TaxTMI 
TaxTMI 
2010 (7) TMI 289
X X X X Extracts X X X X
X X X X Extracts X X X X
....hares of Zenotech Laboratories Ltd. was fair and lawful or whether the offer price could not be less than rupees one hundred and sixty only (Rs. 160) per share? This is the question that falls for consideration in these two appeals. A correct answer to the question requires a proper construction and understanding of certain provision of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (the 'SEBI Takeover Regulations' or 'Takeover Code'). 2. The facts of the case are fairly simple and are admitted on all sides. The two appeals arise from almost identical facts but in this judgment we would be referring to the paper book of Civil Appeal No. 7148 of 2009. 3. On 3-10-2007 Ranbaxy Laboratories Limited (respondent No. 3), a company incorporated and registered under the Indian Companies Act, entered into a Share Purchase and Share Subscription Agreement jointly with Zenotech (respondent No. 4 and its promoter, Dr. Jairam Chigurupati (respondent No. 1 in Civil Appeal No. 7148). The agreement provided for Ranbaxy to purchase from Zenotech's promoters a large block of equity shares (78,78,906 in number), representing 27.35 p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ge Daiichi was nowhere on the scene. It is no one's case that the acquisition of Zenotech's shares and control by Ranbaxy was at the instance of Daiichi or it was in furtherance of some overt or covert understanding between the two. 5. On 11-6-2008 Daiichi (the appellant in these two appeals) entered into a Share Purchase and Share Subscription Agreement (the 'SPSSA') jointly with (i) Malvinder Singh and others, the promoters of Ranbaxy, and (ii) Ranbaxy Laboratories Ltd. under the agreement, Daiichi would acquire 30.91 per cent of the fully paid-up equity share capital of Ranbaxy by buying a sufficiently large block of shares from the company's promoters. In addition, Daiichi would subscribe to (i) shares, representing in the aggregate 11 per cent of the fully paid-up equity share capital of Ranbaxy, and (ii ) 2,38,34,333 share warrants, each warrant exercisable for one equity share of Ranbaxy. On the same day Ranbaxy informed the Stock Exchanges that in the meeting held on that date its Board of Directors had ratified the terms of the SPSSA and had decided to seek the approval of the company's shareholders for issuance of the shares and the warrants to Daiichi, on preferential....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hundred thirteen and paise sixty two (Rs. 113.62) made in the public announcement by Daiichi, N. Narayanan respondent No. 1 in Civil Appeal No. 7314 of 2009, who was holding 63,000 shares in Zenotech made a complaint to the Securities and Exchange Board of India (SEBI) (vide letters dated January 19, March 5, April 1, April 15, and May 7, 2009). He claimed that the offer price for Zenotech shares could not be less than rupees one hundred and sixty (Rs. 160) per share and requested the SEBI to direct Daiichi to revise the offer price accordingly and also to pay interest at the rate of 15 per cent for the delay in coming out with the public announcement. 7. Respondent No. 1 in Civil Appeal No. 7148 of 2009, Dr. Chigurupati who was the Director, founder and promoter of Zenotech and who along with his wife was holding 26 per cent equity shares in Zenotech made a similar complaint to SEBI through a detailed representation dated 27-1-2009. The SEBI after due consideration of the matter turned down the claim of the respondents (vide letter dated 18-6-2009 in the case of N. Narayanan's complaint and letter dated 22-6-2009 in the case of the complaint of Dr. Chigurupati). 8. Against t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s prior to the date of the public announcement to shareholders of RLL. N.A. (iii) The average of the weekly high and low of the closing prices of shares of the Target Company on BSE during the 26 weeks period preceding the date of public announcement to shareholders of RLL. Rs. 113.62 (iv) The average of the daily high and low prices of the shares of the Target Company on BSE during the 2 week period preceding the date of public announcement to shareholders of RLL. Rs. 103.51 (v) Highest price paid by Acquirer for any acquisition (including by way of allotment in a public or rights or preferential issue) during the 26 weeks prior to the date of the P.A. N.A. (vi) The average of the weekly high and low of the closing prices of shares of target company on BSE during the 26 weeks period preceding the date of the P.A. Rs. 106.03 (vii) The average of the daily high and low prices of shares of target company on BSE during the 2 weeks period preceding the date of the P.A. Rs. 109.52" 10. Now is the time to take a look at the statutory provisions controlling and regulating such transactions and to see how far the steps taken by D....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ding company, or subsidiary or such company or company under the same management either individually or together with each other; (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 : Provided that sub-clause (ix) shall not apply to a bank whose sole relationship with the acquirer or with any company, which is a holding company or a subsidiary of the acquirer or with a relative of the acquirer, is by way of providing normal commercial banking services or such activities in connection with the offer such as confirming availability of funds, handling acceptances and other registratio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the marginal heading, "Consolidation of holdings" and it lays down the obligations of an "acquirer" who, together with persons acting in concert with him, has acquired, in accordance with the provisions of law, fifteen per cent or more but less than fifty five per cent of the shares or voting rights in a company. At the end of regulation 11 there is an Explanation that applies both to regulations 10 and 11. The Explanation is relevant for our purpose and it reads as follows : "Explanation.-For the purposes of regulation 10 and regulation 11, acquisition shall mean and include,- (a)direct acquisition in a listed company to which the regulations apply; (b)indirect acquisition by virtue of acquisition of companies, whether listed or unlisted, whether in India or abroad." 19. Regulation 10, as seen above makes it obligatory for an "acquirer" acquiring fifteen per cent or more of shares or voting rights in a listed company to make a public announcement to acquire shares of that company. Regulation 14 prescribes the time-limit within which the public announcement stipulated in regulation 10 is to be made. Regulation 14 along with its marginal heading reads as follows : "14....
