BEFORE THE ADJUDICATING OFFICER

SECURITIES AND EXCHANGE BOARD OF INDIA

[ADJUDICATION ORDER NO. AP/AO-13/2006-07]

In the matter of indirect acquisition of shares of

EVEREST INDUSTRIES LTD.

By,   

HOLCIM (INDIA) PVT. LTD.

(Formerly known as Holdcem Cements Pvt. Ltd.)

___

1)            Holdcem Cements Pvt. Ltd., is a company incorporated under the Indian Companies Act, 1956, having its registered office at New Delhi. Its shares are not listed in any stock exchange.  Subsequently, its name was changed to Holcim (India) Pvt. Ltd., (hereinafter referred as 'Holcim/acquirer/noticee').

2)            Holderind Investments Ltd. (HIL) is a company incorporated under the laws of Mauritius, having its registered office at Mauritius with principle objective of holding investments and is the holding company of Holcim. On December 20, 2002, HIL received FIPB approval for investing Rs. 600 crs, though Holcim, in cement manufacturing activities in India. Both these companies are part of the Holcim group, consisting of Holcim Ltd, Switzerland and its affiliates/subsidiaries, which is the world’s second largest cement manufacturer.

3)            Ambuja Cement India Ltd. (ACIL) is a company incorporated under the Indian Companies Act, 1956, having its registered office at Mumbai and its shares are not listed. It is a promoter of Associated Cement Companies Ltd. (ACC) holding 13.82% of ACC’s equity.

4)            Gujarat Ambuja Cement India Ltd. (GACL) is a company incorporated under the Indian Companies Act, 1956, having its registered office at Gujarat. It is the parent company of ACIL and its shares are listed in NSE, BSE & CSE.

5)            ACC is a company incorporated under the Indian Companies Act, 1956, having its registered office at Mumbai and its shares are listed in BSE, NSE, CSE (and GDR in LSE).

6)            Everest Industries Ltd (EIL) is a company incorporated under the Indian Companies Act, 1956, having its registered office at Maharashtra. EIL’s shares are listed on the BSE and NSE and ACC held 11,250,030 shares, constituting 76.01% of EIL’s equity.  

7)            HIL entered into a share purchase agreement (SPA) with GACL and other sellers, on January 20, 2005 to acquire 190,746,666 shares of ACIL constituting 40% of ACIL’s equity. Holcim entered into Shares Sale Agreement (SSA) with ACIL on January 20, 2005 to subscribe to 390,163,637 shares of ACIL on a preferential basis. The objective of the SPA and SSA was to acquire management control of ACC through ACIL. The aforesaid agreements got consummated on March 30, 2005, when HIL received FIPB approval; accordingly the combined holding of HIL and Holcim in ACIL went up to 67% of ACIL’s post preferential allotment equity.

8)            With an objective of acquiring share in excess of 50% of ACC’s equity, Holcim, HIL, ACIL and GACL together made an open offer under Regulation 10 & 12 of SAST to the shareholders of ACC to acquire 38.82% of its equity vide Letter of Offer dated March 19, 2005 so as to raise their aggregate holding to 52.63% (50.01% of fully diluted equity) of ACC’s equity. This offer was subject to FIPB approval. Upon completion of this offer process on April 26, 2005, the aggregate holding of the acquirers and PACs, together with their existing holding, increased to 34.71% of ACC’s equity as under.

Shareholding in ACC*

*Figures within brackets represent the fully diluted equity of ACC and its % thereof)

9)            Since, ACC held 76.01% of EIL’s equity, it was alleged that the aforesaid acquisition of 34.71 % shares of ACC, also led to indirect acquisition of shares of EIL by the acquirers. Accordingly, the undersigned was appointed as Adjudicating Officer, vide SEBI order dated February 22, 2006, to inquire into and adjudge under Section 15H (ii) of the SEBI Act, 1992, the indirect acquisition of shares of Everest Industries Ltd. (EIL) by Holcim and not making a public announcement to acquire further shares of EIL, in terms of Regulation 11(2A) r/w Regulation 14(4) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

10)        Accordingly, the undersigned issued a show cause notice vide letter dated April 13, 2006 alleging that Holcim did not made the necessary public announcement as required under Regulation 11(2A) of SEBI (SAST) Regulations, 1997 read with 14(4) of the said regulation, to the shareholder of EIL, which makes it liable for penalty under Section 15H (ii) of SEBI Act, 1992.

