TaxTMI 
TaxTMI 
2003 (8) TMI 565
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....with them" were directed to:- Disinvest shares in the Target Company acquired in violation of the Listing Agreement and the 1994 Regulations (i.e. beyond the then existing threshold limit of 10%) through an offer for sale to public in terms of an offer document, subject to the following: a that for the purpose the Appellants appoint a registered merchant banker b that the offer price shall be at the face value of the shares as on the date of the impugned order or the lowest price at which these shares were acquired, whichever is lower c that the offer for sale shall be for a minimum number of shares so as to reduce the shareholding of KRC and MDC and persons acted in concert with them in the Target Company, to less than 10% d that the offer document for the purpose shall be filed with SEBI within 3 months from the date of the impugned order. Ordered to initiate adjudication against KRC and MDC and persons acted in concert with them, under section 15A and 15H of the SEBI Act. 2. The acquisition of shares by the Appellants and persons stated to have acted in concert with ....
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....res of the Target Company were also purchased -- i.e. 0.56% by IMFA, 1.31% by Beethoven Traders Pvt. Ltd., and 0.27% by Darrel Traders Pvt. Ltd. These purchases were made during the currency of the 1997 Regulations. These three lots of shares purchased are not specifically stated in the show cause notice. As per the impugned order approximately 47.48% of the paid up capital of the Target Company were acquired by the Appellants during the period 1993-1997. The said 47.48% shares consisted of 27.21% acquired prior to the notification of the 1994 Regulations, 19.71% during the currency of the 1994 Regulations and 0.56% during the currency of the 1997 Regulations. Acquisition of 1.31% by Beethoven Traders and 0.27% by Darrel Traders seem to be not included in the total acquisition of shares, worked out by SEBI. 6. The 1994 Regulations was notified on 7.11.1994. The 1997 Regulations was notified on 20.2.1997. It repealed the 1994 Regulations. The acquisition of shares of the Target Company (excluding acquisition of shares made prior to the notification of the 1994 Regulations) was subject matter of a suit (Suit No.3910 of 1997- M. Sreenivasulu Reddy V Kishore R. Chhabria) in the Hon&....
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....4, it may not be proper to us to suggest what orders it may pass. We leave it to the SEBI to pass such orders as it may deem fit and proper, and nothing said in this order should be construed as expression of our opinion on the question as to whether, the defendants should be permitted to make a post facto public offer or not." SEBI adjudicated the show cause notice and passed the impugned order inter alia directing the Appellants and the persons acted in concert with them to disinvest the shares held by them in the Target Company acquired allegedly in violation of the provisions of the Listing Agreement/the provisions of the 1994 Regulations, at the price specified in the order. 7. The appeals were agrued at length by the Senior Counsel appearing for the parties. They have also filed written submissions The submissions having a bearing on the issues involved are summarised as follows: Submissions on behalf of KRC Shri Kapil Sibal, learned Senior Counsel appearing for KRC briefly stated the factual matrix of the case, and made the submissions as follows: On 14.12.93 six subsidiary companies of Galan Finvest Pvt. Ltd. (Galan) purchased shares aggregating to 26% in the capit....
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....king the public announcement as contemplated under the said Regulations. Second, that the said acquisition was funded by MDC inasmuch as MDC had made available a sum of Rs. 4.13 crores from his proprietary concern Royal Wines. It has been suggested by SEBI that inasmuch as MDC is the uncle of KRC, was a director of some of the Galan subsidiaries, and further, inasmuch as MDC can be deemed to have acted in concert with IMFA or its directors in the acquisition of the said 10.91% shares, such acquisition was hit by the provisions of the 1994 Regulations as even the acquisition of a single share would have required a public announcement to be made under the said Regulations. The third lot of acquisition was made by Mahameru of 4.97% of the Target Company's equity shares from the market between 14.11.95 and 10.8.96. Again, the challenge by SEBI to such acquisition is on two grounds. First, that such acquisition could not have been made as the holding of the KRC/MDC combined by then exceeded 38% (and, thereby, well above the threshold limit). Second, that MDC actually funded such acquisition and in so doing, such acquisition was violative of the provisions of the 1994 Regulations as ....