X X X X Extracts X X X X
X X X X Extracts X X X X
....upplied] 20. It is noted above that on the date Daiichi entered into the SPSSA with Ranbaxy, it became the "acquirer" both in relation to Ranbaxy and Zenotech, directly in case of the former and indirectly in case of the latter. The period of time within which Daiichi was required to make the public announcement in respect of the two target companies (the former directly and the latter indirectly) were prescribed in sub-regulation (1) (not later than four working days of entering into an agreement for acquisition of shares or voting rights) and sub-regulation (4) (within three months of consummation of such acquisition or change in control . . . .) respectively of regulation 14. 21. It needs to be stated here that sub-regulation (4) was inserted in regulation 14 by the Second Amendment Regulation, 2002 with effect from 9-9-2002 and before that date regulation 14 ended at sub-regulation (3). This means that before 9-9-2002 the Takeover Code in regulation 14(1), allowed only four days time for making the public announcement as required under regulation 10 for both direct and indirect acquisitions. In other words, in case the direct acquisition of a company would lead to the ind....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the acquirer proposes to dispose of or otherwise encumber any assets of the target company in the succeeding two years except in the ordinary course of business of the target company : Provided that where the future plans are set out, the public announce-ment shall also set out how the acquirers propose to implement such future plans : Provided further that the acquirer shall not sell, dispose of or otherwise encumber any substantial asset of the target company except with the prior approval of the shareholders;" 23. Then comes regulation 20 which deals with the "offer price" and is very important for our purpose. Insofar as relevant for the present it is reproduced below : "20. Offer price.-(1) The offer to acquire shares under regulation 10, 11 or 12 shall be made at a price not lower than the price determined as per sub-regulations (4) and (5). (2) The offer price shall be payable- (a)in cash; (b)by issue, exchange and/transfer of shares (other than preference shares) of acquirer company, if the person seeking to acquire the shares is a listed body corporate; or (c)by issue, exchange and, or transfer of secured instruments of acquirer company with a mini....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hall not be applicable in case of disinvestment of a Public Sector Undertaking. Explanation.-In case of disinvestment of a Public Sector Undertaking, the relevant date for the calculation of the average of the weekly prices of the shares of the Public Sector Undertaking, as quoted on the stock exchange where its shares are most frequently traded, shall be the date preceding the date when the Central Government or the State Government opens the financial bid. (5) Where the shares of the target company are infrequently traded, the offer price shall be determined by the acquirer and the merchant banker taking into account the following factors : (a)the negotiated price under the agreement referred to in sub-regulation (1) of regulation 14; (b)the highest price paid by the acquirer or persons acting in concert with him for acquisitions, if any, including by way of allotment in a public or rights or preferential issue during the twenty-six week period prior to the date of public announcement; (c)other parameters including return on net worth, book value of the shares of the target company, earning per share, price earning multiple vis-a-vis the industry average : Provi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ty, the pricing for the cash offer could be different from that of a share exchange offer or offer for exchange with secured instruments provided that the disclosures in the letter of offer contains suitable justification for such differential pricing and the pricing is subject to other provisions of this regulation. (iv)Where the offer is subject to a minimum level of acceptance, the acquirer may, subject to the other provisions of this regulation, indicate a lower price for the minimum acceptance up to twenty per cent should be the offer not receive full acceptance. (12) The offer price for indirect acquisition or control shall be determined with reference to the date of the public announcement for the parent company and the date of the public announcement for acquisition of shares of the target company, whichever is higher, in accordance with sub-regulation (4) or sub-regulation (5)." 24. In order to clearly understand the ways in which the offer price is to be determined in the case of an indirect takeover of a company, as in the present case, it would be useful to examine regulation 20 from the rear end, that is to say starting from sub-regulation (12). This may sound....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pany). Regulation 20(12) tell us the dates with reference to which the offer price is to be determined but it does not tell us how the offer price is to be determined. For that it refers us back to sub-regulations (4) and (5). It needs to be stated here that sub-regulations (4) and (5) remained unchanged and did not undergo any amendments following the introduction of sub-regulation (4) in regulation 14 and sub-regulation (12) in regulation 20. This is to say that the provisions of sub-regulations (4) and (5) apply both to cases of direct and indirect takeover; they were not designed only for cases of indirect takeover. 