TaxTMI 
TaxTMI 
2013 (9) TMI 914
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....nge Board of India Act, 1992. The Petition challenges the legality of the order. 3. For convenience of exposition, this judgment is divided into Parts, which are as follows: * I - Facts. * II - Show Cause Notice by SEBI and the Impugned order. * III- Submissions. * IV - The SCRA and MIMPs Regulations. * V - Role of Stock Exchanges. * VI - Regulation 4 and Regulation 8. * VII- The process of dilution. * VIII- Share warrants. * IX - Buy back arrangements. * X - Duty of disclosure. * XI - Legality of buy backs. * XII âEUR" Persons Acting in concert. * XIII- The Validity of the impugned order. * XIV- Conclusion. I : Facts. 4. The Fourth Respondent, Multi Commodity Exchange of India Limited, who is a promoter of the Petitioner made an application on 12 August 2008 for recognition of the Petitioner as a Stock Exchange. The Petitioner was incorporated on 14 August 2008 and received a certificate for commencement of business on 19 August 2008. The Petitioner has two promoters, Financial Technologies (India) Limited (FTIL) and Multi Commodities Exchange of India (MCX), the Third and the Fourth Respondents. On 22 August 2008, the Petit....
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....llowing which on 8 December 2008, the Petitioner furnished a proposal for commencement of operations in that Segment. On 22 December 2008, the Petitioner applied to SEBI for permission to commence business in the Equities and Derivative segment on the Exchange platform in addition to the Small and Medium Enterprise Segment. 7. On 31 March 2009, the Petitioner offered to issue shares on a preferential basis to Punjab National Bank (PNB) together with an exit option. The exit option stipulated that (i) PNB would be entitled to a simple rate of return at the rate of 16% per annum after completion of three years from the date of investment on the total amount invested; (ii) FTIL or its nominees would have a right to buy back shares from PNB at any time after the expiry of a period of one year from the date of investment; and (iii) If PNB retained the shares inspite of the buy back offer, it would not be entitled to an assured rate of return and FTIL would have no liability to buy back the shares in future. 8. On 21 May 2009, the Petitioner addressed a letter to SEBI seeking an extension of one year to ensure full compliance with the MIMPS Regulations. 9. Between May and Novemb....
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....ater than three years from the date of investment after which the right of IL&FS would lapse. The undertaking furnished by La-Fin to IL&FS inter alia contained the following stipulation: "1. La-Fin Financial Services Pvt. Ltd. (LA-Fin) or its appointed nominees have an obligation to offer to purchase at any time during the Agreed Period (as defined hereinafter) in its sole discretion considers appropriate, all the shares purchased by you under the SPAs in MCX-SX by giving a written notice at any time after completion of one (1) year from the date of investment but no later than three (3) years from the date of investment ("Agreed Period"), post which your rights herein stated shall lapse. You will have to confirm your acceptance/non acceptance for the offer within a maximum period of 30 days. The price at which such shares will be offered to be purchased by us will be at a price which will be higher of the following ("Buy Back Price"): (i) Price which provides an internal rate of return ("IRR") of 15% on the investment or; (ii) Price at which the most recent transaction MCX-SX equity shares is carried out by MCX-SX or MCX or FTIL Group. 2. It being clarified that in the....
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.... submitted a report to SEBI under Regulation 11(2) of the MIMPS Regulations. The report included a statement of top ten shareholders of the Petitioner as on 30 September 2009. Among those shareholders were the Third Respondent with a shareholding of 35.05%, the Fourth Respondent with a shareholding of 38.31% and IFCI Ltd. with a shareholding of 4.27%. Hence, the shareholding pattern reflected that the Promoter Companies had a shareholding of 73.36%. 15. On 31 October 2009, the Petitioner's Board of Directors called upon the initial promoters, the Third and Fourth Respondents, to reduce their shareholding by cancelling their shares in excess of the prescribed limit, by a scheme of reduction-cum-arrangement under Sections 391 to 393 of the Companies' Act, 1956 read with Sections 100 to 104. On 14 December 2009, the Fourth Respondent addressed a letter to IL&FS referring to the Share Purchase Agreement dated 20 August 2009 and La-Fin's letter of the same date and requested IL&FS to approve the scheme of reduction-cum-arrangement proposed to be considered at an Extra-ordinary General Meeting to be held on 15 December 2009. 16. The scheme for reduction of the equity shareholding o....
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....was filed in this Court for sanctioning a Scheme of Reduction-cum-Arrangement under Sections 100 to 104 and 391 to 394 of the Companies' Act, 1956. In the Petition that was filed before this Court, it was stated that though the reducing shareholders had a right to transfer the warrants to other investors or to exercise the option under the warrants, the Petitioner would ensure compliance with the MIMPS Regulations as well as the regulatory regime: "The said Reducing Shareholders shall, over a period of time, transfer their warrants to other prospective investors or exercise the option attached to the warrants. However, the Petitioner Company shall ensure that such transfer or exercise shall always be in compliance with the Securities Contracts (Regulation) (Manner of Increasing and Maintaining Public Shareholding in Recognized Stock Exchanges) Regulations, 2006, or any other equivalent regulatory regime laid down by the competent regulator, which is for the time being in force." 18. On 21 December 2009, the Petitioner addressed a letter to SEBI highlighting the main features of the Scheme of Reduction. The letter accepted that the scheme "will be in contrast to the normal pra....
