IN THE SECURITIES APPELLATE TRIBUNAL

MUMBAI

Appeal No:� 86 of 2003

Appeal No:� 86 of 2003

Appeal No:� 86A of 2003

Appeal No:� 86B of 2003

CORAM

��������� Justice Kumar Rajaratnam, Presiding Officer

��������� N.L. Lakhanpal, Member

Per:��� N.L. Lakhanpal, Member

1.                  The appeal was taken up for final disposal with the consent of parties.

2.                  The appellants had made a public announcement on April 10, 2002 for acquisition of shares in Hindustan Zinc Limited (hereinafter referred to as HZL or the target company) pursuant to the appellants participation in the Government of India Public Sector Disinvestment Programme. Since HZL was a listed company, the provisions of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter �Takeover Code�) were attracted and a letter of offer, pursuant to the public announcement was issued to all the share holders of the target company as required under the Takeover Code.� The shareholders who tendered their acceptance in response to the appellants� open offer included the following 9 persons, not resident in India.

3.                  It is common ground that the entire time table laid down in the Takeover Code for such public offers was followed by the appellants except in the matter of payment of consideration to the above 9 Non-Resident persons. In respect of this category, payment of consideration was required to be effected by 25/07/2002 i.e. within 30 days from the closure of offer while the payment was actually made to 8 out of these 9 persons on 04/09/2002 i.e. after a delay of 40 days and to the remaining one person on 03/10/2002 i.e. after a delay of 69 days. On this issue of delay in payment to these 9 Non-Resident shareholders, the appellants case is that this category of persons were prohibited from transferring any securities under the Foreign Exchange Management (Transfer or Issue of Security by a person Resident outside India) Regulations, 2000 (hereinafter FEMA Regulations) notified under the Foreign Exchange Management Act, 1999 except with the prior permission of the Reserve Bank of India. SEBI�s case as made out in the impugned order is that the appellants were bound to make payment of the consideration to all the shareholders who tendered their shares in response to the open offer by 27/05/2002 under Regulation 22(12) and any failure to do so for any reasons whatsoever, requires payment of interest to the share holders for the period of delay.� SEBI has accordingly passed the following impugned order:

�9.1���� In view of the findings made above and in exercise of the powers conferred upon me under sub-section (3) of Section 4 read with Sections 11 and 11B of SEBI Act read with regulations 44 and 45 of the Regulations, I hereby direct the Acquirers to pay interest @ 10% p.a. to the India Fund, Inc., Metdist India Holdings Limited, Krishna Kumar Rajamani, Lal Tolani, Nazir Ghulamhusain, Saurin J.Shah, Anuja Rohit Wariawalla alias Anuja Kaushik Sheth and Merlyn Lee for delay of 40 days from 26.07.02 to 04.09.02 and to Societe Generale for delay of 69 days from 26.07.02 to 3.10.02 in making payment of the consideration amount to the aforesaid NRI/OCB/FII shareholders, as in terms of sub-regulation (12) of regulation 22, the payment of consideration to the said NRI/OCB/FII shareholders of the Target Company was to be made within 30 days of the closure of the offer. Since delayed payment of consideration amount for acquisition of shares of the Target Company has adversely affected interest of said NRI/OCB/FII shareholders of Target Company, they shall be paid amount within 45 days of this Order.

�9.2���� In case of failure of the Acquirers to comply with the aforesaid direction, I hereby direct:-

����������� �(a)����� the forfeiture of the escrow account in full, maintained by the Acquirers in terms of regulation 28(11) and direct that the proceeds be transferred to Investor Protection Fund as provided in regulation 28(13).

����������� �(b)����� that the Acquirers will be liable for action in terms of Section 15H and/or Section 24 of SEBI Act.

�9.3���� This order shall come into force with immediate effect.�

4.                  �The case of the appellants in brief is that the delay in respect of these 9 non-resident shareholders has occurred because of the Reserve Bank of India having to raise repeated queries for want of full information furnished by 5 out of these 9 persons in their applications for RBI permission.� The appellants contend that they pursued their applications of these 9 share holders diligently with the Reserve Bank of India and that payments were effected to them as soon as the RBI permission was received.� The respondent�s contention is that the proviso to Regulation 22(12) is a no fault liability clause and that the acquirer is liable to pay interest on any delay in payment of consideration to the share holders whatever be the cause of such delay.� Regulation 22(12) reads as under:

�22(12)���������� The acquirer shall, within a period of 30 days from the date of the closure of the offer, complete all procedures relating to the offer including payment of consideration to the shareholders who have accepted the offer and for the purpose open a special account as provided under regulation 29:

�Provided that where the acquirer is unable to make the payment to the shareholders who have accepted the offer before the said period of 30 days due to non-receipt of requisite statutory approvals, the Board may, if satisfied that non-receipt of requisite statutory approvals was not due to any willful default or neglect of the acquirer or failure of the acquirer to diligently pursue the applications for such approvals, grant extension of time for the purpose, subject to the acquirer agreeing to pay interest to the shareholders for delay beyond 30 days, as may be specified by the Board from time to time.�

5.                  SEBI�s case therefore is that the Regulation contemplates completion of all procedures relating to the offer including payment of consideration to the share holders who have accepted the offer within a period of 30 days from the date of closure of the offer.� The proviso to Regulation 22(12) permits SEBI to condone the delay at its discretion provided� (i) the delay is only due to non-receipt of requisite statutory approvals (ii) the non receipt of statutory approvals is not due to any willful default or neglect of the acquirer or his failure to diligently pursue the applications for such approvals and (iii) the acquirer agrees to pay interest to the shareholders for the delay beyond 30 days.� Therefore, according to the learned counsel for the respondents, SEBI is bound to follow the provisions contained in this regulation and cannot in any case condone the delay without imposition of interest to the benefit of the shareholders. As regards appellants� argument that the FEMA Regulations place the responsibility for acquiring RBI permission on the non-resident shareholders, SEBI contends that despite this provision of the FEMA Regulation, the appellants took on this responsibility of obtaining RBI permission in their letter of offer and that since they failed to obtain the RBI permission within this period of 30 days they are liable to pay interest to these shareholders. The learned counsel for the respondent Shri Kumar Desai further argued during the hearing that if the applications received from these 9 non-resident shareholders were deficient in any respect warranting repeated queries and objections by the Reserve Bank of India, it was open to the appellants to have rejected these applications but that having accepted the offer of these shares and having failed to obtain RBI permission in time, the appellants must pay interest for the period of delay as per the no fault liability clause contained in Regulation 22(12). Shri Kumar Desai further argued that the RBI had raised queries only regarding 5 entities and that the appellants could have taken part approval from the RBI for the remaining 4 entities to whom payment was delayed for no fault of theirs.

6.                  As against this, the learned counsel for the appellants argued that Regulation 3 of the FEMA Regulations stipulated that �save as otherwise provided in the Act or Rules or Regulations made thereunder, no person resident outside India shall issue or transfer any security.�� According to the learned counsel for the appellants Shri Somasekhar Sunderasan, there was thus a general prohibition on persons resident outside India against issuing or transferring any securities and that Regulations 9 and 10 provided for such transfers in specific cases with the prior permission of the RBI.� While Regulation 9 of the FEMA Regulations covers instances in which a person resident outside India can transfer securities, Regulation 10(B) covers sale or transfer of securities which are not covered under Regulation 9. Thus, according to the learned counsel for the appellants, there is a prohibition on non-resident persons from transferring their securities and that the tender of any securities by them in response to the open offer can only be subject to prior permission of the Reserve Bank of India and that the responsibility for obtaining such permission is on such non-residents. Regarding the responsibility taken by the appellants in the letter of offer for obtaining RBI permission in respect of non-resident persons, the appellants contend that the responsibility taken was for filing applications on behalf of the shareholders with the RBI and that too in accordance with the procedure adopted by the RBI for granting such permission on the basis of composite consolidated applications and as per the procedure followed by all other companies making such open offers.� In the memorandum of appeal and in the written arguments the appellants have narrated the entire sequence of events showing that they had diligently pursued the matter with the Reserve Bank of India as well as with 5 out these 9 non-resident persons in respect of whom the Reserve Bank of India had wanted clarifications.

7.                  We do not consider it necessary to recount the entire sequence here because lack of due diligence is not a charge levelled against the appellants in the impugned order.� Nevertheless, we have carefully gone through the list of dates and have come to a definite conclusion that the appellant acquirer had acted with due dispatch at every stage of the process. �The chronology of events as presented by the learned counsel for the appellant and not objected to by the respondent was as follows:

Chronology of Events

Public Announcement (10/04/2002)

90 days closure of offer (25/06/2002)

[Regulation 22(12)

21 days

Opening of special a/c (non-interest bearing) and transfer of funds thereto (16/07/2002)

[Regulation 29(1)]

����������������������������������� Letter from Sahrepro Services setting out the basis of allocation (15/07/2002)

����������������������������������� Application to RBI in form TS1 after collation of acceptances to the offer throughout India (18/07/2002)

Letter from RBI seeking clarifications (31/07/2002)

Reply to RBI (05/08/2002)

Meeting with RBI (19/08/2002)

Letter to RBI complying with further queries raised (22/08/2002)

Receipt of approval on behalf of 8 NR sharesholders (02/09/2002)

Receipt of approval on behalf of the remaining 1 NR shareholders (03/10/2002)

Payment to 1 NR shareholder 03/10/2002)

It will be seen from the above chronology that there has not been a single day�s unexplained delay on the part of the appellants in pursuing the matter with the RBI.