11)        New Delhi Law Office (NDLO), representing Holcim, sought additional time to file reply vide its letter dated April 27, 2006, which was granted till May 15, 2006 vide letter dated May 03, 2006. However, vide letter dated May 15, 2006, NDLO sought further extension of time to file reply.

12)        Under the above circumstances, the undersigned was of the opinion that an inquiry should be held in the matter. Accordingly, vide letter dated May 23, 2006, June 16, 2006 was fixed as the dated for inquiry. Holcim was also granted time till June 02, 2006 to file its reply, which it did.  

13)        Holcim in its letter dated June 02, 2006 submitted that, Holcim Group's business policy is to pursue only activities pertaining to cement, aggregates and service, and to divest of all non core activities, whereby the group has divested non core assets worth $1.25 bn during the period 2002 to 2005. Since 2003 Holcim does not own any asset that used fibre cement in production, as use of asbestos fibres is prohibited in Switzerland since 1994 and in all EU since 2005, it was submitted. Holcim did not want to manufacture products using asbestos fibre in India, though it is permitted here, as it wanted similarity of standards in all the markets it operated, it was submitted. As EIL was primarily engaged in manufacture of fibre asbestos, cement roofing products and flat sheet, Holcim’s intention was to cause ACC to divest its holding in EIL which was adequately disclosed in the PA dated January 21, 2005 to the shareholders of ACC at paragraphs II (k) and IV (d) (Annexure A) and also in the LoO dated March 19, 2006 (Annexure C), it was contented.

14)        Holcim stated that it entered into an agreement (TA) with Accurate Finstock Pvt. Ltd. (AFPL) on January 20, 2005 whereby AFPL agreed to acquire 76.01% of EIL’s equity from ACC, as and when Holcim acquires control of ACC. Accordingly AFPL made a PA on January 24, 2005 to the shareholders of EIL in terms of Regulation 10 and 12 of SAST to acquire 20% of EIL equity @ Rs. 147/- per share and copy of the PA in this regard was enclosed as annexure D. Upon closure of the open offer of ACC, the directors of ACC proposed to execute the obligations under the TA dated January 24, 2005, in ACC’s board meeting on July, 13, 2005, it was submitted. AFPL filed LoO with SEBI, which was subsequently advised by SEBI to be withdrawn vide letter dated September 6, 2005, it was stated. Consequently, the open offer of AFPL was withdrawn by its Merchant Banker by issuing a PA dated October 14, 2005, to this effect, it was submitted.

15)        Subsequently, vide SPA dated October 14, 2005, Everest Finvest (India) Pvt. Ltd. (EFI) and other buyers agreed to acquire 7,400,020 shares of EIL (just >50% of EIL’s equity) @ Rs. 134 per shares, Holcim submitted.  EFI made a PA to acquire 20% of EIL’s shares from the shareholders of EIL @ 184 / shares; the ensuing open offer closed on February 18, 2006, it was stated. Relying upon the opinion of Retd. Justice H.H. Kania and the SC judgment in the matter of Technip case, Holcim made a request to SEBI for no-action vide letter dated July 26, 2005 under the SEBI Informal guidance scheme. This request was rejected vide SEBI letter dated February 01, 2006, consequently resulting in this proceedings.

16)        Holcim submitted that it was under no obligation to make an open offer to the share holders of EIL u/r 11(2A) r/w 14(4) of SAST. Relying upon the chain principle enunciated in the Bhagwati Committee Report as well as in the UK City Take over code and also the SC verdict in the matter of Technip case, Holcim submitted that SAST is triggered only if the first company’s shareholding in the second company constitutes a substantial part of the assets of the first company or one of the main purposes of acquiring control of the first company was to secure control of the second company. In the instant case, Holcim submitted that the shareholding of ACC in EIL constituted only 3% of ACC’s assets and EIL’s turnover was just 5% of ACC’s turnover, thus SAST is not triggered.   

