Exchange Board of India (Substantial Acquisition
of Shares and Takeovers) Regulations, 1994 through a notification dated
4.11.1994. Since this Regulation was found wanting in several aspects,
an expert committee under the Chairmanship of Justice P.N.Bhagwati was
constituted in November, 1995 "to examine the areas of deficiencies in
the 1994 Regulations; and to suggest amendments in the Regulations with
a view to strengthening the Regulations and making them more fair, transparent
and unambiguous and also protecting the interest of investors and of all
parties concerned in the acquisition process". The committee viewed that
the Regulations for substantial acquisition of shares and takeovers should
operate principally to ensure fair and equal treatment of all shareholders
in relation to substantial acquisition of shares and takeovers. In the
committee�s words "The Committee also recognised that the process of take
over is complex and is inter related to the dynamics of the market place.
It would therefore be impracticable to devise regulations in such detail
as to cover the entire range of situations, which could arise in the process
of substantial acquisition of shares and takeovers. Instead there should
be a set of General Principles which should guide the interpretation and
operation of the Regulations, especially in circumstances which are not
explicitly covered by the Regulations. These principles are:
Equality of treatment and opportunity to all the shareholders Protection of interests of share holders ����. ������.." The Committee
further stated that "in the event of any ambiguity or doubt as to the interpretation
of the regulation, the concerned authority shall pay adequate attention
to and be guided by any one or more of the aforesaid general principles
having a bearing on the matter"
After
taking into consideration the recommendations of the Committee a new set
of regulations namely Securities and Exchange Board of India (Substantial
Acquisition of Shares and Takeovers) Regulations, 1997 was brought in position
with effect from 20.2.1997 repealing the 1994 Regulations. The Regulation
was amended again thereafter based on the recommendations subsequently
made by Justice Bhagwati Committee. However, since the instant acquisition
was on 15.9.1997, it is felt not necessary to go into the regulatory changes
effected thereafter.
From the
scheme of the Regulations and the background of the same, it is clear that
it is a piece of beneficial legislation directed to protect the interests
of shareholders in the context of substantial acquisition of shares and
takeovers. The Regulation is meant to protect the interests of all the
shareholders and not any particular class or category, at the cost of another.
Therefore interpretation of the provisions of the Regulation should be
done taking into consideration its broad objective and also the general
principles formulated by the Committee.
In the
instant case there is no dispute about the facts. The Appellants are the
promoters of the company. Their holding in the company�s capital prior
to their acquisition of 20 lakh shares through preferential allotment was
52.95%. The company with a view to generate funds for its business activities,
made a preferential allotment of 20 lakhs shares (18.82%) on 15.9.1997
to the promoters. As a result thereof the promoters� shareholding in the
company increased to 71.77%. The Respondent is of the view that though
the acquisition attracted regulation 11(2), it was saved of the need of
complying with the requirement of making public offer required under the
said regulation, as the transaction being preferential allotment, enjoyed
exemption in terms of regulation 3(1)(c), but compliance of the reporting
requirement provided under regulation 3(3), 3(4) and 3(5) attracted, and
by not complying with those requirements, penal provisions of section 15A
attracted. But the Appellants hold differently claiming that the regulations
are not applicable to them as they are promoters and not acquirers and
that as on 15.9.1997 their share holding had already crossed the bench
mark level of 51% provided in regulation 11(2) and they being already in
control of the company, the question of acquiring control by them also
did not rise at that point of time. The Appellants had filed detailed reply
in the adjudication, which has been extensively extracted in the impugned
order. Shri Kinikar authorised representative of the Appellants made very
exhaustive submissions in support of the Appellants stand. It was really
enlightening. However for the limited purpose of deciding the present appeal,
the basic question that need be answered is as to whether the acquisition
under consideration is beyond the purview of the Regulation.