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....cheme together with the Scheme which was sanctioned was furnished by the Petitioner to SEBI. SEBI had conducted an inspection of the Petitioner in July and August 2009 in respect of which an inspection report was forwarded on 16 April 2010. 21. On 4 June 2010, the Petitioner applied for renewal of its recognition valid until 15 September 2010 to trade in the existing securities. The Petitioner also sought an expeditious grant of permission to commence operation in other segments. 22. On 16 July 2010, the Petitioner instituted a writ proceeding under Article 226 of the Constitution before this Court aggrieved by the delay on the part of SEBI in deciding upon the application for approval for commencing trading in other segments in addition to exchange credit currency derivatives. 23. On 21 July 2010, SEBI addressed a letter to the Petitioner stating that it had been brought to its notice that the Petitioner had entered into buy back arrangements with a Bank which was a shareholder of the Petitioner. This, it was stated, was observed from a news article published on 19 July 2010. On 2 August 2010, the Petitioner in a reply to SEBI's letter enclosed a copy of the "comfort lett....
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....f one year with effect from16 September 2010 without prejudice to its right to decide upon the application submitted by the Petitioner on 7 April 2010. II : The Notice by SEBI and the impugned order: 28. A notice was issued by SEBI to the Petitioner on 30 August 2010 under Sections 4(4) and 12A of the SCRA read with Sections 11(1) and 11B of the SEBI Act to show cause why the application dated 7 April 2010 should not be rejected. Five grounds were set out in support of the notice to show cause: (i) Concentration of the promoters' interest in the Petitioner as a stock exchange : the case being that both the Third and Fourth Respondents continue to retain the same percentage share (38.01% and 33.89%) of the issued equity shares and warrants taken together as they did when both the promoters were holding only equity shares of the Petitioner; (ii) The manner of compliance with Regulation 8(1) of the MIMPS Regulations did not accord with the modes set out in Regulation 4. All other Stock Exchanges had adopted one of the modes explicitly recognised in Regulation 4, whereas the Petitioner had merely substituted the holding of equity by a right to acquire equity; (iii) Neither the Pe....
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....(v) The conversion of shares into warrants was not one of the four modes set out in Regulation 4 and was, therefore, not permissible; (vi) The undertaking furnished by the Petitioner together with its promoters not to violate the MIMPS Regulations in the Scheme of Capital Reduction will not render it compliant with the Regulations; (vii) The difficulty of the promoters in divesting shares was purely a commercial consideration. SEBI's interpretation of the meaning of full compliance under the Regulations should not be tailored to meet the business objectives of the promoters; (viii) Other Stock Exchanges have not adopted any method other than one of the methods referred to in the MIMPS Regulations; (ix) The meaning of the expression "acting in concert" is to be derived from the Takeover Regulations by virtue of Explanation (IV) to Regulation 8; (x) The meaning in the Takeover Regulations has to be adopted mutatis mutandis. Regulation 8 uses the expression "hold" in contrast to the Takeover Regulations which use the expression "acquire". This would mean that a common objective attaches itself to the holding of shares and not acquiring a target company. A person holding....
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....ic interest in the Petitioner in the hands of the two promoters. The conclusions which have been arrived at by the Whole Time Member are as follows: "a. The concentration of economic interest in a recognised stock exchange in the hands of two promoters is not in the interest of a well-regulated securities market; b. The Applicant is not fully compliant with the MIMPS Regulations as substitution of shares by warrants is an attempt to work around the requirements of Regulation 8 and the same is not a mode recognised as falling within the scope of the said Regulations; c. The Applicant has been dishonest in withholding material information on arrangements regarding the ownership of shares of its shareholders and therefore has not adhered to fair and reasonable standards of honesty that should be expected of a recognised Stock Exchange; d. The Applicant has failed to ensure compliance with Regulation 8 of the MIMPS Regulations as its two promoters (FTIL and MCX) are persons acting in concert and cannot hold more than 5% in the equity shares of a recognized stock exchange; e. The Applicant is instrumental to buy back transactions that are illegal under the SCR Act and ....
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....lations do not ipso facto apply to the Petitioner since the Petitioner was not subjected to a scheme for corporatisation or demutualisation approved by SEBI, but were made applicable as a condition of a permission granted to establish an exchange. Regulation 4 applies to dilution of equity of persons having trading rights in a Stock Exchange and cannot apply in terms to the Petitioner. At the highest, Regulation 4 can apply as regards the requirement of at least 51% shares being held by the public. Regulation 2(1)(h) defines the expression "public" as including a member of the public, but excluding a shareholder with trading rights. In the case of the Petitioner, the entire equity is held by persons other than those holding trading rights; (ii) The method of reduction of share capital has resulted in the Third and Fourth Respondents reducing their shareholding respectively to less than five per cent; (iii) The letter dated 21 December 2009 addressed by the Petitioner points out the manner in which the MIMPS Regulations would be complied with and it was the case of the Petitioner that the method of reduction was suggested by Senior Officers of SEBI; (iv) Other Stock Exchang....
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....NB and/or IL&FS to sell back the shares to the promoters. In that event, it has been presumed that the promoters upon the performance of the obligation to buy back would exceed the limit of five percent set out in the MIMPS Regulations; and (iii) The promoters are not fit and proper persons within the meaning of Regulation 9 since they are parties to an illegal contract. A. The submissions which have been urged by the Third Respondent on the legality of the buy back arrangement are as follows: (i) The buy back arrangement does not constitute a concluded contract for the purchase and sale of shares, but only furnishes an option to PNB/IL&FS. This is in the nature of a privilege or concession entirely dependent on the volition of the PNB/IL&FS. An option involves a unilateral exercise of volition as distinct from a contract of sale and purchase which involves reciprocal obligations; (ii) If and when, the buy back arrangement fructifies into a contract, the contract will be for sale and transfer of shares necessarily on a spot delivery basis. Spot delivery contracts are expressly permitted by the notification issued under Section 16 of the SCRA. Spot delivery in Section 2(....