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....at even a non-party to such listing agreement could be penalized, that Section 23(2) of the SCRA prescribes a fine of Rs. 1,000/- payable on conviction by a magistrate in terms of the criminal process prescribed under the SCRA, that for the first time on 25.1.95, Section 23(2) prescribed such penalty, that the Listing Agreement itself was referred to in the SCRA for the first time, by an amendment to Section 21 made on 25.1.95. The acquisitions by the Galan subsidiaries made on 14.12.93 are not and cannot be covered by such amendments, which came into force much later i.e. on 25.1.95 Even after the aforesaid amendments, the Listing Agreement has not been made legally binding on any person other than the listed company, that Clauses 40A and 40B would apply to an acquirer if such acquirer was itself a listed company, not otherwise. Therefore, at the time of acquisition there was no law prescribing any penalty of the nature inflicted by SEBI in the impugned order. SEBI cannot invoke the general provisions of section 11 and 11 B of the SEBI Act since any breach of Listing Agreement could be actionable only under the SCRA and not under the SEBI Act. The Securities Contract Regulation Ru....
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....f the 1994 Regulations. The definition of "acting in concert" is relevant only for the purpose of acquisition and at the time of acquisition. A post acquisition "acting in concert" for holding shares and lending support to another holder cannot render the acquisition bad, that as a matter of fact, even "acting in concert" is permissible provided the provisions of Regulation 10 are complied with. The deeming provision contained in the inclusive definition of "person acting in concert" may raise a rebut table presumption that by virtue of the position of one or more person vis-a-vis the acquirer (such person or persons were acting in concert with the acquirer). Even assuming that MDC funded the acquisition of the said 10.91% shares by IMFA , only MDC alone can be said to have acted in concert with IMFA or its directors or vice versa and no more. If persons who are said to have acted in concert with the acquirer do not fall within the inclusive definition of Regulation 2(d), it has to be established that such person acted in concert with the acquirer i.e. acquired shares for a common objective. Mere conjecture and surmise cannot replace the legal requirement of proof. In respect of th....
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.... similar finding in the Impugned Order, merely record submissions made by Counsel appearing on behalf of the Respondent-Plaintiffs and that they are not findings by the Court. In any view of the matter, it was improper on the part of SEBI to have relied on an allegation of fact appearing in the reported judgment without such charge being either investigated or made part of the Show Cause Notice. On the basis of a factually incorrect allegation of MDC allegedly holding 20% shares in Galan even at the time of Galan acquiring the 27.21% shares in the Target Company it has been insinuated that such holding shows some link between Galan and the IMFA's acquisition of these shares. At the time of Galan's acquisition of the 26% shares and 75,000 debentures, MDC was not a shareholder of Galan. The Show Cause Notice of 8.1.1999 alleged in paragraph 1 thereof that at the time of acquisition of the 27.21% shares by Galan, MDC held 20% of the paid up capital of the Galan, that such erroneous fact was refuted by MDC in his reply to the Show Cause Notice and also by KRC. In the impugned order, it has been recorded that at the time of acquisition of the Target Company's shares by Galan....
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....and IMFA were part of the same group. At the relevant point of time, the 1997 Regulations permitted creeping acquisitions upto 2% during any continuous period of 12 months in terms of Regulation 11 of the 1997 Regulations. The IMFA creeping acquisition of 0.56% was made between 27.2.97 and 1.8.97. The Beethoven purchase of 1.31% by way of creeping acquisition was made between 10.8.98 and 16.12.98. The Darrel purchase of 0.27% was made on 16.12.98. It is thus evident from the aforesaid dates that during no continuous period of 12 months did the creeping acquisition exceeded the then permissible limit of 2%, that the only requirement for a creeping acquisition to be permissible was the making of a declaration in terms of the 1997 Regulations, that once the declarations were made as aforesaid pursuant to the 1997 Regulations, the creeping acquisition could not be challenged. In fact, there is no challenge to the creeping acquisitions in the Show Cause Notice. However, inasmuch as the impugned order has directed KRC/MDC and all companies under their control to reduce their combined shareholding to 10%, the share acquired under the creeping acquisitions also get affected, although there....