8.                  In fact if any such lack of due diligence had been noticed, the respondent could not have granted condonation under Regulation 22(12) of the Takeover Code and would have proceeded to take action against the appellants under Regulation 22(13). Regarding the reason why they did not make payment to the remaining 4 non-resident persons in respect of whom the RBI had not raised any queries, the appellants contend that they did pursue the matter of granting permission to these 4 shareholders, but the RBI insisted on treating all the 9 applications in a consolidated manner. Regarding Regulation 22(12) being a no fault liability clause the appellants have contended that these regulations stipulate that the acquirers have to agree to the payment of interest for the period of delay.� According to the appellants the extension of time under Regulation 22(12) is required to be sought only if the open offer itself is substantially incapable of being closed for want of statutory approvals that are required to be taken by the acquirer.� In the instant case, according to the appellants, the statutory approval from the RBI was required to be taken by non-resident shareholders and not by the acquirers and therefore no extension of time was sought and no payment of interest was agreed to by the acquirers.� The appellants have further contended that the Takeover Code required them to open a special account into which all funds required for the open offer are transferred and that this special account is required to be a non-interest bearing account. This special account in the present case was opened, as required, on 16/07/2002 and that that the appellants therefore had not earned any interest on these amounts during the period of delay in payments and that it is therefore inequitous to ask them to pay interest which they had not earned for the period of delay caused due to the failure of the non-resident shareholders themselves in obtaining RBI permission within the stipulated period.

9.                  We have carefully gone through the facts of the case and the arguments of the learned counsel on both sides.� Before we go into the contentious issues it would be profitable to record the areas constituting common ground. It is thus agreed that there was a delay in payment of consideration to the 9 non-resident shareholders beyond the stipulated period of 30 days; it is also common ground that the responsibility under FEMA Regulations for obtaining the RBI permission is on the non-resident shareholders and not on the appellant acquirers; it is also common ground that the letter of offer did contain the provision that the acquirer would make application to RBI for obtaining this permission on behalf of the non-resident shareholders; it is also common ground that lack of due diligence on the part of the appellants is not the gravamen of the charge against the appellants. It is also common ground as seen from para 7.18 of the impugned order that the RBI approval under the FEMA Regulations was not a statutory approval required by the acquirers in order to make the open offer. It is also common ground that no gains have accrued to the acquirers on account of the delay in payment to the shareholders. Thus, what we are left with is only the interpretation of the proviso to Regulation 22(12) of the Takeover Code to see whether it is indeed a no fault liability clause as contended by the appellants.

10.             We have gone through Regulation 22(12) very carefully.� We find that it is a regulation made to protect the interests of the shareholders who tender their shares in response to the open offers made by the acquirers as per the requirements of the Takeover Code. It is a salutary provision mandating the acquirers to complete all procedures including the payment of consideration within the period of 30 days from the date of closure of the offer and to pay interest if such payment is delayed despite due diligence of the acquirer due to non-receipt of requisite statutory approvals. In the present case the impugned order states in para 7.18 that:

�I have noted the contention of the acquirers that the RBI approval under the FEMA Regulations was not a statutory approval required by the acquirers in order to make open offer.�

11.             If that be the case and if there is no charge of lack of due diligence it is difficult for us to come to the conclusion that there was indeed a delay in payment requiring grant of extension of time by SEBI subject to the acquirer agreeing to pay interest.� Since no such extension of time was sought by the acquirer in the belief that there was no delay in payment, the acquirer never agreed to pay interest.� SEBI�s jurisdiction under Regulation 22(12) was thus never attracted and no order was necessary under this Regulation because no application for extension of time indicating willingness to pay interest was made by the acquirer.� Thus while being in agreement with SEBI that Regulation 22(12) is a no fault liability clause, we hold that it is indeed a no fault liability clause in respect of resident shareholders who are in a position to tender their shares on their own volition in response to the open offer without any regulatory or statutory handicaps. So far as the non-resident shareholders are concerned, their ability to tender shares is limited by the requirement of advance permission from the Reserve Bank of India and the protection of Regulation 22(12) becomes available to them only from the date on which they acquire the RBI permission or it is obtained for them with their own help and assistance by the acquirer acting on their behalf unless, of course, the acquirer is shown to have been guilty of lack of due diligence. As we have observed above, there is no finding of lack of due diligence against the appellants. Accordingly we find it difficult to sustain the impugned order. We note that apart from the delay in payment of these 9 non-resident shareholders no other delay or inefficiency or any other lapses have been alleged against the appellants in respect of the open offer.

12.             The learned counsel for the appellants also contended during the hearing of the appeal that if the interest is paid, the biggest beneficiary would be Metdist India Holdings Limited who would be entitled to receive an amount of approximately Rs. 32 lakhs out of a total of about Rs. 46 lakhs. According to the learned counsel for the appellants Metdist India Holdings Limited is also their competitor in business. This position was not challenged by the respondents during the hearing. This entity was a complainant before SEBI and had also moved an intervention application before this Tribunal which was naturally declined. We would, however, not like to go into this aspect because this does not form any part of the impugned order.

13.             Accordingly both on interpretation of Regulation 22(12) of the Takeover Code and Regulations 3, 9 and 10 of the FEMA Regulations as well as on the facts of this case the appeal is allowed and the impugned order is set aside. No order as to costs.

Place: Mumbai

Date:� 11/02/2005

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