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....an underlying asset. In the case of the buy back arrangement in the present case, the subject matter is the buy back of shares directly and there is no question of deriving the value of the shares from any underlying asset; (iii) In the case of an option contract, the right to buy or the right to sell is itself the subject matter of the contract and the option is traded on the Stock Exchange. It is only such option contracts that are required to be traded on the Stock Exchange; (iv) The buy back arrangement in the present case does not result in an option being traded or sold. The arrangement is directly with reference to shares and is not an option contract. C. As regards the second contention of SEBI that the exercise of the option under the buy back arrangement will result in a contract coming into existence and which upon being performed by the promoters will result in their exceeding the limit of five percent under the MIMPS Regulations, it has been urged that: (i) SEBI is not entitled to take into consideration the mere possibility of future events taking place, particularly when there is no obligation on PNB and/or IL&FS to sell the shares to the promoters in fut....
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....laim immunity from judicial review though in a restricted field. If within the restricted area where judicial review is permissible, it is demonstrated that the order is arbitrary, based on irrelevant considerations and contrary to law, the Court ought to exercise its jurisdiction to set aside the order. c. The Fourth Respondent's submissions 33. On behalf of the Fourth Respondent, the following submissions have been urged: (i) In view of the order of the Company Court dated 12 March 2010 sanctioning the Scheme of Capital Reduction, the issue as to whether the holding of the promoters stands reduced to five percent and the effect of the convertible warrants on promoters' shareholding stands conclusively decided in favour of the Petitioner. The object of the Scheme was solely to reduce the holding of the promoters to five percent to comply with the MIMPS Regulations. It was the function of the Company Court to scrutinize the Scheme and once sanctioned, the Scheme binds SEBI and operates as res judicata on all issues involved in the Petition; (ii) The finding that a reduction can be achieved only in one of the modes prescribed in Regulation 4 is unsustainable: (a) Regulat....
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....levant Regulations are made applicable. This notification was issued to get over an impasse created by the earlier notification. If a limited Company already in existence applied for permission, such permission could not be granted because all promoters taken together would ordinarily hold more than five percent shares. In such an event, there would be no application made by an existing Company and all the provisions would be rendered useless. Hence, that regulation has no application to the facts of the present case and there can be no occasion to commit a breach thereof; (ix) Alternatively, even if the combined shareholding of two promoters is to be considered, even then, unless it is established that they were acting in concert, there would be no violation of Regulation 8. Acting in concert pre-supposes a requirement of an overt act. Acting in concert in promoting a Company cannot be regarded as acting in concert while considering an application for permission unless an overt act post promotion is established; (x) The issue as to whether two promoters by holding more than five percent of the shares are acting in concert is a question of fact to be determined after consider....
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....would not be increased; (xv) In any event, the findings which have been made against the promoters cannot be permitted to be used in any other proceedings, since the promoters are not parties to the proceedings in which the order was passed. d. Submissions of SEBI 34. On behalf of the First Respondent, the following submissions have been urged by the Additional Solicitor General of India: (i) Stock Exchanges play a vital and important role in the economy and are an instrument of regulation. Recognition under Section 4 of the SCRA has to be in the interest of trade and public interest. SEBI has to be satisfied of the suitability and integrity of an applicant; (ii) The initial approval granted by SEBI to the Petitioner on 18 September 2008 was subject to full compliance with the MIMPS Regulations. The fact that in the renewal notification dated 31 August 2009, the expression "relevant provisions" was used, does not make any difference; (iii) Between 2008 and 2010, the Petitioner adopted a number of steps to achieve compliance with the MIMPS Regulations including the sale of shares coupled with an obligation of the promoters to buy back shares and the Scheme of Reduc....
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....ond promoter of the Petitioner). He is also a non-executive Vice Chairman of the Petitioner. He issued an undertaking on behalf of MCX and FTIL and other group Companies that the Petitioner will not issue shares except as provided for. This shows that he was not only in a position to issue an undertaking for FTIL of which he is Managing Director, but also for MCX of which he is designated as non-executive Vice Chairman. MCX is listed as a Group Company of FTIL. The two promoters are, therefore, under a common management; (vii) The expression "persons in concert" as it is used in the Takeover Regulations must apply mutatis mutandis to the MIMPS Regulations and hence, there is no requirement of a common objective of acquisition for the purposes of the MIMPS Regulations. This is buttressed by the use of the word "derived" in Explanation 4. Prior to its amendment in 2008, Regulation 8 provided that no person shall directly or indirectly acquire or hold more than five percent in the paid up equity capital of a recognized Stock Exchange. After the amendment, the reference to acquire has been deleted indicating that a common purpose of acquiring shares is not relevant to the MIMPS Regu....
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....nce, if a member of the Stock Exchange enters into an illegal contract, it is rendered unfit to run a Stock Exchange. SEBI should be allowed to plead the illegality of the agreements in these proceedings on grounds other than those contained in the show cause notice and the impugned order; (xiii) The Scheme of Reduction did not have any impact on the buy back agreements. IL&FS was offered a fresh buy back agreement by MCX in respect of warrants that were issued to it pursuant to the Scheme of Reduction. IL&FS exercised that right on 26 March 2010 by requiring MCX to procure the purchase of some warrants. In fact, IL&FS in a letter to SEBI asserted that the buy back agreement is a valid contract; (xiv) The buy back agreements are valid contracts in praesenti though there is no obligation in praesenti. The enforceability of the contract is dependent on the volition of one of the parties and not on a contingent event; (xv) The SCRA applies equally to listed and unlisted companies and would apply to the shares of the Petitioner; (xvi) The impugned order proceeds on the basis that the buy back agreements are forward contracts and, therefore, illegal under Sections 13 and 16 ....
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....rcise of the power of judicial review, the Court will not sit in judgment over the decision of the regulator as an Appellate Forum, but will interfere only when the decision is so unreasonable that no reasonable authority could have come to that decision. When dealing with orders of the expert bodies, the interference of the Court is confined to those cases where an order is perverse, based on no evidence or on a misreading of evidence. On these grounds, it has been urged that the interference of the Court is not warranted in the exercise of the jurisdiction under Article 226 of the Constitution. 35. These submissions now fall for determination. 36. The adjudication in the present case is by the Whole Time Member of SEBI, which is an expert statutory body. While assessing the challenge to those findings, the Court must bear in mind that the interference of the Court under Article 226 of the Constitution is confined to certain well settled, if restricted, parameters. The view of the expert should not be disturbed unless it is perverse or not based on evidence or is based on a misreading of evidence. This principle was laid down by the Supreme Court even in the context of the a....