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....oss to the Appellant, the said Impugned Order is without jurisdiction. The maximum penalty permissible for breach of the SEBI takeover Regulations is a sum of Rs. 5 lakh as provided in section 15H of the SEBI Act, 1992. It was submitted that by way of an order under a subordinate legislation (the takeover Regulations) a punitive measure of greater pecuniary value cannot be imposed. 13. It was submitted that the jurisdictional pre-condition for making an order under Regulation 44 of the 1997 Regulations was not complied with. The sustainability of an order under Regulation 44 would depend on whether such order is in the interest of the Securities market. In the instant case, the direction is clearly not in the interest of the Securities market, as such direction would really result in the market capitalization of the Target Company being reduced, the value of the shares in the hands of small investors dwindling, and only entrenched management in the Target Company benefiting. Primarily the takeover Regulations are aimed at protecting the rights of the small investors and to ensure that due declarations are made to the target company so that the management is not taken by surprise....
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....o Shri Mallya had been set up to file the suit since Mallya and the Target Company, could not challenge the acquisitions, having despite initial reservations registered the 10.91% shares of IMFA and even the 4.97% shares acquired by Mahameru. The defendants alleged that the Plaintiffs had no locus standi to maintain the suit inter alia as the Plaintiffs were not interested in any of the impugned shares as transferors or transferees thereof. 15. Though the suit was filed in 1997 and the initial Interlocutory application moved therein contemporaneously, the Plaintiffs really pressed for interim orders upon a notice being issued on behalf of some of the defendants for removal of directors of the Board of Companies and for the appointment of directors supported by such defendants. Such interlocutory application was disposed off by the Court by directing the voting rights in respect of Imfa, Mahameru, Shrirish, Beethoven and Darrel shares to remain frozen, pending disposal of the suit. The prayer regarding the freezing of voting rights in respect of the 3,75,000 shares which had been allotted upon the conversion of the debentures purchased by the Galan subsidiaries was, however, reje....
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....aragraph 183: "...... Since SEBI has issued notices for breach of SEBI Regulations of 1994, it may not be proper to us to suggest what orders it may pass. We leave it to the SEBI to pass such orders as it may deem fit and proper, and nothing said in this order should be construed as expression of our opinion on the question as to whether, the defendants should be permitted to make a post-facto public offer or not.(emphasis supplied) 17. The Appellant submitted that the directions contained in the impugned order must only be sustained by the reasons contained in the impugned order itself. The reply by SEBI in the present proceedings to justify the impugned order or the directions contained therein which are contrary to the reasons set out in the order cannot be taken into account. Cited Mohinder Singh Gill V Chief Election Commissioner (AIR 1978 SC 851) for the proposition that quasi judicial orders have only to be supported by the reasons contained therein and the reasons cannot be subsequently introduced or added. The Appellant relied on the decisions of this Tribunal in Sterlite Industries V SEBI (2001 (34) SCL 485) and Mega Resources Ltd. V SEBI (2002 (36) SCL 569) f....
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....arlier orders/ directions passed by Chairman, SEBI. In support of the Appellant's aforesaid contention, the following three Supreme Court decisions were cited: (i) Assistant Transport Commissioner, Lucknow V Nand Singh (1979 (4) SCC 19) Para 2 at Pg 20 ".... The order must be communicated either directly or constructively in the sense of making it known, which may make it possible for the Authority to say that the party affected must be deemed to have known the order. In a given case, the date of putting the order in communication under certain circumstances may be taken to be the date of the communication of the order or the date of the order but ordinarily and generally speaking, the order would be effective against the person affected by it only when it comes to his knowledge either directly or constructively, otherwise not." (ii) Collector of Central Excise, Madras V M. M. Rubber and Co. (1992 (1) SCC 471) Para 12 at Pg 477 "...... The date of such order or decision is a date on which the order or decisions was passed or made; that is to say when he ceased to have any authority to tear it off and draft a different order and when he ceased....
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.... brought into force. .... If the award is pronounced in the presence of the party whose rights are affected by it can be said to be made when pronounced ... ... ... The knowledge of the party affected by the award, either actual or constructive, being an essential requirement of fair play and natural justice, the expression "the date of the award" used for the proviso must mean the date when the award is either communicated to the party or is known to him either actually or constructively." 20. It was submitted that all the above citations/decisions were brushed aside by the Counsel of SEBI on the ground that all the said decisions pertain to the question of limitation and that the decision set out at item (iii) above pertains to an award which is only an offer, that whether or not these cases relate to limitation is not relevant for the instant case, that these authorities indeed support the case of the Appellant that the SEBI Chairman had not only passed his order but had also communicated the same to MDC's representative. 21. On the concept of person acting in concert it was submitted that: According to (Clause 2 (d) of 1994 Regulations) Persons Ac....