26. Sub-regulation (5) of regulation 20 lays down the method for determining the offer price for a company the shares of which are infrequently traded. That is not the case with Zenotech; hence, we may leave out sub-regulation (5). This takes us to sub-regulation (4) of regulation 20. Sub-regulation (4) prescribes three ways for determining the share price with the stipulation that the highest among them would be the offer price. Clause (a) of sub-regulation (4) refers to the negotiated price under the agreement. This would clearly apply to a case of direct takeo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ad made the public announcement for Ranbaxy shares. In terms of regulation 20(12) the date of the public announcement for the parent company (16-6-2008) is one of two relevant dates with reference to which the offer price for acquisition of the shares of the target company (Zenotech) is to be determined. Thus, according to the respondents, clause (b) of regulation 20(4) was clearly attracted and the price (Rs. 160) under that clause being higher than the price (Rs. 113.62) worked out in terms clause (c) that alone could form the offer price in the public announcement. 29. The Securities Appellate Tribunal accepted the respondents' contention observing and holding as follows : "It is Daiichi's own case, as is clear from the public announcement made to the shareholders of the target company, that Ranbaxy became its subsidiary on October 20, 2008 when the acquisition of Ranbaxy got completed. Being a subsidiary, Ranbaxy shall be deemed to be acting in concert with Daiichi with effect from that date as per regulation 2(1)(e)(2)( i) of the Takeover Code. According to this regulation, "person acting in concert" comprises a company, its holding company or subsidiary unless the contr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....orted the appellant's case. 32. The SEBI, though itself not in appeal against the judgment of the Appellate Tribunal and only impleaded as respondent in the two appeals, strongly defended its stand in rejecting the complaints made by the respondents before it. The learned Attorney General appearing for the SEBI submitted that the judgment of the Appellate Tribunal coming under appeal was based on a complete misinterpretation of the expression "person acting in concert" as defined in regulation 2( e) of the Takeover Regulations. Taking a position even more forthright than the appellant, the learned Attorney General contended that the Daiichi and Ranbaxy never came within the definition of "person acting in concert". He submitted that the Appellate Tribunal erred in assuming that "being a subsidiary, Ranbaxy shall be deemed to be acting in concert with Daiichi as per regulation 2(e )(2)(i ) of the Takeover Code". The Appellate Tribunal also missed the true import of the words "unless the contrary is established" at the conclusion of regulation 2(e)(2). The Attorney General submitted that the deeming provision under regulation 2(e)(2) needs to be read and understood in context and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or to date on which the acquirer and the purchaser came into the relationship of persons acting in concert". 35. The main argument of Mr. Sundaram, however, was that the expression 'persons acting in concert' used in regulation 20(4)(b) refers to a person who is in praesenti, that is, at the time of the public announcement acting in concert with the acquirer. This is exactly the basis of the Appellate Tribunal's judgment and if that is accepted the conclusion arrived at by the Tribunal simply follows. Ranbaxy was a person acting in concert with Daiichi on 19-1-2008, the date of the public announcement made by the latter for the Zenotech shares. Ranbaxy had purchased Zenotech shares during the period January 16 to 28, 2008 that fell within the twenty six weeks period from 16-6-2008, the date of the public announcement made by Daiichi for Ranbaxy shares. Hence, attracting regulation 20(4)(b). 36. Mr. Divan made additional submissions in support of the view taken by the Appellate Tribunal upholding the respondents' claim. He submitted that regulation 2(1)(e)(1) expressly contemplates a situation where the parties agree to acquire shares or voting rights in the future. Hence, an ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o acquire more shares and make a public announcement under the takeover regulation. Following the agreement between them, C enters into an agreement with a financial institution to acquire another 5 per cent block of shares of the company X at a price much lower than the price paid by A or B for their earlier acquisitions. Mr. Divan submitted that if the submission of the appellant and the SEBI are accepted than the result would be as follows : (1)Since there is no fresh acquisition and C has only entered into an agreement with the financial institution for the acquisition of shares, the three persons are not yet in concert. (2)Since the earlier purchases were made before A, B or C came together as "persons acting in concert" their earlier acquisitions (4 per cent + 4 per cent + 4.5 per cent) cannot be aggregated with the proposed fresh acquisition of 5 per cent by them after having entered into the agreement. Consequently, regulation 10 of the Takeover Code would not come into play and there would be no requirement to make a public announcement. 39. He contended that such a simple ploy would defeat the whole object and purpose of the Takeover Code. We shall presently cons....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hip with Daiichi when Daiichi made the public announcement for Zenotech shares. 