2013 (5) TMI 629 - SC - Companies Law

Supreme Court Upholds SEBI Decision on Takeover Code Interpretation

The Supreme Court upheld SEBI and SAT's decisions, dismissing the appeal. It emphasized the narrow interpretation of Regulation 27(1)(d) of the Takeover ... Principle of natural justice - Takeover code - SRMTL - the request of the appellants for withdrawal of an offer to acquire the equity shares of Shree Ram Multi Tech Limited (SRMTL) under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (Takeover Code/Takeover Regulation) has been rejected. Principle of natural justice - order of SEBI - held that:- it is apparent that all the necessary information was available before SEBI for taking a decision as to whether the claim of the appellants seeking exemption from the Takeover Code, or withdrawal of the Letter of Offer would fall within the purview of Regulation 27(1) (d). The purpose of granting an opportunity of hearing is to ensure fair treatment of the person or entity against whom an order is likely to be passed. - In our opinion, the appellants cannot justifiably claim that any order had been passed by SEBI that would cause adverse civil consequences, as envisaged by this Court in B. Karunakar & Ors. (1993 (10) TMI 310 - SUPREME COURT). The person challenging the order on the basis that it is causing civil consequences would have to prove the prejudice that has been caused by the non-grant of opportunity of hearing. In the present case, we must hasten to add that, in the letter dated 4th May, 2006, the appellants have not made a request for being granted an opportunity of personal hearing. Therefore, the ground with regard to the breach of rules of natural justice clearly seems to be an after thought. About takeover code - held that:- the takeover code is meant to ensure fair and equal treatment of all shareholders in relation to substantial acquisition of shares and takeovers and that the process does not take place in a clandestine manner without protecting the interest of the shareholders. It is keeping in view the aforesaid aims and objects of the takeover code that we shall have to interpret Regulations 27(1). Power of the board to allow withdrawal from the scheme - held that:- certain amount of discretion has been left with the Board to determine as to whether the circumstances fall within the realm of impossibility as visualized under sub-clause (b) and (c). In the present case, we are not satisfied that circumstances are such which would make it impossible for the acquirer to perform the public offer. The possibility that the acquirer would end-up making loses instead of generating a huge profit would not bring the situation within the realm of impossibility. Principle of ejusdem generis - held that:- The appellants wanting to withdraw the public offer merely wishes to cut its losses at the expense of the innocent shareholders, who are entitled under the Regulations to the exit option. In such circumstances, the appellants would have to buy the shares at the quoted prices of Rs.18.60 per share, placing a financial burden on the appellants. The aim of the appellants was merely to avoid such an added burden. - we are not inclined to accept the submissions of Mr. Divan that the principle of ejusdem generis is not applicable for interpreting Regulation 27(1) (d) of the Takeover Code. Regulation 24(2) mandates that the merchant banker shall furnish to the Board a due diligence certificate which shall accompany the draft letter of offer. The aforesaid regulation clearly indicates that any enquiries and any due diligence that has to be made by the acquirer have to be made prior to the public announcement. It is, therefore, not possible to accept the submission of Mr. Shyam Divan that the appellants are to be permitted to withdraw the public announcement based on the discovery of certain facts subsequent to the making of the public announcement. Regarding delay in approval - held that:- the repeated advice given by the merchant banker to enhance the issue size of the open offer and to comply with other requirements of the Takeover Regulations. The appellants, in fact, were prevaricating and did not agree with the interpretation placed on Regulation 27(1) (d) by the Merchant Banker. We, therefore, reject the submission of Mr. Shyam Divan that there was delay on the part of SEBI in approving the draft letter of offer. Regarding valuation - held that:- The formula given in Regulation 20 would have no applicability in the facts and circumstances of this case. The determination of the lowest price under Regulation 20 would be at a stage prior to the making of the public announcement and not thereafter. - appeal dismissed - Decided against the appellant company. Issues Involved:1. Applicability of Regulation 27(1)(d) of the Takeover Code.2. Breach of rules of natural justice.3. Interpretation of Regulation 27(1)(d) and ejusdem generis principle.4. SEBI's powers under Sections 11 and 11B of the SEBI Act.5. Allegation of fraud and due diligence.6. Delay by SEBI in processing the letter of offer.7. Request for fresh valuation of shares.Detailed Analysis:1. Applicability of Regulation 27(1)(d) of the Takeover Code:The appellants sought to withdraw their public offer under Regulation 27(1)(d) of the Takeover Code, arguing that SEBI had the power to grant such withdrawals in 'such circumstances as in the opinion of the Board merit withdrawal.' The Supreme Court upheld SAT's interpretation that Regulation 27(1)(d) should be read ejusdem generis with clauses (b) and (c), which pertain to impossibility of performance. The Court concluded that financial losses or business misfortunes do not constitute circumstances meriting withdrawal under Regulation 27(1)(d).2. Breach of rules of natural justice:The appellants contended that SEBI's decision was made without granting them a personal hearing, thus violating the rules of natural justice. The Supreme Court rejected this argument, noting that the appellants had ample opportunity to present their case through written submissions. The Court emphasized that an oral hearing is not always necessary, especially when all relevant information has been submitted in writing.3. Interpretation of Regulation 27(1)(d) and ejusdem generis principle:The appellants argued against the application of the ejusdem generis principle to Regulation 27(1)(d). They claimed that the clause should be interpreted broadly to allow SEBI to permit withdrawal in various circumstances. The Supreme Court disagreed, stating that Regulation 27(1)(d) should be interpreted narrowly, consistent with clauses (b) and (c), which deal with legal and natural impossibility. The Court held that financial difficulties do not fall within the scope of 'such circumstances' under Regulation 27(1)(d).4. SEBI's powers under Sections 11 and 11B of the SEBI Act:The appellants argued that SEBI had residual powers under Sections 11 and 11B of the SEBI Act to permit withdrawal of the public offer. The Supreme Court rejected this argument, stating that SEBI's powers under these sections are intended to protect investors and regulate the securities market, not to allow acquirers to withdraw offers to avoid financial losses.5. Allegation of fraud and due diligence:The appellants claimed that they discovered fraudulent activities and embezzlement by the target company's promoters only after making the public announcement. They argued that SEBI should have allowed them to withdraw the offer based on these findings. The Supreme Court held that the appellants should have conducted due diligence before invoking the pledge and making the public announcement. The Court noted that the appellants were aware of the company's financial difficulties and pending litigations, which should have prompted further investigation.6. Delay by SEBI in processing the letter of offer:The appellants contended that SEBI's delay in processing the letter of offer caused the share price to fall, increasing their financial burden. The Supreme Court dismissed this argument, noting that the appellants themselves contributed to the delay by not providing necessary information promptly. The Court emphasized that the appellants could not blame SEBI for their own lack of diligence.7. Request for fresh valuation of shares:The appellants requested the Court to appoint an independent valuer for a fresh valuation of the shares. The Supreme Court rejected this request, stating that the valuation formula under Regulation 20 applies before the public announcement, not after. The Court held that the appellants must adhere to the original offer price of Rs. 18.60 per share.Conclusion:The Supreme Court dismissed the appeal, upholding SEBI and SAT's decisions. The Court emphasized the importance of due diligence, the narrow interpretation of Regulation 27(1)(d), and the need to protect investors' interests and market integrity. The appellants were required to proceed with the public offer at the original offer price.