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....eved in one of two ways: (a) by the shares initially issued to brokers being offered for sale to the public; and (b) by the stock exchange making an issue of shares to the public. The Committee opined that no specific form of dispersal need be prescribed, but there a time limit should be prescribed within which at least 51% of the shares would be held by non-trading members of the stock exchange. In paragraph 9.32, the Committee was of the view that having regard to the public interest in the efficient functioning of stock exchanges, it is important that no single entity or groups of related entities should be allowed to control a stock exchange through a cornering of shares. The Committee's view was that there should be a ceiling of five per cent on the voting rights which can be exercised by a single entity or groups of related entities irrespective of the size of the ownership of shares. 39. Following the report of the Kania Committee, Sections 4A and 4B were introduced with effect from 12 October 2004 by the Securities Laws (Amendment) Act, 2004 into the SCRA. Section 4A stipulates that on and from the appointed date, all recognized stock exchanges if not corporatised and de....
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.... of Increasing and Maintaining Public Shareholding in Recognized Stock Exchanges) Regulations, 2006. 42. Regulation 2 contains definitions. The expression "control" is defined in Regulation 2(e) to have the meaning assigned to it, in Regulation 2(1)(c) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. The expression "public" is defined in Regulation 2(h) to include any member or section of the public, but not to include any shareholder of a recognized stock exchange having trading rights or any associate of such shareholder. The expression "associate" is defined in Regulation 2(b). In Regulation 2(j) a shareholder having trading rights means a shareholder, who has a trading interest in the stock exchange, whether directly or indirectly. 43. Regulation 3 provides that the MIMPS Regulations shall be applicable to all recognized stock exchanges in respect of which a scheme for corporatisation or demutualisation has been approved by the Board under Section 4B. Regulation 3 indicates that the MIMPS Regulations were to apply only to old mutualised stock exchanges for which a scheme is approved by SEBI. The application of the Regulations to the Petitio....
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....rading rights to such persons or institutions as may be shortlisted by the recognised stock exchange with the approval of the Board; (c) issue of equity shares on private placement basis by the recognized stock exchange to any person or group of persons not being shareholders having trading rights or their associates subject to the approval of the Board; or (d) any combination of the above." Regulation 4 forms part of Chapter II of the MIMPS Regulations which deals with the manner of increasing public shareholding. Regulation 8 forms part of Chapter III which deals with shareholding restrictions. Regulation 8(1) provides that no person resident in India shall, at any time, directly or indirectly, either individually or together with persons acting in concert hold more than five per cent of the equity share capital in a recognized stock exchange. Under the first proviso, the restriction of five per cent is enhanced upto fifteen per cent of the paid up equity share capital of a recognized stock exchange in the case of a stock exchange, a depository, a clearing corporation, a banking or an insurance company and a public financial institution. Explanation (IV) to Regulation 8 ....
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....mpliance of the provisions of sub-regulation (1) has to be submitted to the Board on a quarterly basis within fifteen days from the end of each quarter. Regulation 11(4) confers an overriding power on SEBI to call for any information inter alia from a recognized stock exchange. Every exchange is required by Regulation 11(5) to maintain and preserve books, registers and documents and records relating to the issue or sale of equity shares under the Regulations for a period of ten years. The Board has the power under Regulation 12 to undertake inspection and conduct enquiries and audit of a recognized stock exchange or any shareholder having trading rights in the exchange. V : Role of Stock Exchanges 47. Stock Exchanges traditionally were constituted by brokers and dealers, who were in management. This position has undergone a radical change in several countries. Andreas M Fleckner in a seminal article titled "Stock Exchanges at the Crossroads" (Fordham Law Review - April, 2006) notes that with increased competition caused by deregulation, technological advances and globalization, the organisation of stock exchanges was at crossroads. The organization of stock exchanges was alte....
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....ction consists of the trades executed, the volume, price, and parties involved. This function has a considerable economic value in providing financial services such as market reports and analysis of stocks. Information about previous trades is of material significance in the market for derivatives which are financial instruments whose value is derived from an underlying asset such as stocks. Information about settled trades has a regulatory function since it is the basis of market surveillance and helps in detecting securities fraud such as insider trading or market manipulation; (iii) Stock exchanges are regulators of the market which they organize. This ranges from compliance surveillance to enforcement. The broker-dealers who trade on the market are subject to rules of the stock exchanges. Stock exchanges also monitor compliance by participants with the regulatory regime including that directed by the statutory regulator. Stock exchanges perform an important role to ensure fair trading and accurate price discovery both of which are critical in creating investor confidence; (iv) Stock exchanges set standards of corporate governance through their listing rules; (v) Finall....
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.... system. The orderly functioning of the market for securities is no longer a matter of a private concern, for those who transact on the market. The market for securities can be volatile. Transactions in the securities' market and the transparency of institutional mechanisms have a significant bearing on the wealth of investors. Inflows and outflows of capital from the stock market have an immediate and, often serious, impact on financial stability in the country. The orderly functioning of stock exchanges as institutions through which transactions in securities take place is a matter of public interest. The regulatory powers which have been conferred upon SEBI to recognise stock exchanges must be understood in the context of ensuring the protection of investors on one hand and the public interest that is involved on the other. SEBI is an expert regulatory body which is vested with the power to direct and regulate the functioning of stock exchanges. SEBI, as a regulatory authority, is vested with wide powers to ensure the protection of the interest of investors and the orderly development of the securities market. Ensuring the proper management of stock exchanges is a matter which f....
