TaxTMI 
TaxTMI 
2016 (11) TMI 297
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....ny are listed on the Bombay Stock Exchange Limited (BSE) and the National Stock Exchange of India Limited (NSE). 3. On November 12, 2009, Mr. Pramod Jain and Pranidhi Holdings Private Limited (the acquirers) along with J.P. Financial Services Private Limited (the person acting in concert (PAC) made PA through VC Corporate Advisors Private Limited (the merchant banker) in accordance with regulations 10 and 12 read with regulation 14. As on the date of the PA, the acquirers and PAC collectively held 11, 39, 002 equity shares (6.47%) of the target company. The PA was voluntarily made by the acquirers and the PAC to acquire 44, 02, 201 equity shares (25%) of the target company from its equity shareholders at a price of Rs. 101/- (the offer price) per equity share. At that time, market price of the target company shares was Rs. 109/- per share. Networth of the target company as on 31st March, 2009 was Rs. 42.44 crores. Net current assets were Rs. 134.4 crores and gross sales were Rs. 173.68 crores. The offer was for hostile takeover of the target company. The PA mentioned that the prime object of the offer was to acquire substantial shares/voting rights accompanied with the change an....
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.... shareholdings. Disputes were pending before the arbitrator arising out of default in payments. Most valuable assets of the target company had been encumbered in violation of SEBI regulations and against the interest of minority shareholders and the acquirers. Since the date of PA, financial position of the target company had deteriorated substantially. ORDER OF SEBI 6. The SEBI vide order dated 13th April, 2012 declined to permit withdrawal of the PA but observed that alleged violation of Regulation 23 by the target company shall be investigated. It was held that as per Regulation 23(1), the target company was entitled to dispose of its assets with the approval of the shareholders even after the PA. Correspondence which the SEBI had with the acquirers was referred to, with a view to explain the delay in deciding the DLO. It was observed that the SEBI had informed the merchant banker of the appellants on 3rd February, 2010 that it was not competent to administer the authenticity of the process of Resolution in the General Body Meeting (GBM) dated 18th January, 2010. The merchant banker vide letter dated 5th May, 2010 informed the SEBI that the acquirers had reached a settleme....
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....d 6.47 per cent shares. Discovery of adverse effects pertaining to financial health subsequent to the PA could not be a ground to withdraw the PA. Doing so will jeopardize the interests of the shareholders. The takeover regulations laid down a self-contained code and withdrawal of public offer was not governed by principles of withdrawal of an offer under the Contract Act, 1872. ORDER OF SAT 7. The above view has been affirmed by the SAT in its impugned order (by majority). As regards the timeline stipulated in Regulation 18, it was observed that under the second proviso thereto, the SEBI could take time in making inquiry on a complaint and thereafter could call for a revised letter of offer with or without re-scheduling the date of opening or closing the offer. However, it was observed that in the present case, SEBI was wholly unjustified in taking more than two years for offering its comments on the letter of offer submitted by the appellants. This, however, did not constitute a ground to permit withdrawal of the PA. As regards the contention that the public offer was frustrated and became impossible of implementation on account of encumbering of the most valuable property ....
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....ublic offer, appellants had filed Company Petition No. 3 of 2010, wherein specific grievance was made to the effect that GTL had entered into MOU with Sheth Developers without disclosing all material facts to the shareholders and without the approval of shareholders which was in gross violation of regulation 23 of SAST Regulations, 1997. It was also alleged in the Company Petition that the promoters of GTL have been mismanaging the affairs of the company and have siphoned of huge amounts from the company, as a result whereof, there has been deep decline in the performance and profitability of the company. Appellants had also sought an order restraining GTL from holding EGM which was scheduled to be held on January 18, 2010. 16. Company Law Board in its order dated January 19, 2010, recorded statement made by counsel for GTL that in the EGM held on January 18, 2010 requisite resolutions have been passed in relation to development of Vile-Parle property and in implementation of the said resolution third party rights have been created. By that order Company Law Board directed that during the pendency of Company Petition No. 3 of 2010 GTL shall not act upon resolution dated Ja....
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....appellants on April 26, 2011 and that ad- interim order continues to be in operation till date. Therefore, irrespective of the fact that SEBI was not justified in taking more than two years for approving the draft letter of offer, in the facts of present case, grievance of appellants that the public offer is frustrated and has become impossible of performance cannot be accepted, because, both grounds based on which appellants had sought withdrawal of public offer, were in fact settled by appellants on the basis of oral assurance given by promoters of GTL and further, for the alleged breach of oral assurance, appellants have filed Suit in the Bombay City Civil Court and obtained stay of development of Vile-Parle property and that stay is admitted operating till date. 23. Strong reliance was placed by counsel for appellants on decision of SEBI dated February 14, 2014 wherein penalty of Rs. 1 crore has been levied against the promoters of GTL interalia for violating regulation 23 of SAST Regulations, 1997. No doubt that entering into an MOU by GTL with Sheth Developers on November 26, 2009 without obtaining approval of general body of shareholders was in violation of regulati....