17)        Holcim relied upon SEBI press release dated March 21, 2001 in the matter of Robert Bosch GmBH (Annexure L) as the facts were similar and SEBI granted exemption from open offer for an indirect acquisition. Holcim’s intention to cause ACC to divest its holding in EIL was unambiguously communicated to all stakeholders in many instances, as mentioned above. Neither did Holcim nominate any members to the management committed of EIL, unlike in the case of ACC, it was submitted. Holcim’s action positively confirms its intention not to acquire control over EIL. Considering all the above, Holcim emphasizes that it was never under obligation to make open offer to the shareholder of EIL as alleged. Since it acted it good faith and provided exit opportunity to the shareholder of EIL, Holcim submitted that penalty should not be imposed on it, even if any breach was established.

18)        On the day of inquiry, Aswath Rau and Indranil D. Deshmukh, Advocates, Amarchand Mangaldas represented Holcim and filed authorization letter dated June 15, 2006. Mr. Der Weijde, director of the Holcim also attended the inquiry and they reiterated the contents of letter dated June 02, 2006. It was also contented that Regulation 11(2A) was not applicable and in addition, Holcim was not required to apply for exemption under Regulation 4 of SAST in view of the decision of the SC in the matter of Technip case. They also agreed to file a written submission on the non applicability of Regulation 11(2A) in the instant case, by June 26, 2006.

19)        In the written submission dated July 26, 2006, Holcim submitted that Reg. 11(2A) was inserted to prevent regulatory arbitrage between SAST regulations and delisting guidelines. Holcim argued that Reg. 11(2A) would be applicable to it only if it was under obligation to make open offer to shareholders of EIL and pursuant to that open offer; EIL’s public shareholding went to be reduced to less than 20%, which was the delisting threshold for EIL. In this regard a certificate from EIL was enclosed (annexure D). Holcim also claimed that since the instant case was a result of global arrangement, exemption from delisting EIL was available u/r 21(3) SAST.

20)        Holcim’s role (already mentioned) in the open offer by AFPL @ 147 to shareholder EIL and subsequently by EFI @ 184, was in the benefit of EIL’s shareholder, it was submitted. Holcim relied upon the SAT order in the matter of Sterling Investment Corporation Ltd. to support its contention that where shareholders interest is not compromised, penalty need not be imposed. Further, Holcim claimed that the SC ruling in Technip case, automatically grants exemption from seeking exemption u/r 3 & 4 of SAST.

21)        I have carefully considered all the material before me and record my findings as under. The first issue that needs to be addressed is: Does the acquisition in the instant case trigger the provisions of SAST regulations? The facts pertaining to this case have been elaborated earlier and hence for the sake of brevity, not repeated here. The acquisition of shares and control over ACC by the acquirers and PAC, per se is not disputed. It is the ensuing implication of this acquisition which is disputed, as ACC held 76.01% of EIL’s equity. What is the obligation, (if any), of the acquirers to the shareholder of EIL under SAST? To answer this, it is important to understand the relevant provisions of SAST, which are discussed as under.

a)      Regulation 10 of SAST, r/w Regulation 21(1), prohibits an acquirer, who holds less than 15% of a target company’s equity, from acquiring shares, such that his aggregate holding would exceed 15% of its equity, unless he makes a public announcement to acquire a minimum of 20% of the company’s equity. No upper limit for acquisition of shares is provided under this provision, except for acquisition through market purchase or through preferential allotment, where the upper limit of 55% is prescribed.  

b)     Regulation 11(1) of SAST, r/w Regulation 21(1), deals with situation where the acquirer already holds more than 15% and less than 55% of a company’s equity. In such situation, the acquirer is prohibited from acquiring more than 5% of the company’s equity in any financial year, unless he make a public announcement to acquire a minimum of 20% of the company’s equity.

c)      In terms of Regulation 21(2), if an acquisition u/r 10 or 11(1) of SAST, through an agreement or MoU, exceeds 55% of a company’s equity then also the acquirer has to offer to acquire a minimum of 20% of the company’s equity and reduce the size of his acquisition through MoU, such that the ‘public shareholding’ in the target company does not fall below the level prescribed for the purpose of continuous listing, as agreed in the Listing Agreement with the exchange.