The Appellants� version that they are only promoters and not acquirers need be examined first. In this context it is also pertinent to mention that according to the Adjudicating Officer, the provisions of regulation 11(2) are attracted to the case. There cannot be two opinion on the issue that regulation 3 has no application to an acquisition not covered under regulation 10 or 11 or 12. Exemption provided under regulation 3 is from the applicability of the provisions of the said regulation. To be more precise exemption is from the compliance of the requirements of making public offer required thereunder. It is to be noted that regulation 11(2) was drastically amended in 1998 (w.e.f 28.10.1998). Since the preferential allotment was made on 15.9.1997, the applicable provision to the instant case is the one, which was in force on 15.9.1997 and not as amended subsequently. Regulation 11(2) as it stood on 15.9.1997 reads as under: 11 (1) "No acquirer who, together with persons acting in concert with him, has acquired, in accordance with the provisions of law not less than 10% but not more than 51% of the shares or voting rights in a company, shall acquire, either by himself or through or with persons acting in concert with him, additional shares or voting rights entitling him to exercise more than 2% of the voting rights in any period of 12 months, unless such acquirer makes a public announcement to acquire shares in accordance with the Regulations. (2) 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 more than 51% of the voting rights in a company, unless such acquirer makes a public announcement to acquire share of such company in accordance with the Regulations. Explanation:
For the purpose of Regulation 10 and Regulation 11, acquisition shall mean
and include:
(b) indirect acquisition by virtue of acquisition of holding companies, whether listed or unlisted, whether in India or abroad". In terms of regulation 2(1)(b) "acquirer" means any person who, directly or indirectly, acquires 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. According to regulation 2(1)(e) "person acting in concert" comprises persons who for a common objective or purpose of substantial acquisition of shares or voting rights or gaining control over the target company, pursuant to an agreement or understanding (formal or informal), directly or indirectly co-operate by acquiring or agreeing to acquire shares or voting rights in the target company or control over the target company. (ii) a company with any of its directors , or any person entrusted with the management of the funds of the company; (iii) directors of companies referred to in sub-clause(i) of clause (2) and their associates; (iv) mutual fund with sponsor or trustee or asset management company; (v) foreign institutional investors with sub account (s); (vi) merchant bankers with their client(s) as acquirer; (vii) portfolio managers with their client(s) as acquirer; (viii) venture capital funds with sponsors; (ix) banks
with financial advisers, stock brokers of the acquirer or any company which
is a holding company, subsidiary or relative of the acquirer.
(b) family trusts and Hindu Undivided Families." (2) a relative of the promoter within the meaning of section 6 of the Companies act, 1956 (1 of 1956); and (3) in
case of a corporate body,
(ii) any company in which the �Promoter� holds 10% or more of the equity capital or which holds 10% or more of the equity capital of the Promoter, or (iii) any corporate body in which a group of individuals or corporate bodies or combinations thereof who hold 20% or more of the equity capital in that company also hold 20% or more of the equity capital of the �Promoter�; and
(ii) any company in which a company specified in (i) above, holds 10% or more of the share capital, or (iii) any HUF or firm in which the aggregate share of the Promoter and his relatives is equal to or more than 10% of the total." According
to Regulation 2(1)(c) "control shall include the right to appoint majority
of the directors or to control the management or policy decisions exercisable
by a person or persons acting individually or in concert, directly or indirectly,
including by virtue of their shareholding, or management rights
or shareholders agreements or voting rights in anymanner.
(emphasis supplied)
Thus it is clear from the definition that control of a company is not confined only to the extent of the shareholding, but it can be exercised through several means as stated in the definition. Therefore it is wrong to say that a promoter already in control of the company may not resort to acquisition of shares in that company. Recently this Tribunal had examined the concept of promoter and acquirer in a case (appeal No.34 � Modipon Ltd v. Securities and Exchange Board of India & others, decided on 31.7.2001) wherein, the Tribunal held as under: "The expression
�acquirer� and the �person acting in concert with the acquirer� have been
defined in the regulation. There is no hard and fast rule that a promoter
can never be an acquirer or person acting in concert. If a promoter acquires
or agrees to acquire shares or voting rights or gains control over the
target company he can be safely considered as an acquirer who in turn would
be subject to the provisions of regulation 11. Likewise a promoter can
be a person acting in concert provided he is found to cover within the
scope of the definition under regulation 2(1)(e). Whether a promoter is
also an acquirer or person acting in concert would depend on the facts
of each case. It is to be noted that there is no blanket prohibition on
the promoters acquiring shares etc. in the company."