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....s a restriction on the holding of shares does not expressly incorporate the provisions of Regulation 4 in regard to the manner in which a reduction of the shareholding has to be brought about to ensure compliance with the five per cent norm. The order passed by the Whole Time Member proceeds on the basis that compliance with one of the modes specified in Regulation 4 is the only acceptable method for bringing about conformity with Regulation 8. SEBI in the course of its oral and written submissions also accedes to the position that Regulation 8, unlike Regulation 4, does not specify the manner in which shareholding should be reduced to below the specified threshold. 55. SEBI, however, suggests that one would ordinarily expect the modes specified in Regulation 4 to be followed for the purposes of Regulation 8, even though they are not mandatory. Now, all the modes which are provided for in Regulation 4 may not be applicable to a situation involved such as in the case of the Petitioner. Among the modes which are specified, are an offer for sale of shares held by shareholders having trading rights; the placement of shares held by shareholders having trading rights to such persons o....
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....Company Judge under Sections 391 to 394 read with Sections 100 to 103 of the Companies' Act, 1956 on 18 December 2009, envisaged that in order to comply with the provisions of Regulation 8(1), the Petitioner was implementing a scheme of capital restructuring so that the voting rights of the promoters and their equity stake would be brought down to five per cent each. The scheme envisages that warrants would be issued to the shareholders, who are subject to the scheme of capital reduction, namely, MCX, FTIL and IL&FS. Each warrant would entitle the holder to subscribe to one equity share at any time after six months from the date of issue and an option to that effect could be exercised after six months from the date of allotment. The warrants were, however, not to carry any voting rights. Clause 2.4 of the scheme provided that the exercise of the warrant would be subject to the Regulations. 59. By a letter dated 21 December 2009, SEBI was informed of the Scheme. The letter intimated SEBI that (i) Post reduction, the shareholding of the two promoters would not be in excess of five per cent; (ii) The two promoters and another shareholder, a financial institution whose equity shares....
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....' Union v. Hindustan Lever Ltd.. [1995] Suppl. 1 SCC 499/[1994] 2 SCL 157 (SC). The aspect as to whether the promoters can be regarded as persons acting in concert, will be dealt with separately. 62. Having regard to this finding, the submission which has been urged on behalf of the Fourth Respondent by Counsel, to the effect that the scheme when sanctioned, became binding on SEBI and would be res judicata of all issues involved in the Petition assumes subsidiary significance. A scheme under Section 391 of the Companies' Act, 1956 has statutory force and binds the creditors and shareholders of the Company. SEBI is not a creditor of the Company. SEBI, as a matter of fact, was not heard in the Company Petition. There can be no dispute about the principle of law that the powers of the Company Court, when it sanctions a scheme under Sections 391 to 393 of the Companies' Act, 1956, are wide. Before sanctioning a scheme, though approved by a majority of the creditors or members, the Court has to be satisfied that the Company or any other person moving the application for sanction, has disclosed all the relevant matters. The Court has to determine whether the scheme is fair, just and r....
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.... crore shares. Prior to the Scheme of Reduction, the shareholding of IL&FS in the Petitioner was 2.54% of the equity capital. As a result of the Scheme of Reduction, the holding of IL&FS would have increased to 8.13% of the equity capital of the Petitioner. Consequently, under the Scheme of reduction IL&FS was to be allotted 1.70 crore warrants. Upon the Scheme of Arrangement-cum-Reduction, the shareholding of IL&FS was brought down to five per cent, in addition to which, IL&FS held 1.70 crore warrants. 65. On 20 August 2009, IL&FS entered into a buy back agreement with La-Fin Financial Services Pvt. Ltd. (La Fin). The terms of the buy back agreement stipulated that La-Fin or its nominees would be under an obligation to purchase back the shares at any time after the completion of one year from the date of investment and no later than three years. On 14 December 2009, MCX addressed a letter to IL&FS seeking approval of the Scheme of Reduction, but confirmed that this would not be construed as a dilution of the terms of the Share Purchase Agreement and of the letter issued by La-Fin. On 11 August 2010, IL&FS addressed a communication to SEBI reaffirming that the buy back agreement....
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....e than five per cent of the equity capital, the divestment of their excess holding, so as to bring them in compliance with Regulation 8, must be genuine. The fact that the divestment of the shares held by a promoter in a stock exchange is accompanied by a buy back agreement is a material circumstance which must be disclosed to SEBI. On 21 July 2010, SEBI addressed a letter to the Petitioner adverting to a news article published on 19 July 2010, stating that the promoters of the Petitioner had entered into buy back agreements with the Banks who are shareholders of the Petitioner. In a reply dated 2 August 2010, the Petitioner informed SEBI that FTIL, as its promoter, had issued a letter of comfort dated 12 August 2009 to PNB without entering into a formal binding buy back agreement or shareholding agreement. It was stated that once the Scheme of Reduction was approved, the letter addressed by FTIL to PNB became infructuous and irrelevant. The Petitioner stated that it has complied with the MIMPS Regulations by virtue of the Scheme as approved and the shareholding of FTIL and MCX stood reduced to five per cent with no right to acquire even a single share in violation of limit prescri....
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....t, enter into any contract for the sale or purchase of any security specified in the notification except to the extent and in the manner specified therein. Sub-section (2) provides that all contracts entered into in contravention of the provisions of sub-section (1) shall be illegal. 72. In exercise of the powers conferred by Sub-section (1) of Section 16, the Central Government by a notification dated 27 June 1969 declared that save with its permission, no person shall enter into any contract for the sale or purchase of any security other than such spot delivery contract or a contract for cash or hand delivery or special delivery in any security as is permissible under the Act and the Rules, Bye-laws and Regulations of a recognized stock exchange. On 1 March 2000, the earlier notification was rescinded and a fresh notification was issued by which it has been declared that no person shall save with the permission of SEBI enter into any contract for the sale or purchase of securities other than a spot delivery contract or a contract for cash or hand delivery or special delivery or a contract in derivatives as is permissible under the SCRA or the SEBI Act, 1992; and the Rules and ....