d)     Regulation 11(2) of SAST, r/w Regulation 21(1), deals in situation where the acquirer already holds more than 55% and less than 75% of a company’s equity. In such situation, the acquirer is prohibited from acquiring any shares of the company unless he makes a public announcement to acquire a minimum number of shares, such that the ‘public shareholding’ in the target company does not fall below the level prescribed for the purpose of continuous listing, as agreed in the Listing Agreement with the exchange.

e)      Regulation 11(2A), deals with situations wherein an acquirer seeks to reduce the ‘public shareholding’ of a listed company to less than the level prescribed for the purpose of continuous listing, as agreed in the Listing Agreement with the exchange. In such situation, the acquirer has to make an open offer under the delisting guidelines of the Board and not under the provisions of SAST. However, exemption from making open offer under the delisting guidelines is available in case of indirect acquisition by virtue of global arrangement.  

f)       Regulation 12 deals of SAST, r/w Regulation 21(1), deals with acquisition of control over a company, with or without acquisition of shares. In such situation, the acquirer is required to make a public announcement to acquire a minimum of 20% of the company’s equity.

g)     Most importantly, for all the aforesaid regulations, the term acquisition also includes indirect acquisition either in India or abroad as per the explanations given to these provisions.  

22)        The explanation to the cited provisions of SAST makes it very clear that all these provisions are applicable, even in the case of indirect acquisitions. Further, regulation 3 of SAST and its sub regulations list out situations wherein acquisition u/r 10, 11 & 12 of SAST are exempt from making open offer, subject to conditions prescribed therein. There is no automatic exemption available to indirect acquisition under regulation 3 of SAST, notwithstanding the recommendation made in the Bhagwati Committee report. Therefore, exemption from making an open offer to the shareholder of EIL, as claimed by Holcim, was available only in its imagination, and not in the regulations.  If at all Holcim was entitled to exemption, as claimed by it, it should have approached the Takeover Panel of SEBI constituted under Regulation 4 of SAST Regulations.

23)        Holcim has relied upon the Supreme Court order dated May 11, 2005 in the matter of Technip SA Vs SMS Holdings (P) Ltd and Ors in the Civil Appeals Nos. 9258-65 of 2003 (Technip case) to support its contention that for indirect acquisition, there is no need to make an open offer. I examine the cited ruling. South East Marine Engineering and Construction Ltd., (SEAMEC) is a company registered under the provisions of Indian Companies Act, 1956 and listed on NSE, BSE, ASE and CSE. Coflexip SA, of France, through its chain of subsidiary companies held 58.24% of SEAMAC. Technip SA is another company registered in France; it acquired 29.6% of equity of Coflexip from Stena (promoter/person in control) on April 12, 2000 and also appointed 4 directors on the board of Coflexip, which had 12 directors. Subsequently, on July 03, 2001 Technip make an open offer and increased its holding in Coflexip from 29.6% to 98.4%. Technip did not make any open offer to the shareholder of SEAMAC under SAST. Acting upon investor complaints, SEBI directed Technip to make an open offer to the shareholders of SEAMEC, with July 03, 2001 as the reference date. Some shareholder of SEAMAC were aggrieved by SEBI's order and appealed in SAT. In the order dated October 27, 2003, SAT ruled that the relevant date for Technip to make open offer to the shareholders of SEAMAC is April 12, 2000. The Hon'ble Supreme Court in its order in the appeal against this SAT order, upheld the SEBI order and ruled that July 03, 2001 would be the relevant date for Technip to make an open offer to shareholders of SEAMAC. While arriving to the judgment, the Hon'ble Supreme Court has also discussed "chain principle" referred to in the Bhagwati Committee Report in paragraph 53 of the order. From the reading of this paragraph, it is observed that the discussions are made in order to decide the relevant date of acquiring the control over the second company. Nowhere it is observed that any exemption, from giving an open offer to the shareholders of the second company, is given to the acquirer based on Bhagwati Committee Report. Importantly, before arriving at the aforesaid ruling, the SC noted the portion of SEBI order which mentioned that the indirect acquisition of SEAMAC by Technip was only incidental fallout to the acquisition of Coflexip and SEEMAC constituted insignificant 2% of Coflexip’s assets as on December 2000. The Technip case emphatically demonstrated that even in an indirect acquisition as a result of global arrangement, irrespective of intention, irrespective of size, the acquirer is required to make an open offer to the shareholder of the Indian subsidiary, from the date of change in control. I therefore find that there is no application of Technip case in favour of Holcim and rather it supports the case of SEBI that Holcim was required to make an open offer to the shareholder of EIL.

