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BEFORE THE SECURITIES
APPELLATE TRIBUNAL, MUMBAI Appeal No.11/03 ��� ������������������������������������������������������������������� �Date of Hearing��� 13.1.05 ����������������������������������������������������������������������� �Date of Decision��� 28.1.2005 In the matter of: Appellant����
:� Shri Pramod Jain, Ahmeadabad Respondents :� 1.�
Securities & Exchange Board of 2. Shri Navneet
Mohan Mittal, New ����������������������� Appellant
by� ������:�
Ms. Neeta Adhvarya,
Advocate ����������������������� Respondents
by�� :�
Shri Bhavik Narsana, Advocate Coram: ����������� �Justice Kumar Rajaratnam,
Presiding Officer ����������� Dr.
B. Samal, Member ����������� N.L.
Lakhanpal, Member Per:� Justice
Kumar Rajaratnam, Presiding Officer ����������� The
appeal is taken up with consent of parties for final disposal. 2.�������� The appellant challenges the order
passed by the respondent dated 15th of November 2002.� The impugned order directs the appellant to
make a public offer to the shareholders of the target company taking into
account 3.10.1997 as the reference date and directs the appellant to pay
interest @ 15% per annum on the offer price from 1.2.1998 till the date of
actual payment as the appellant violated regulations 10 and 12 of the SEBI
(Substantial Acquisition of Shares and Takeovers) Regulations, 1997. 3.�������� Aggrieved by the above order, the
appellant has preferred this appeal. 4.�������� The facts very briefly are that Shri Kishore H. Patel, Shri Naresh H. Patel and others
(hereinafter referred to as �the original promoters�) collectively held 39.02%
shares in the equity capital of Gujarat Foils Ltd. (hereinafter referred to as
�the target company�).� Of this, 11.94%
was held by the three investment companies, viz., Rutvi
Investments Pvt. Ltd., Bindi Investments Pvt. Ltd.
and Kanig Investments Pvt. Ltd. floated by the original
promoters.� The shares of the target
company are listed at the 5.�������� The original promoters allegedly entered
into a Memorandum of Undertaking (hereinafter referred to as �MOU�) dated
3.10.97 with Shri Navneet
Mohan Mittal and Shri Pramod Jain (hereinafter referred to as �the acquirers�)
for transfer of 39.02% shares and control in the target company in favour of the acquirers. 6.�������� A letter dated 12.2.99 was received by
SEBI from the office of the Deputy Director of Income Tax (Investigations, Ahmedabad) stating, inter alia,
that search and seizure action under section 132 of Income Tax Act, 1961 was
taken by the Income Tax Department on the business and residential premises of Shri Kishore Patel and
others.� Statements of Shri Kishore H. Patel and Shri Navneet Mohan Mittal were recorded during the said search and they stated
that the management of the target company has been handed over to S/Shri Navneet Mittal
and Pramod Jain with effect from 1.10.97 and the said
two individuals are �in
charge of affairs of the target company.�
It was also stated that Shri Kishore Patel and Naresh Patel
have withdrawn from the company.� It was further
stated that the entire process has been done in violation of the provisions of
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997
(hereinafter referred to as �the said Regulations�).� A copy of the aforesaid MOU dated 3.10.97 and
another agreement (undated) signed by the acquirers and Kishore
H. Patel were also forwarded to SEBI along with the said letter. 7.�������� A show cause notice was issued by the
respondent to the appellant asking as to why action should not be taken against
the appellant for violating regulations 10 and 12 of the said Regulations.� 8.�������� The case of the appellant in short was
that as per the MOU dated 3.10.97 the appellant was to acquire the entire stake
of the promoters of the target company (i.e. 39.02%) and to acquire management
of its affairs.�� But since it was an
unenforceable agreement and not signed by all the persons willing to sell
shares in the target company, it was not acted upon. 9.�������� According to the respondent, the
appellant was required to make public announcement within four working days of
entering into an agreement, which, according to it, the appellant failed to do
and therefore he is liable for penal action for violation of regulations 10 and
12 of the said Regulations.� 10.������ Ms. Neeta Adhvarya, the learned counsel for the appellant, submitted
that mere signing of the MOU (which was not acted upon and was only an
intention to agree to acquire) required no public announcement and disclosure
under regulation 10 as it envisages disclosure only if the acquirer (along with
persons acting in concert) acquires more than 10% shares or voting rights of a
given target company.� It was also
mentioned that as per 2002 amendment to the said Regulations, the limit has now
been increased to 15%.� It was further
submitted that the appellant along with Mr. Navneet
Mohan Mittal acquired only 9.98% shares of the target