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.... no liability for buying back the shares in future. In the case of IL&FS, La-Fin assumed an obligation to offer to purchase either through itself or its nominee the shares which were sold to IL&FS after the expiry of a stipulated period. In both cases, the option to sell rested in the unilateral decision of PNB and IL&FS, as the case may be. 75. In a buy back agreement of the nature involved in the present case, the promissor who makes an offer to buy back shares cannot compel the exercise of the option by the promisee to sell the shares at a future point in time. If the promisee declines to exercise the option, the promissor cannot compel performance. A concluded contract for the sale and purchase of shares comes into existence only when the promisee upon whom an option is conferred, exercises the option to sell the shares. Hence, an option to purchase or repurchase is regarded as being in the nature of a privilege. 76. In V.Pechimuthu v. Gowrammal [2001] 7 SCC 617. Mrs.Justice Ruma Pal, speaking for a Bench of the Supreme Court explained the nature of an option or privilege thus: "A privilege has been defined as a particular and peculiar benefit or advantage enjoyed by a....
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....ry, cash or special delivery. Where securities are dealt with by a depository, the transfer of securities by a depository from the account of a beneficial owner to another beneficial owner is within the ambit of spot delivery. 78. Reliance is sought to be placed by the Additional Solicitor General on a decision of Chief Justice M.C.Chagla, speaking for a Division Bench in Jethalal P.Thakkar v. R.N. Kapur AIR 1956 Bombay 74. In that case, an undertaking was furnished by the Defendant to the Plaintiff to sell off for the Plaintiff a stipulated quantity of shares of a Bank at a specified price within twelve months from the date on which the Bank was converted into a Financial Corporation and if at the end of twelve months, the Defendant was not able to sell off the shares for the Plaintiff, the Defendant accepted the obligation to take delivery of those shares against the payment of a stipulated amount to the Plaintiff without interest. The Defendant failed to sell off the shares within the time stipulated upon which the Plaintiff sued for damages on the strength of the contract. In that case, the provisions of the Bombay Securities Control Contract Act, 1925 came up for considerat....
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.... securities? The issue, as would be noted hereinafter, has been settled in a judgment of the Supreme Court. In Dahiben Umedbhai Patel v. Norman James Hamilton [1983] 85 Bom. LR 275/[1985] 57 Comp. Cas. 700 (Bom.) a Division Bench of this Court held that the definition of 'securities' requires marketability which the shares of a private Company do not possess and hence, that expression will only take in shares of a public limited company. In Brooke Bond India Ltd. v. U.B. Ltd. [1994] 3 Comp. LJ. 279/ 79 Comp. Cas. 346 (Bom.) a Learned Single Judge of this Court held prima facie at the hearing of a motion for interlocutory relief that a transaction of shares of a public limited Company unlisted on the stock exchange is not intended to be governed by the SCRA. In Mysore Fruit Products Ltd. v. The Custodian [2005] 107 Bom. L.R. 955 another Learned Single Judge held that the forward sale of shares even of public limited Companies which are not listed on the stock exchange are prohibited by the SCRA. This aspect of the controversy is now resolved by the decision of the Supreme Court in Naresh K.Aggarwala & Co. v. Canbank Financial Services Ltd. [2010] 6 SCC 178/ 100 SCL 425 (SC). The Sup....
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.... at a specified price was a ready forward contract and was unlawful. 80. In the present case, there is no contract for the sale and purchase of shares. A contract for the purchase or sale of the shares would come into being only at a future point of time in the eventuality of the party which is granted an option exercising the option in future. Once such an option is exercised, the contract would be completed only by means of spot delivery or by a mode which is considered lawful. Hence, the basis and foundation of the order which is that there was a forward contract which is unlawful at its inception is lacking in substance. 81. The Learned Additional Solicitor General, however, sought to sustain the finding of illegality by submitting that the buy back agreements constitute an option in securities within the meaning of Section 2(1)(d) and derivatives under Section 2(ac) of the SCRA and are violative of the provisions of Section 18A. Section 18A stipulates that notwithstanding anything contained in any other law for the time being in force, contracts in derivatives shall be legal and valid if such contracts are traded in a recognised stock exchange in accordance with the rule....
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....ing of ten per cent of the total equity capital of the Petitioner is not in compliance with Regulation 8 of the MIMPS Regulations. These findings have been challenged on behalf of the Petitioner and a substantial area of submission has covered the ambit and purview of Explanation (IV) to Regulation 8. 83. Regulation 8 contains a bar on a person resident holding directly or indirectly either individually or together with persons acting in concert, more than five per cent of the equity share capital of a recognized stock exchange. The expression "person acting in concert" is defined in Explanation (IV) to have the meaning "derived from" Regulation 2(1)(e) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. Regulation 2(1)(e) of the Takeover Regulations defines the expression "person acting in concert" as follows : (e) "person acting in concert" comprises.- (1) persons who, for a common objective or purpose of substantial acquisition of shares or voting rights or graining 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 v....
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.... origin. The act of deriving, it has been stated, is immediate and direct and is perhaps distinguishable from an act of tracing which may be a some what more gradual process. To derive a meaning is to obtain that meaning from a source or origin. The source indicated in Explanation (IV) is Regulation 2(1)(e) of the Takeover Regulations. 86. In construing the words of an explanation in a statute, it must be borne in mind that while traditionally, the function of an explanation is to explain the meaning of a word used in a statutory provision or to clear up any doubt, ultimately the issue is one of legislative intent. The position has been elucidated in the judgment of the Supreme Court in Dattatraya Govind Mahajan v. State of Maharashtra [1977] 2 SCC 548 thus: "...the orthodox function of an explanation is to explain the meaning and effect of the main provision to which it is an explanation and to clear up any doubt or ambiguity in it. But ultimately it is the intention of the legislature which is paramount and mere use of a label cannot control or deflect such intention. It must be remembered that the legislature has different ways of expressing itself and in the last analysis....