24)        Given the plain reading of SAST regulations 10, 11, 12 along with the exemptions available in Reg. 3, in tandem with SC ruling in Technip case, it is clear that the contention of Hoclim that it was not required to make an open offer to the shareholder of EIL u/r 10 and 12 of SAST is absolutely untenable. Acquisition of shares and control over ACC by Holcim and PACs triggered SAST regulations, thus obligating them to make open offer to the shareholders of EIL.  In terms of the provisions of Regulation 21(1) of SAST, the public offer made by the acquirer to the shareholders of the target company (EIL) shall be for a minimum 20% of the voting capital of the company. Had Holcim complied with the provisions of SAST Regulations and given an open offer, the result of the same would have increased their holding in EIL to 76.01%+20% , i.e. 96.01%, which in any case was a fit case for delisting. This is so because even if we take 10% as the minimum continuous listing requirement, the 3.99% public shareholding is far less than that. In this regard, I would like to refer to the provisions of Rule 19 (2) (b) of Securities Contracts (Regulation) Rules, 1957, which inter –alia mandates that 10% of securities issued by a company were to be offered to the public. Therefore it can be concluded here that resultantly, and as a consequence of an indirect acquisition of EIL by Holcim, and crossing the 'delisting threshold', the ultimate requirement and obligation of Holcim was to make delisting offer in respect of acquisition of EIL under the delisting guidelines read with Regulation 11(2A) of SAST Regulations.  In view of the above, the response to the questions framed in paragraph 21 of this order is that the provisions of Regulation 11(2A) of SAST are triggered and accordingly it was obligatory on the part of Holcim to comply with Regulation 11 (2A) of SAST, i.e. to give delisting offer in respect of acquisition of EIL.

25)         Holcim has contented that in the instant case, the acquisition of EIL is ‘as a result of global arrangement’, thus qualifying it for exemption from making open offer under delisting guidelines. The term global arrangement is not defined in SAST. However, from experience and also from facts pertaining to the Technip case, as already discussed, the connotation of term ‘global arrangement’ is clear. In the instant case, the acquirers and PACs, except HIL, all are incorporated in India. Importantly their intended target company was ACC, which is registered in India and not abroad. None of the conditions for ‘global arrangement’ as in the Technip case is satisfied in the instant case. Therefore, I do not find any merit in the submission of Holcim that the instant case is an indirect acquisition ‘as a result of global arrangement’.

26)        Holcim has cited the exemption from making open offer in the Robert Bosch GmBH (annexure L to the reply) to support its contention. From perusal of the press release pertaining to the cited case, I find that its facts may be comparable to the instant case, but the only inference that I am able to draw is that Holcim knew about the exemptions that were granted by the Board based on recommendation of the Takeover panel constituted under Regulation 4 of SAST. However, Holcim deliberately choose not to seek exemption from making open offer to the shareholder of EIL.  This inference is amply supported by Holcim’s act in seeking ‘no-action’ under the Informal guidance scheme of the board. It is not a mere co-incidence that this letter was dated July 26, 2005, ie the last date by which Holcim was required to make open offer to the share holders of EIL. The intention is clearly mischievous.  If at all any doubt was there in the minds of Holcim, they could have approached SEBI under the Informal Guidance Scheme for clarification, but they failed to do so and instead choose a path i.e. 'No action letter', which is nowhere recognized in the context of Indian Laws. I would further add here that Holcim tried to sit on judgment in its own case by not seeking exemption under Regulation 4 of SAST from SEBI Takeover Panel. But at the same time I doubt that Holcim would have got exemption, and I say this because of the following provisions:-

Regulation 3 (1A) of SAST:

3 [(1A) The benefit of availing exemption under the relevant clauses of sub-regulation (1), shall be subject to compliance with requirement specified in sub-regulation (2A) of regulation 11.]

Although, I have got no authority to give any finding for which only the Board is empowered to decide on the recommendations of Takeover Panel under Regulation 4 of SAST, but in general the benefits of exemption under Regulation 3 of SAST would not be available to acquirer if provisions of Regulation 11(2A), as in the present matter, is attracted.