company and as such regulation 10 was not violated and thereby disclosure under
regulation 14(1) was not necessitated.�
If the acquisition is less than 10%, there is no requirement of a public
offer as it is only a condition precedent to acquisition of more than 10%
shares in a target company.� In other
words, it was the submission of the learned counsel that if the MOU is not
acted upon and actually the shares in excess of 10% are not acquired, there
cannot be a violation of regulation 10. 11.������ Shri Bhavik Narsana, learned counsel
for the respondent, relied on the definition of an �acquirer� in regulation
2.� Regulation 2(1)(b)
reads as follows: � �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;� By the
definition or the meaning of �acquirer� as contained in regulation 2(1)(b), it was submitted, even person agreeing to acquire
shares or voting rights or control is an acquirer.� It was further submitted that it was not
necessary that one should actually acquire shares or voting rights or control
of the company.� It would not be
necessary to delve deep into the definition of �acquirer� in regulation 2(1)(b).� The relevant
regulation has to be, in our view, read harmoniously with regulations 10, 11
and 12 of Chapter III of the regulation.�
12.������ Regulation 10 reads as follows: �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 1[fifteen] per cent 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.� 1. Substituted for �ten� by
the SEBI (Substantial Acquisition of Shares and Takeovers) (Amendment)
Regulations, 1998, w.e.f. 28.10.1998.� At the relevant time, it was 10%. Regulation
12 deals with acquisition of control over a company.� Regulation 12 as at present reads as follows: �Irrespective of whether or
not there has been any acquisition of shares or voting rights in a company, no
acquirer shall acquire control over the target company, unless such person
makes a public announcement to acquire shares and acquires such shares in
accordance with the regulations: Provided that nothing contained herein shall apply to any change in
control which takes place in pursuance to a special resolution passed by the
shareholders in a general meeting: ����������������������������������� Provided further that for passing of the special resolution
facility of voting through postal ballot as specified under the Companies
(Passing of the Resolutions by Postal Ballot) Rules, 2001 shall also be
provided. ����������������������������������� Explanation.- For the
purposes of this regulation, acquisition shall include direct or indirect
acquisition of control of target company by virtue of acquisition of companies,
whether listed or unlisted and whether in India or abroad.� 13.������ On a meaningful understanding of
regulations 10, 12 and 22(16), it cannot be said that the code is triggered on
a mere agreement to acquire shares without that agreement being acted
upon.� Supposing for a moment parties resile from the agreement and there is no change in the
control over the target company at the instance of the acquirer, it cannot be
said that there will be a compulsion of law that the alleged acquirer will be
forced to make a public announcement to acquire shares of the target
company.� It is possible and certainly
wise to look at a memorandum of undertaking to know the intention of the
acquirer when the threshold of 10% is touched.�
The impugned order proceeds on the footing that the
acquirer had acquired 39.02% of the shares � voting rights - in the target
company without making a public announcement.� We do not find any finding as to when the
acquirer crossed the threshold of 10% for the code to be triggered.� That should have been the concern of the
respondent.� It cannot be that raids were
conducted on the business premises of certain promoters of the target company
and that they stated to the Income Tax Authorities that the management of the
target company was handed over to the appellant.� The entire case of the respondent proceeded
on the footing of this MOU dated 3.10.1997, which was perhaps handed over to
the respondent by the Income Tax Department. 14.������ It was pointed out by the appellant that
the alleged MOU was on a plain paper and was not signed by all the sellers and
buyers of the shares of the target company.�
It was not a stamped document.� It
is doubtful whether the respondent could have directed the appellant to make a
public offer only on the basis of the incomplete agreement dated 3.10.97.� The entire case of SEBI proceeds on the MOU
rather than the actual acquisition of shares by the acquirer of the target
company. 15.������ A careful reading of Regulation 22 would
indicate the proposition of law that an acquirer can be made liable under the
code only if he acts in pursuance of an agreement and non-compliance of the
agreement for whatever reason cannot be the basis for acting on the
agreement.� Regulation 22 deals with
general obligations of the acquirer.� In