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...." in two parts. Clause (1) of Regulation 2(1)(e) refers to a situation where persons who, for 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 cooperate by acquiring or agreeing to acquire shares or voting rights in the target Company or control over the target Company. The elements which go to comprise clause (1) of Regulation 2(1)(e) are: (i) A group of persons who share a common object or purpose; (ii) The object or purpose is the substantial acquisition of shares or voting rights or gaining control; (iii) The object or purpose must be referable to a target Company; (iv) Such persons must act in pursuance of an agreement or understanding, though the agreement or understanding may be formal or informal; (v) Pursuant to the agreement or understanding, there must be cooperation between those persons directly or indirectly by acquiring or agreeing to acquire shares or voting rights in the target Company or control over the target Company. 88. The existence of a common object or purpose is an essential requirement of R....
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....n pursuance of an agreement or an understanding, formal or informal; the acquisition of shares etc. may be direct or indirect or the persons acting in concert may cooperate in actual acquisition of shares etc. or they may agree to cooperate in such acquisition. Nonetheless, the element of the shared common objective or purpose is the sine qua non for the relationship of "persons acting in concert" to come into being." Hence, it is now a settled principle of law that the relationship which the words "persons acting in concert" encompasses is one which comes into being by design. The existence of this design postulates a meeting of minds, the holding of a shared common object or purpose, the existence of an understanding and the implementation of that understanding in fulfilling the shared purpose of acquiring shares or voting rights or gaining control over the target Company. 89. A similar view has been taken in a judgment of a Division Bench of this Court in K.K. Modi v. Securities Appellate Tribunal [2003] 113 Com. Cases 418/[2002] 35 SCL 230 (Mum.) where it has been held that "the mere fact that a person is a promoter does not make him an acquirer, unless it is shown that h....
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....g the provisions of the Assam Land (Requisition and Acquisition) Act, 1948, that the legislature having provided that the provisions of the Land Acquisition Act, 1894, shall apply mutatis mutandis in respect of a reference made to the Court under the State Act, appropriate changes in the phraseology used in Section 23 of the Central Act may have to be made to apply the principles underlying those provisions to the state legislation. The Additional Solicitor General urged that there is a difference in the context and setting of the expression "persons acting in concert" used in the Takeover Regulations and, the definition of the expression in the Takeover Regulations must apply with due alteration of details. If such an interpretation is adopted, it was urged, there would be no requirement of a common objective of acquisition for the purpose of the MIMPS Regulations. 92. Now, it must be emphasized that Explanation (IV) to Regulation 8 provides that the expression "persons acting in concert" shall have the meaning derived from Regulation 2(1)(e) of the Takeover Regulations. The meaning ascribed to the expression "persons acting in concert" in Regulation 2(1)(e) is unless the conte....
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....ly adopt the heart and soul of the meaning and the existence of a common object and purpose constitutes the essence of the meaning of the expression "persons acting in concert". Regulation 8 is being applied to a situation where the promoters of a stock exchange held the entire equity capital before the process of divestment commenced. The mere fact that they are promoters is not sufficient to hold that they are acting in concert for the purpose of Regulation 8. If such an extreme position of interpretation were to be adopted, compliance with Regulation 8 norms would be illusory in a situation where the original position is that the entire share capital is held by promoters. Hence, the law requires something more to establish a case of persons acting in concert. The essential ingredients of the definition in Regulation 2(1)(e) must be fulfilled. 93. In CIT v. East Coast Commercial Co. Ltd. AIR 1967 SC 768 the Supreme Court construed the provisions of Section 23A of the Income Tax Act, 1922, while analysing as to when it could be said that a Company is one in which the public are substantially interested. By the Explanation to Section 23A(1), it was enacted inter alia that a comp....
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....sons acting in concert on the basis of a letter dated 14 December 2009 addressed by MCX to IL&FS and a letter dated 20 August 2009 addressed by La-Fin to IL&FS Financial Services. Moreover, it was alleged that FTIL and MCX are under the same management in terms of Regulation 2(1)(e)(2)(i) of the Takeover Regulations read with Section 370(1B) of the Companies' Act, 1956. Moreover, it was alleged that FTIL as on 31 March 2010, held 31.18% of the equity share capital of MCX and that by its dominant holding, FTIL is in control of MCX. 95. There are two limbs to the finding which has been arrived at by the Whole Time Member on the issue. First, the impugned order adverts to the letters dated 20 August 2009, addressed by La-Fin to IL&FS and to the letter dated 14 December 2009, addressed by MCX to IL&FS. The letter dated 20 August 2009, was addressed by La-Fin to IL&FS, following on a Share Purchase Agreement signed between MCX, IL&FS and the Petitioner on the same date. By the letter, La-Fin furnished an undertaking to offer to purchase all the shares which under the SPA were sold by MCX to IL&FS within a stipulated period. The price at which the shares would be offered to be purchas....
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....i) La-Fin together with Jignesh Shah and his family hold 45.53% of the equity share capital of FTIL; (iii) FTIL holds 31.18% of the equity share capital of MCX; and (iv) The website of FTIL shows the Petitioner and MCX as part of the FTIL group. In paragraph 52 of his impugned order, the Whole Time Member has concluded that FTIL and MCX are Companies under the same management under Section 370(1B)(i) of the Companies' Act, 1956 on the ground that they have a common manager, Mr. Jignesh Shah, and are, therefore, deemed to be persons acting in concert for the purpose of MIMPS Regulations. This finding in the impugned order is as follows : "The letters referred to above are those of Mr. Jignesh P. Shah, Director of La-Fin Financial Services Private Ltd., the promoter of FTIL. I find that, as brought out in the Notice, Mr. Jignesh Shah holds the positions of Chairman and Group Chief Executive Officer of FTIL, (a promoter of MCX-SX) and the Vice Chairman of MCX (the second promoter of SCX-SX). The Applicant has in his written submissions explained that he is only a non-executive Vice Chairman of MCX. Mr. Jignesh Shah has issued the undertakings referred to on behalf of MCX, FTIL, and....