In the
light of the factual and the legal position discussed above, I am of the
view that the Appellants are acquirers. In this context the next question
to be considered is as to whether the acquisition of additional shares
forming 18.82% of the company�s capital attracted the regulations.
Shri Kinikar
had advanced an argument that since the Appellants� holding in the company�s
share capital having been crossed the benchmark prescribed in the regulation
well before the acquisition of 18.82% shares on 15.9.1997, the Appellants
cannot be said to have acquired shares which would entitle them to exercise
more than 51% of the voting rights, is not getting support from the provisions
of regulation 11(2). His argument is that the regulation deals with acquisition
crossing the benchmark provided therein, and that benchmark can be crossed
only once and not every time an acquisition is made. Since the Appellants
were holding 52.95% shares on 15.9.1997, i.e. above the cut off figure
of 51% stipulated in the regulation, acquisition of additional shares accounting
for about 18.82% in the company�s capital on 15.9.1997did not result in
creating any fresh entitlement to exercise more than 51% of the voting
rights of the company. In this context he had also referred to regulation
10 and the Adjudicating Officer�s observation that regulation 10 is not
applicable to the instant acquisition. Based on the said observation he
had canvassed that if regulation 10 is not applicable regulation 11(2)
also is not applicable as both the regulations, but for the quantum of
percentage cut off, are in paramateria the same. For comparative purpose
regulation 10 and regulation 11(2) are extracted below:
On a perusal of the text of the said two regulations, it is seen that these regulations, but for the quantum of threshold limit, are identical. However, it does not stand to reason to believe that regulation 11(2) is redundant or superfluous in view of the provisions of regulation 10 that a case to which regulation 10 is not attracted regulation 11 (2) also would not attract. In this context it is necessary to find out the object of incorporating these two regulations. It is not proper or possible to jump to the conclusion that framers of the regulation had inadvertently put a regulation over looking the scope of another regulation. Attempt should be to find out the reason to incorporate those regulations rather than holding them redundant or superfluous. It is a settled principle of interpretations that the court should adopt a construction, which advances the policy of the legislation to extend the benefit rather than one, which curtails the benefit (Union of India Vs. Pradeep Kumari. (1995) 2 SCC 736). It is no body�s case that the provision for making public offer in the cases of substantial acquisition and takeovers is not meant for the benefit of the public shareholders. In this context the observation made by Supreme court in Keshoram and Co v. UOI (1989) 3 SCC 151 is to be noted. In the said case the apex court while considering the validity of section 3 of the East Punjab Urban Rent Restriction Act 1949 and the notification dated Sept. 24, 1974, granting exemption from section 13 of the Act to buildings constructed in the urban area, observed as follows: "On a conspectus of the case law indicated above, the following principles are clearly discernible. It is the duty of the courts to avoid a head on clash between two sections of the Act and to construe the provisions, which appear to be in conflict with each other in such a manner as to harmonise them. The provisions of one section of a statute cannot be used to defeat the other provisions unless the court, inspite of its efforts, finds it impossible to effect reconciliation between them. It has to be borne in mind all the courts all the time that when there are two conflicting provisions in an Act, which cannot be reconciled with each other, they should be so interpreted that, if possible, effect should be given to both. This is the essence of the rule of "harmonious construction". The courts have also to keep in mind that an interpretation which reduces one of the provisions as a "dead letter" or "useless lumber" is not harmonious construction. To harmonise is not to destroy any statutory provision or to render it otiose. Keeping in mind the above observations of the apex court one has to see the relevance of regulations 10 and 11 (2). Regulation 10 is on acquisition of shares beyond the benchmark of 10% stated therein. Said regulation 10 provides the threshold limit for public offer. Justice Bhagwati Committee has discussed at length the background in which the said regulation 10 was considered necessary to be put in the Regulations. The Committee has stated that " it was felt that under Indian conditions hardly any person as investor would invest in more than 10% in any company unless he has an intention of taking over the company at some point of time and the committee therefore decided to retain the existing threshold limit of 10%". Thus regulation 10 is on the "beginning of the beginning". Regulation 11 is for a different purpose. It is on consolidation of holdings. In this context the clarification given by SEBI vide its press release dated 30.1.1997 while adopting the Bhagwati committee report is considered