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....ation having changed to the prejudice of the appellant, the appellants are entitled to withdraw their offer. Since under the scheme of the regulations, the appellants could not withdraw the offer once made except in circumstances mentioned in Regulation 27, the regulation should be read as creating an obligation on the part of the SEBI to take speedy decision and if there was unexplained delay resulting in prejudice to the appellants-acquirers, the appellants are entitled to be absolved of the liability to honour the offer. GTL had become a BIFR company on account of siphoning off funds by the promoters. It was submitted that in absence of obligation to approve the offer within reasonable time, the promoters could take steps to siphon the funds or dispose of the assets which could prejudice the interests of the acquirer. Thus, it could not be held that the acquirer was indefinitely bound by the offer. Reference was also made to the timeline provided in Regulation 22 and the provisions of Regulation 23. It was submitted that while normal ups and downs in the market may not be a ground to permit withdrawal of offer, unilateral action of the promoters resulting in transfer of assets c....
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....21 days after the PA. Complaints against the appellants were frivolous. The appellants duly responded to the complaints in timely manner. The complaints were made at the behest of the promoters. The appellants pointed out various illegal acts of the promoters but the SEBI failed to take any action. The appellants requested the SEBI to keep the open offer in abeyance till action was taken against the promoters. This justifies the prayer of the appellants to withdraw the open offer. 12. Shri C.A. Sundaram, learned senior counsel for the appellants submitted that all the members of the SAT (majority as well as minority) have held the delay by SEBI to be unjustified but still, on erroneous interpretation, right of the appellants to withdraw the public offer has not been upheld. Reference was made to the complaint about transfer of valuable property of the Company which was un-encumbered at the time of PA. The funds raised from the transaction have been siphoned off. One of the key promoters was arrested by the Economic Offences Wing of the Police and remained in jail for one and a half years. Chargesheet was filed against him. The financial ratio of the target company reflects manne....
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....smanagement or other illegalities, remedy was under Section 397/398 of the Companies Act which remedy the appellants had taken. The appellants reached an amicable settlement with the target company and thereafter approached the civil court. It was wrong to state that the target company had become defunct. The target company continued to own the Vile Parle property worth Rs. 2000 crores. 16. Shri Datar submitted that more than 43 complaints/letters were received which were to be dealt with by SEBI. In such circumstances, it could not be held that there was undue delay on the part of the SEBI in dealing with the DLO. 17. It was submitted that the appellants ought to have exercised due diligence before making the PA. The appellants were not strangers and had 6.47% shares. They had advanced loan of Rs. 8.5 crores and acquired shares worth Rs. 66.33 lakhs before the PA. They were aware of the FIR and alleged acts of mismanagement they had resorted to public offer out of frustration against the decision of the target company developing the Vile Parle property with Sheth Developers. They settled the matter before the Company Law Board with the target company and also approached the ....
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....measures to repel an unwanted takeover) sale of valuable assets, etc. 20. Justice P.N. Bhagwati Committee was appointed in November, 1995 to review the existing framework of regulations and to suggest amendments in the interest of investors and all parties concerned in the acquisition process. The Committee kept in mind the following principles : "i. Equality of treatment and opportunity to all shareholders. ii. Protection of interests of shareholders. iii. Fair and truthful disclosure of all material information by the acquirer in all public announcements and offer documents. iv. No information to be furnished by the acquirer and other parties to an offer exclusively to any one group of shareholders. v. Availability of sufficient time to shareholders for making informed decisions. vi. An offer to be announced only after most careful and responsible consideration. vii. The acquirer and all other intermediaries professionally involved in the offer, to exercise highest standards of care and accuracy in preparing offer documents. viii. Recognition by all persons connected with the process of substantial acquisi....
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.... Board. (2) The letter of offer shall be despatched to the shareholders not earlier than 21 days from its submission to the Board under sub-regulation (1): Provided that if, within 21 days from the date of submission of the letter of offer, the Board specifies changes, if any, in the letter of offer (without being Page 35 of 75 under any obligation to do so), the merchant banker and the acquirer shall carry out such changes before the letter of offer is despatched to the shareholders : [Provided further that if the disclosures in the draft letter of offer are inadequate or the Board has received any complaint or has initiated any enquiry or investigation in respect of the public offer, the Board may call for revised letter of offer with or without rescheduling the date of opening or closing of the offer and may offer its comments to the revised letter of offer within seven working days of filing of such revised letter of offer. (3) The acquirer shall, while filing the draft letter of offer with the Board under sub-regulation (1), pay a fee as mentioned in the following table, by bankers' cheque or demand draft drawn in favour of the 'Securities and Exchan....