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....dian Companies Act, 1913 as also the new Companies Act, 1956, which have a bearing on the question at issue. Since the Agreement between the assessee on the one hand and the Kamala Mills Ltd. On the other was entered into at a time when the Indian Companies Act, 1913 was in force it will be proper first to refer to the definition of 'Manager' given in s. 2(9) of the said Act. Section 2(9) ran thus: "2(9) "manager" means a person who, subject to the control and direction of the directors has the management of the whole affairs of a company, and includes a director or any other person occupying the position of a manager by whatever name called and whether under a contract of service or not. It will be clear that to satisfy the aforesaid definition a person, which could include a firm, body corporate or an association of persons, apart from being in management of the whole affairs of a company had to be "subject to the control and direction of the directors". This definition has undergone a substantial change under the Companies Act, 1956. Under this Act s. 2(24) defines the expression "manager" thus. 2(24) "manager means an individual (not being the managing agent) who, subj....
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....e Time Member of SEBI has not dealt with whether the principal requirement of a common objective or purpose has been fulfilled. The impugned order is, therefore, rendered vulnerable on account of its failure to apply the requisite legal standard that must determine whether the promoters were acting in concert within the meaning of Regulation 2(1)(e). 98. During the course of the hearing, a joint statement has been tendered to the Court on behalf of the Third and Fourth Respondents in the form of an undertaking signed by their Advocates in the following terms: "Joint Statement by Respondent Nos.3 and Respondent No. 4 The Respondent No.3 and 4 jointly and severally hereby undertake to reduce their total shareholding in the Petitioner so that they do not collectively exceed 5% shareholding in the Petitioner or such limits as prescribed under the MIMPS Regulations from time to time. Such reduction shall take place within such time line as directed by SEBI. Further the Respondent no.3 and 4 jointly and severally hereby undertake that in the event the options either under buy back or under the warrants is exercised then their shareholding either jointly or severally will not ....
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....st in not giving SEBI adequate information about the Scheme itself. 102. In the earlier part of this judgment, the issue of disclosure has been elaborated upon at length. The relationship of a stock exchange with SEBI must be founded on utmost good faith. Material and relevant facts which have a bearing on compliance with the Act and the Regulations which SEBI enforces must be disclosed. When SEBI, as a condition for the recognition of a stock exchange imposes a stipulation of compliance with the provisions of the MIMPS Regulations - and it may be compliance of the relevant provisions as the subsequent notification imposes - there has to be a genuine and honest compliance with the requirements of the Regulations. The Petitioner and its promoters may be correct in asserting that the existence of the buy back agreements does not ipso facto result in a violation of the MIMPS Regulations, in the present, once the shareholding of the promoters is brought within the permissible limit. The buy back involves an option which may or may not be exercised in the future. The promoters submit that they have several courses of action open to ensure that their shareholding does not exceed the s....
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....he Petitioner is not a fit and proper person necessarily ceases to exist. Another circumstance which must be borne in mind is that during the course of the proceedings before SEBI, an undertaking has been tendered on behalf of the promoters that the statutory limit which has been prescribed under the MIMPS Regulations would not be exceeded. Moreover, during the course of the proceedings before this Court, the undertaking which has been tendered by the promoters is even more specific and stringent: that notwithstanding the exercise of the option under the buy back or the warrants, the shareholding of both the promoters together jointly or severally will not exceed five per cent. There has, hence, been a bona fide effort on the part of the Petitioner and its two promoters to ensure that they do not breach the provisions of the MIMPS Regulations by undertaking to the Court that the shareholding of the promoters together shall not exceed the limit of five per cent prescribed under the MIMPS Regulations for a resident. XIV : Conclusion: 104. In this view of the matter, the conclusions which have been arrived at in the course of the judgment may now be revisited in determining the ....
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....mining as to whether the provisions of the MIMPS Regulations have been complied with. SEBI is independently entitled to ensure compliance with the MIMPS Regulations which have been made a condition for the grant of recognition. The statutory functions conferred upon SEBI under the SCRA and cognate legislation are not diluted; (vi) During the course of the proceedings before SEBI as well as before this Court, undertakings have been filed by the promoters to the effect that the provisions of the MIMPS Regulations including the ceiling on the holding of the shares would be complied with notwithstanding the exercise of the option under the buy back agreement and the warrants for the allotment of shares. Both the promoters have now held themselves down to hold together, jointly and severally no more than five per cent of the equity capital. There is no reasonable basis to reject the undertakings which have been filed; (vii) The buy back agreements cannot be held to be illegal as found in the impugned order of the Whole Time Member of SEBI on the ground that they constitute forward contracts. A buy back confers an option on the promisee and no contract for the purchase and sale of ....
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....incipal test enunciated by the judgment of the Supreme Court in Daiichi Sankyo Co. Ltd. (supra) in determining as to whether certain persons may be held to be acting in concert. The mere fact that two persons have come together in promoting a Company does not lead to the inference that they are acting in concert for the purposes of the Takeover Regulations. The further finding of the Whole Time Member of SEBI that the two promoters of the Petitioner had a common Manager is based primarily on the execution of one letter. The finding does not take into account the test spelt out by the Supreme Court in Alagappa Textile (supra) that a person in order to be a manager within the meaning of Section 2(24) of the Companies' Act, 1956 must have the management of the whole or substantially the whole of the affairs of the Company and be subject to the superintendence, control and directions of the Board of Directors. The findings which have been arrived at in the impugned order are contrary to law since they ignore the relevant legal tests which have been laid down by the Supreme Court; (xi) In any event, both the promoters of the Petitioner have, during the course of the hearing of these ....