particular, Regulation 22(16) reads as follows: �If the acquirer, in
pursuance of an agreement, acquires shares which along with his existing
holding, if any, increases his shareholding beyond 1[15] per cent, then such
agreement for sale of shares shall contain a clause to the effect that in case
of non-compliance of any provisions of this regulation, the agreement for such
sale shall not be acted upon by the seller or the acquirer. 2[Provided that in case of
the acquisition of shares of a Public Sector Undertaking pursuant to a public
announcement made under the Regulations, the provisions of sub-regulation (8)
of regulation 23 shall be applicable.]� 1. ������� Substituted for �10� by the SEBI
(Substantial Acquisition of Shares and Takeovers) (Amendment) Regulations,
1998, w.e.f. 28.10.1998. 2.�������� Inserted by the SEBI (Substantial
Acquisition of Shares and Takeovers) (Amendment) Regulations, 2001, w.e.f. 17.8.2001. From this,
it is apparent to us than an incomplete unenforceable agreement not signed by
all the parties cannot be a source from which the code is triggered.� Regulation 22(16) would clearly indicate that
incomplete and unenforceable agreements cannot be subject matter of any enquiry
under the Regulations.� The agreement
may, however, have other consequences in law.�
In this case, admittedly, as stated earlier, the agreement was not
stamped, nor signed by all the parties.�
It was found as a result of raid conducted by the Income Tax Department
of one of the shareholders of the target company.� Therefore we hold that the code cannot be
triggered on an unenforceable agreement.�
However, the agreement may have some bearing on the offer price. 16.������ We looked at the files and sought the
assistance of both counsel as to when the appellant had crossed the threshold
of 10%.� It is borne out from records
that the appellant acquired only 9.98% shares in October 1997 and the
acquisition did not cross the threshold of 10%.�
It also appears that the appellant did not acquire any control or voting
rights in the three investment companies, viz.: ����������� (i)������� Rutavi Investments Pvt. Ltd. (ii)
Kanig Investments Pvt. Ltd. (iii)
Bindi Investments Pvt. Ltd. As such, the
provisions of regulation 10 or 12 were not attracted on 3.10.97 merely by
reason of the incomplete Memorandum of Undertaking since it was not signed by
all the shareholders who wanted to sell the shares to the appellant. 17.������ On a further perusal of the records, we
find that on 18.5.2001 the appellant acquired 17.69% shares of the target
company at a price of Rs.3/- per share.�
It appears from the records that the appellant had submitted a report to
SEBI under regulation 3(4).� Therefore we
find that there is no case made out by the appellant.� Once the records show that 17.69% shares has been acquired by the appellant from the shareholders of
the target company, there is a clear violation of regulation 10 on
18.5.2001.� As such, the provisions of
regulation 10 are triggered with the trigger date as 18.5.2001. 18.������ We cannot accept the case of the respondent
that it is 3.10.1997, which is the trigger date since the memorandum of
undertaking as on that date was incomplete as it was not signed by all concerned
shareholders and more importantly not signed by all those who were willing to
sell the shares of the target company to the appellant, the acquirer.� The MOU was not even on a stamp paper. 19.������ However, there were
clinching evidence on the perusal of the record that the appellant crossed the
threshold limit of 10% on 18.5.2001 when the appellant acquired 17.69% of
shares in the target company at the price of Rs.3/- per share. 20.������ The trigger date is, in our view, not
3.10.97 but 18.5.2001 when the appellant crossed the threshold limit of 10% of
acquisition of the shares in the target company.� 21.������ We therefore have no hesitation in
holding that the appellant has crossed the threshold on 18.5.2001 and the
necessary consequences should follow in accordance with regulations 13, 14, 15,
16, 17, 18, 19 and the other regulations dealing with public offer it shall be
complied with. 22.������ The learned counsel for the appellant
also submitted that if 18.5.2001 is the trigger date, the appellant would be
liable to pay interest from 31st of August 2001.� 23.������ The question that arose before us was as
to what is the rate of interest that is to be paid by the appellant to the
successful shareholders who decide to exit from the open offer made by the
acquirer under the provisions of regulation 44.�
Regulation 44 was substituted with effect from 9.9.2002.� Prior to 9.9.2002, no specific rate of
interest was mentioned.� After the
amendment, regulation 44(i) reads as follows: �44. Without prejudice to
its right to initiate action under Chapter VIA and section 24 of the Act, the
Board may, in the interest of securities market or for protection of interest
of investors, issue such directions as it deems fit including:- (a) ----------------- �to (h) ----------------- (i)