42. We now proceed to examine the question whether Daiichi and Ranbaxy came together in the relationship of "persons acting in concert" as claimed by the respondents and connected with it the larger question as to the stage when the relationship of "persons acting in concert" must be in existence for the applicability of regulation 20(4)(b) of the Takeover Code. For this, we must first understand what is the true meaning of "persons acting in concert" as defined in regulation 2(e). 43. To begin with, the concept of "person acting in concert" under regulation 2(e)(1) is based on a target company on the one side, and on the other side two or more persons coming together with the shared common objective or purpose of substantial acquisition of shares etc. of the target company. Unless there is a target company, substantial acquisition of whose shares etc. is the common objective or purpose of two or more persons coming together there can be no "persons acting in concert". For, de hors the target company the idea of "persons acting in concert" is as irrelevant as a cheat with no one as victim of his d....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of shares or voting rights or control over Zenotech they cannot be said to have come in the relationship of "persons acting in concert". This is not even the case of the respondents. The inevitable conclusion, therefore, is that on signing the SPSSA Daiichi and Ranbaxy did not come within the relationship of persons acting in concert within the meaning of regulation 2(e)(1) of the Takeover Code. 46. We may now proceed to the deeming provision as contained in sub-clause (2) of regulation 2(e). Here, it would be better to restate the obvious that the deeming provision cannot do away either with the target company or the common objective or purpose of substantial acquisition of shares etc. of the target company shared by two or more persons because to do so would be destructive of the very idea of "persons acting in concert" as defined, in sub-clause (1) of regulation 2(e ). We, therefore, see no merit in the submission, as urged at one stage, on behalf of the respondents that sub-regulation (2) of regulation 2(e) containing the deeming clause should be seen as a 'stand alone' provision, independent of sub-regulation (1) of regulation 2(e). The deeming provision under sub-regulatio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eeming provision. It has to be read in conjunction with regulation 2(1)(e)(1) which states that person acting in concert comprises of persons who in furtherance of 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 to acquire control over the target company. The word "comprises" in regulation 2(1)(e) is significant. It applies to regulation 2(1)(e)(2) as much as to regulation 2(1)(e)(1). A fortiori, a person deemed to be acting in concert with others is also a person acting in concert. In other words, persons who are deemed to be acting in concert must have the intention or the aim of acquisition of shares of a target company. It is the conduct of the parties that determines their identity. Whether a person is or is not acting in concert with the acquirer would depend upon the facts of each case. In order to hold that a person is acting in concert with the acquirer or with another person it must be established that the two sha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Ranbaxy-Zenotech deal which period falls within twenty-six weeks prior to June 16, 2008." 51. The Appellate Tribunal's error is the result of mixing up the provisions of sub-regulations (12) and (4) of regulation 20. As explained earlier sub-regulation (12) came to be introduced in regulation 20 as a consequence of extension of time for making public announcement for the secondary and indirectly targeted company by insertion of sub-regulation (4) in regulation 14. Sub-regulation (12) of regulation 20 obliges the acquirer to work out the best value for the shares of the indirectly targeted company as obtaining on the date of the public announcement for the parent target company as well as on the date of the public announcement for the concerned indirectly targeted company and then to offer the shareholders the better of the two values. This is for the simple reason that the extension allowed for making the public announcement for the indirectly targeted company should not cause any prejudice to its shareholders. Sub-regulation (12) does not in any way affect sub-regulation (4) which remains unamended and it certainly does not alter the meaning of "persons acting in concert" as ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rting the shareholders. The Attorney General strongly refuted the submission that the Takeover Code was intended solely to protect the shareholders interests. We, however, need not go into that question because in light of the above discussion, we find that the controversy is completely free from any confusion and the view canvassed on behalf of the respondents is not even a remotely possible view of the matter. 57. Before parting with the records of the case we would like to say that, in arriving at the correct meaning of the provisions of the Takeover Code specially regulations 14(4) and 20(12) we were greatly helped by the reports of the two Committees headed by Justice Bhagwati. We mention the fact especially because as per the legislative practice in this country, unlike an Act, a regulation or any amendments introduced in it are not preceded by the "Object and Purpose" clause. The absence of the object and purpose in the regulation or the later amendments introduced in it only adds to the difficulties of the court in properly construing the provisions of regulations dealing with complex issues. The court, so to say, has to work in complete darkness without so much as a gli....