27)        The violation thus being established, the next issue is penalty imposable u/s 15H (ii) of SEBI Act, 1992, on the acquirers for not making open offer under SAST.  In this regard I refer to Section 15H(ii) of SEBI Act, 1992, as under:-

Penalty for non-disclosure of acquisition of shares and take-overs

15H. If any person, who is required under this Act or any rules or regulations made thereunder, fails to,- 

(i) ………..

(ii) make a public announcement to acquire shares at a minimum price,

he shall be liable to a penalty [twenty-five crore rupees or three times the amount of profits made out of such failure, whichever is higher].

28)        To determine the quantum of penalty under Section 15H (ii), the undersigned considered the following factors as provided in the section 15J of SEBI Act, 1992 viz. (a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default; (b) the amount of loss caused to an investor or group of investors as a result of the default and; (c) the repetitive nature of the default. The amount of disproportionate gain or unfair gain to acquirers for not making the open offer to the shareholders of EIL is not directly ascertainable as there is a contingent element of open offer under the delisting guidelines. In other words basis of penalty may be drawn from the amount of money involved as a result of the default by Holcim and which can be computed as the value of 23.99% of EIL’s equity @ Rs. 147 /(basis AFPL offer) per share, which works out to be Rs. 51,64,78,326 (51.64 crores). The value of loss caused to the investor is also not precisely ascertainable as they did eventually get the benefit of open offer @ Rs. 184 / share in February 2006, from EFI, but it was Holcim who was required to make an open offer by July 26, 2005. Here it is to be emphasized that the losses of shareholders as a result of default by the Holcim, is made good by an entity EFI, which is different from Holcim. I have a strong feeling here that the conduct of the Holcim has been in complete defiance of the provisions of SAST Regulations. In addition to this I find it shocking that Holcim, by ignoring the provisions of SAST Regulations, have been able to get easy liquidity (easy money) of their shareholding in EIL. Firstly, they could avoid parting with money equivalent to value of 23.99% of public shareholding in EIL, which comes out to be Rs. 51.64 crores. Lastly, they could get the liquidity of about 50% of their shareholding in EIL without complying with Regulation 11(2A) of SAST, when EFI gave the public offer and entered into a Transaction Agreement (TA) with Holcim for purchase of 50% of its shareholding in EIL. Further, there is an element of opportunity loss to the shareholders of EIL, which is substantial and has a bearing on the interest of minority shareholders of EIL, especially looking at the pace of the Indian Securities Market. To be fair enough, Holcim’s conduct towards Indian consumers, by not producing products with asbestos fibre, is indeed exemplary, but cannot be a mitigating factor for this proceeding. I am aware of SAT rulings that have down played the role of monetary penalty in cases where the acquirer subsequently made open offer to the shareholder of the ‘target company’. However, as Holcim has not made any open offer to the shareholder of EIL, it does not qualify for this benefit also.

29)        Considering the large amount of monies involved as a result of default by Holcim, which comes out to be in anyway above Rs. 50 crores since they failed to give public offer under SAST Regulations, I think it appropriate to impose a penalty of Rs. 25 crores on Holcim, which according to me would be commensurate to the nature of violation committed by Holcim.  

30)        I, therefore, in exercise of the powers conferred under section 15-I (2) of the SEBI Act, 1992, read with Rule 5 of SEBI Adjudication Rules, I hereby impose a penalty of Rs. 25 crores (Rs. Twenty Five Crores only) on Holcim (India) Pvt. Ltd. (Formerly known as Holdcem Cements Pvt. Ltd.) under section 15H (ii) of SEBI Act, 1992 for the violations of Regulation 11(2A) of SAST Regulations.

31)        Holcim (India) Pvt. Ltd. shall pay the said amount of penalty by way of demand draft in favour of “SEBI- Penalties Remittable to Government of India”, payable at Mumbai within 45 days of receipt of this order. The said demand draft should be forwarded to Mr. S.V. Muralidhar Rao, General Manager, Mittal Court, 1st floor, B- Wing, 224, Nariman Point, Mumbai 400 021.

32)        This order of adjudication is made and passed on 25^th day of August 2006 at Mumbai.

AMIT PRADHAN

ADJUDICATING OFFICER