relevant. According to the said press report "for the purpose of consolidation of holdings, acquirers holding not less than 10% but not more than 51% are allowed creeping acquisition up to 2% in any period of 12 months. Any purchase by a person holding more than 51% would have to be in a transparent manner through a public tender offer". In this context observation made by the Bhagwati committee in para 6.2 of its report is also relevant, as based on the said recommendation regulation 11(2) was redrafted. The Committee also recognised the need to harmonise consolidation of holdings by persons already holding substantial shares with the need to protect the interest of shareholders in a competitive, free market environment. Indeed for the same reason, Regulations of other countries do not trigger mandatory public offers for all acquisitions and provide for consolidation of shareholdings within a band in a specified period. This only allowed for consolidation in a regulated manner without unduly affecting the interest of the shareholders. The draft Report had proposed a graduated limit of acquisition � depending upon whether the acquirers existing holding was between 10% and 25% or between 25% and 50%. The Committee felt that introducing such differential limit would not be in the interest of the shareholders and more over would not be justifiable on any rational basis. It was therefore decided to remove this differentiation and permit acquisition upto 2% in any 12 month period, to all persons who holds shares above the threshold limit of 10%. The draft
report had also contained a proposal for clarification to the effect that
the provisions of regulations will not be applicable to any person who
holds 50% or more. But reservations were expressed from some quarters about
this exclusion clause on the ground that if the regulations are intended
to safeguard shareholders interest even in the event of substantial acquisition
of shares not involving a takeover, there is no justification for excluding
substantial acquisition by acquirers holding more than 50%. The question
which arose in this regard is upto what point of time substantial acquisitions
not involving takeovers need to be regulated. The committee decided that
substantial acquisition till an acquirer gains absolute control lever of
75% may be brought within the scope of the Regulations".
If financing
the business activities of the company was their sole objective, the Appellants
would not have provided funds against the issue of shares in a preferential
allotment. It would have been possible through other least risky and more
remunerative modes. The argument that since the Appellants were already
entitled to exercise more than 51% of the voting rights, further acquisition
of shares did not attract the requirements of making public offer as provided
in regulation 11(2) is not supported by the regulation. Any further addition
to the voting right beyond 51% would attract regulation 11(2) as is clear
from the wording of the regulation that �no acquirer shall acquire shares����.,
which entitle such acquirer to exercise more than 51% of the voting rights
in a company, unless such acquirer makes a public announcement to acquire
shares of such company�.". It is an absurd proposition that public offer
is required to be made only when the acquisition is in the range of 10
% and 51% and on crossing 51% the acquirer is free to acquire shares without
making public offer. Admitting such a proposition would be endorsing the
view that the benefit proposed to be extended to the shareholders will
not be available to those public shareholders holding 49% in a company
where the acquirers held 51% shares. In this context one has to remember
the objective of the regulation and the general principles laid down by
the Committee discussed in this order above. The Regulation should operate
principally to ensure fair and equal treatment of all shareholders in relation
to substantial acquisition of shares and takeovers. The fact that the regulation
was redrafted in 1998 making the intention clear does not mean that the
pre-amended regulation 11(2) provided acquisition of shares without making
public offer, once the 51% benchmark is crossed. As the Adjudicating officer
rightly pointed out the words "more than 51%" in the regulation need be
interpreted in a purposive manner. The Appellants contention that 51% benchmark
can be crossed only once and repeated crossing is not possible is unsustainable
in view of the scope of the regulation as could be gathered in the light
of clarification provided by SEBI and the recommendations of Justice Bhagwati
Committee. It is thus obvious that regulations 10 and 11 are put in position
with different objectives. Therefore non-application of regulation 10 does
not automatically exclude the acquisition from the ambit of regulation
11(2). In the light of the above discussion it is clear that acquisition
of shares by the Appellants in the preferential allotment made by the company
on 15.9.1997 attracted the provisions of regulation 11(2).
Having
come to the conclusion that the Appellants are acquirers and that the acquisition
attracted the provisions of regulation 11(2), the next question is as to
whether the Appellants were required to comply with the requirements of
regulations 3 (4) and 3(5).