directing the person concerned, who has failed to make a public
offer or delayed the making of a public offer in terms of the regulations, to
pay to the shareholders, whose shares have been accepted in the public offer
made after the delay, the consideration amount along with interest at the rate
not less than the applicable rate of interest payable by banks on fixed
deposits.� ����� (Italics by us) 24.������ The learned counsel for the appellant
submitted and produced evidence to show that the prevailing rates of interest
offered by various banks on FDs. for a period of one
year or above are 5.25%, 5.50% and 6%.�
Copies of the brochures of HDFC Bank, ICICI Bank and SBI indicating the
prevailing rate of interest have been produced before this Tribunal and are not
disputed by the respondent. 25.������ The learned counsel for the respondent
submitted that the rate of interest should be at least 10% as the Supreme Court
in Clariant International Ltd. ordered interest to be
paid at 9% per annum.� The Judgment of
the Supreme court in Clariant
International Ltd. pertained to the period from 1997 to 2004 and the acquirer
agreed to pay 9% and the dispute before the Supreme court was whether the
interest should be 10% or 9%.� 26.������ In the present case, the relevant date is
August 2001.� Although the amendment was
introduced on 9.9.2002, it cannot be forgotten that the legislation took into
account the prevailing rate of interest in private banks and nationalized
banks.� It is common ground that it was
the effort of the appellant that was responsible for infusion of funds and the
company that was making huge losses turned around and started making small
profits. 27.������ Considering the large capital base of
82,01,870 shares of Rs.10/- each, the requirement of acquisition of 20% shares
from the public offer would mean, undoubtedly, a substantial burden on the
resources of the appellant.� Out of the
3000 shareholders, 90% are from 28.������ It is about time that SEBI thought of
cutting cost of public offer since such money could be used for the welfare of
the investor.� It has been brought to our
notice that the cost of appointment of a Category I Merchant Banker, Registrar
and Banker is very burdensome and in many cases the amount spent on such
entities is almost equal to the quantum of money that will go to the investors
in a public offer.� SEBI, which claims to
be concerned about the interest of the investor, should come forward with a
less burdensome method than what is detailed in the Regulations with regard to
the appointment of Category I Merchant Banker, Registrar and Banker. 29.������ However, it is for SEBI to decide how to
cut cost in the interest of the investor public.� 30.������ As far as this case is concerned, taking
into account that there are nearly 3000 shareholders, no departure can be made
from the procedure contemplated under the Regulations.� However, taking into account the financial impecuniosity and the cost of public offer and on a careful
perusal of regulation 44(i), we hold that the interest
payable to the shareholders shall be 6% or the prevailing bank rate (the rate
at which the RBI lends to the banks) to be determined by SEBI in the facts and
circumstances of this case.� We
accordingly confirm the order of SEBI and direct the appellant to make a public
announcement in accordance with Regulation 14 within four days from the date of
receipt of this order or to be extended at the discretion of SEBI if the time
is too short.� We, however, modify the
order of the respondent to the extent mentioned above with respect to the
interest in the facts and circumstances of this case. 31.������ No
order as to costs. �������������������������������������������������������������
Sd/- ����������������������������������� ����������� Justice
Kumar Rajaratnam ����������������������������������������������������������� �Presiding Officer ���������� Sd/-���������������������������������������������������� ����������������������������������� �������� Sd/- N.L. Lakhanpal����������������������������������������������������������������������������� Dr.
B. Samal Member������������������������������������������������������������������������������������������ Member Place: Mumbai Date: 28.1.2005 Avm ����������� After the judgment was pronounced, the learned counsel for the respondent sought to file an additional affidavit. �The judgement was
reserved on 13.1.2005 and no effort was made to file any affidavit till it was
sought to be filed at the time of pronouncement of orders.� In these circumstances, it was not fair on
the advocate for the respondent to have sought to file an affidavit when the
matter was filed for judgment. The affidavit is rejected. �������������������������������� Sd/-����������������������������������������������������� ����� Sd/- �������������������������������� K.R.������������������������������������������������������ ���� B.S. |