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....vestors, the intermediaries or any other person on any matter having a bearing on the allegations of substantial acquisition of shares and takeovers ; (b) to investigate suo motu upon its own knowledge or information, in the interest of the securities market or investors' interest, for any breach of the regulations; (c) to ascertain whether the provisions of the Act and the regulations are being complied with for any breach of the regulations." 22. In Nirma Industries Limited (Supra), the acquirer after making PA sought withdrawal therefrom on the ground of embezzlement of funds by the target company. SEBI rejected the application with the observation that the acquirer ought to have used due diligence prior to making the public offer. Rejecting the plea that the embezzlement and siphoning off of funds by the target company could not have been found by third party even after exercising diligence, this Court held under the scheme of the takeover code public offer once made could not be withdrawn so as to deprive the shareholders of their valuable right to have exit option and also to ensure that public announcement is not made by way of speculation. The scheme of....
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....on to permit withdrawal of an offer even though it is not impossible to perform. We are unable to accept such an interpretation. 67. Applying the aforesaid tests, we have no hesitation in accepting the conclusions reached by SAT that clauses (b) and (c) referred to circumstances which pertain to a class, category or genus, that the common thread which runs through them is the impossibility in carrying out the public offer. Therefore, the term "such circumstances" in clause (d) would also be restricted to a situation which would make it impossible for the acquirer to perform the public offer. The discretion has been left to the Board by the legislature realising that it is impossible to anticipate all the circumstances that may arise making it impossible to complete a public offer. Therefore, certain amount of discretion has been left with the Board to determine as to whether the circumstances fall within the realm of impossibility as visualised under clauses (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 loss....
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....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. In such circumstances, in our opinion, the judgments cited by Mr Shyam Divan are of no relevance. " 24. As regards the effect of delay on the part of SEBI, it was observed: "94. A perusal of the aforesaid Regulation clearly shows that the acquirer is required to file the draft letter of offer containing disclosures as specified by the Board within a period of 14 days from the date of public announcement. Thereafter, letter of offer has to be dispatched to the shareholders not earlier than 21 days from its submission to the Board. Within 21 days, the Board is required to specify changes if any, that ought to be made in the letter of offer. The merchant banker and the acquirer have then to carry out such changes before the letter of offer is dispatched to the shareholders. But there is no ob....
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....EBI was required to dispatch the necessary letters to the shareholders within a reasonable period. It is a matter of record that the comments were not offered for 13 months. Such kind of delay is wholly inexcusable and needs to be avoided. It can lead to avoidable controversy with regard to whether such belated action is bona fide exercise of statutory power by SEBI. By adopting such a lackadaisical, if not callous attitude, the very object for which the Regulations have been framed is diluted, if not frustrated. It must be remembered that SEBI is the watchdog of the securities market. It is the guardian of the interest of the shareholders. It is the protective shield against unscrupulous practices in the securities market. Therefore, SEBI like any other body, which is established as a watchdog, ought not to act in a lackadaisical manner in the performance of its duties. The time-frame stipulated by the Act and the Takeover Regulations for performing certain functions is required to be maintained to establish the transparency in the functioning of SEBI. 31. Having said this, we are afraid such delay is of no assistance to the respondent. It will not result in nullifying th....
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....ine prescribed under the Regulations may not be adhered to when the SEBI justifiably takes time in dealing with the complaints, as rightly submitted by Shri Datar, in the present case, the stand of the SEBI itself is that it could not go into the complaints for which the right forum was CLB. As regards the time taken in dealing with the complaints against the acquirers, the SEBI could have promptly proceeded with the matter. However, mere upholding of finding of SAT on the aspect of delay by SEBI is not enough to hold that the appellants are entitled to withdrawal of the public offer. The withdrawal has to be dealt with under Regulation 27, as held by this Court. The general principle is that public offer once made cannot be withdrawn. Exception to the rule is the specified situations under the Regulation as laid down by this Court in above decisions particularly in Nirma Industries Limited (Supra) (2013) 8 SCC 20 para 67 . In the present case, though SEBI was not justified in causing delay in giving its comments on public offer, this by itself is not enough to justify withdrawal from public offer so long as the case does not fall under Regulation 27. First question is answered acc....