Regulation
3 enumerates certain categories of acquisitions exempted from the compliance
of the requirement of regulation 10, 11 and 12. One of such exempted categories
is acquisition of shares in a preferential allotment made in pursuance
of a resolution passed under section 81A of the Companies Act. The exemption
is not automatic. It is subject to compliance of certain requirements.
In any case it is an admitted fact that the instant acquisition was in
a preferential allotment and the same enjoyed exemption under regulation
3. In this context it is to be noted that the acquisition enjoys exemption
only from the compliance requirements of regulation 10, 11 and 12. They
are not exempted from complying with the reporting requirements in terms
of sub regulations (3), (4) and (5) of regulation 3. The said sub regulations
require the acquirer to comply with certain reporting requirements with
Stock Exchange and SEBI.
These sub regulations are extracted below: In respect of acquisitions under clauses (a), (b), (c), (e) and (i) of sub-regulation (1), the acquirer shall, within 21 days of the date of acquisition, submit a report along with supporting documents to the Board giving all details in respect of acquisitions which (taken together with shares or voting rights, if any, held by him or by persons acting in concert with him) would entitle such person to exercise 10% or more of the voting rights in a company. (5) The acquirer shall, along with the report referred to under sub- regulation (4), pay a fee of Rs. 10, 000/- to the Board, either by a bankers cheque or demand draft in favour of the Securities and Exchange Board of India, payable at Mumbai." Sub regulations (3), (4) and (5) were incorporated in the regulation for the reason as the committee put it "in order to ensure transparency in the transaction and assist in the monitoring, all the exempted transactions should be subject to reporting requirements to the concerned stock exchange in advance of the proposed acquisition and to SEBI".
On a perusal
of regulation 3(4) it is seen that in respect of certain acquisitions,
which include acquisitions in preferential allotment, the acquirer is required
within 21 days of the date of acquisition to file a report with SEBI with
details in respect of acquisitions which would entitle such person to exercise
10% or more of the voting rights. The Appellants had advanced more or less
the same argument as put forth with reference to the applicability of regulation
11(2) to them that their holding exceeded the prescribed limit even before
the present acquisition, also in support of their contention that regulation
3(4) is not attracted. It has already been discussed at length in this
order that the said argument is devoid of any merit. What is envisaged
in regulation 3(4) is not a onetime reporting, as is evident from the reason
stated by the committee necessitating such reporting. Thus the contention
that regulation 3(4) is not required to be complied with by the Appellants
who had crossed the benchmark before 15.9.1997 is of no sound footing and
I reject the same.
The Appellants
allegations that the Respondent had issued two show cause notices and that
they were not given opportunity to explain their viewpoint in the proceedings
before the authorities are baseless. Learned representative of the Respondent
has explained the procedure followed by SEBI in the investigations/inquiries
and the circumstances in which the said two show cause notices were issued.
The explanations are found satisfactory. It is evident from the order itself
that the Appellants were given sufficient opportunities to make written
and oral submissions before the adjudicating officer and they had availed
of the opportunity. Therefore attack of the impugned order on the ground
of failure to comply with the rules of natural justice does not sustain.
The impugned order runs to 37 closely typed pages, wherein the Adjudicating
Officer has explained each and every ground adduced by the Appellants.
It is therefore incorrect to say that the order is not a reasoned speaking
order.
The Appellants
had submitted that quantum of penalty of Rs.1.25 lakhs levied on them is
unwarranted and that in any case, they had not committed any serious offence
to attract such a penalty, that in all fairness, if at all any penalty
is leviable the same be restricted to a nominal penalty of Rs. 10, 000
i.e., to the extent of the fee payable under regulation 3(5) with the report
to SEBI under regulation 3(4).
In terms of section 15I of the Act, it is for the Adjudicating Officer on being satisfied after inquiry that the person has failed to comply with any of the specific provisions of the Act, to decide as to whether any penalty need be imposed and if so what should be the quantum thereof in terms of the concerned provisions In this regard he is required to take into account the following factors stated in section 15J (b) the amount of loss caused to an investor or group of investors as result of the default (c) the repetitive nature of the default" For the
reasons stated above the appeal is dismissed.
(C.ACHUTHAN)
Place:
Mumbai
PRESIDING OFFICER Date: August 17, 2001 |
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