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....t by virtue of the position of one or more persons such persons may be said to be acting in concert. Once, however, persons charged with acting in concert, do not fall within the inclusive definition, their mere positions, would not be the basis for establishing acting in concert. That is to say, a person as a shareholder or a person as a director may not be deemed to be in concert unless an active co-operation between that person and another is shown or established. 24. This aspect of co-operation was noticed by the Bhagwati Committee prior to the 1997 Regulations. The inclusive definition in 2(d) of the 1994 regulations was altered in the 1997 Regulations. A sub-clause was introduced to indicate which persons would be deemed to have acted in concert. 25. The cooperation that is necessary to be established to satisfy the expression "agreement or understanding" has to be a co-operation in course or in aid of the substantial acquisition, that a subsequent getting together or a subsequent co-operation for some further acquisition would not be material for the previous acquisition, if the previous acquisition is impugned. 26. The position of each of the entities viz. IMFA, Ma....
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....FA nor any co-operation between Galan and MDC for that matter. Since neither MDC nor Raheja attract the inclusive definition of 2 (d) of the 1994 Regulations, the mere fact that Shri Ram Raheja is a director in some Galan subsidiary or a nominee share holder in one of the Galan subsidiaries does not make him a person acting in concert in the matter relating to IMFA acquiring substantial shares in Herbertsons. Similar is the case with MDC. 27. In respect of Mahameru it was submittesd that Mahameru did not have either any holding company or any subsidiary. The directors and shareholders of Mahameru at the time of acquisition of 4.97% were either Mr. H.S.R. Sharma and Mrs. Sophia Sawant (upto December 5, 1995) or Mr. R. M. Sanghvi and Mr. Abid Ali (upto September 4, 1996). Thereafter the directors and shareholders in the ratio of 50 : 50 were Mrs. A. A. Kakade and Mr. S. Masand. It was only on February 13, 1997, that Sevenstar took over the entire capital of Mahameru and MDC became a director on the board. Therefore, until this date neither KRC nor MDC can be said to have been a person deemed to have been acting in concert with Mahameru. Neither MRC nor MDC are relatives of any of ....
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....ord "relative" has the same meaning in sub clause (A) and (B) in the Explanation to Regulation 2(1)(d) of 1994 Regulations. 2 Commissioner of Income-tax V East Coast Commercial Co. Ltd. AIR 1967 SC 768: Proposition: Evidence of acting in concert has to be inferred. This reported case was in connection with Section 23(A)(1) of the Income Tax Act 1922. The expression "acting in concert" was not used in the said section or in that Act. The expression "acting in concert" was used by the Supreme Court as an English expression. In the instant case "persons acting in concert" is a defined term in the Regulations and there is no scope for relying on the expression as it is ordinarily used in ordinary parlance. 3. Delhi Development Authority V Skipper Construction Co. P. Ltd. (AIR 1996 SC 2005) Proposition: Lifting of corporate veil ; Court's power to remedy wrongs. The question of lifting of corporate veil is irrelevant in this case as no person has ever hidden behind any corporate veil. KRC has come forward (by letter dated 9.1.1996) to own up the shares that he controlled; MDC has volunteered information (by his note dated 22.7.19....
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....action" had been taken under the 1994 Regulations, has to be decided on fact. The only "thing" relied upon is the purported enquiry made vide the 9.6.1995 letter by SEBI. The 1994 Regulations do not contemplate any "enquiry" nor is the word used in the 1994 Regulations. Assuming that by the enquiry started by the 9.6.1995 letter, there indeed was some "thing" done as required by clause 47(2) of the 1997 Regulations, such enquiry related only to 38% shares (Galan 27.21% + Imfa 10.91%) In respect of the other acquisitions nothing was done or any action taken. In any view of the matter "the enquiry" was completed upon the Target Company replied to the letter dated 9.6.1995. It may also be borne in mind that even the show cause notice issued to Shri Ram Raheja has been "rightly" dropped by SEBI. 7. Public Prosecutor V R. Raju (AIR 1972 SC 2504): Proposition: "Anything done" includes "omission" The expression "anything done or any action taken" in the present case is to be read in the light of the repeal and the savings provisions contained in Regulation 47 of the 1997 Regulations. In the reported judgement, the Hon'ble Supreme C....
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....ial and can not be looked into In both the reported cases it was held that notings in files made by Government Officers in discharge of administrative duties cannot be taken cognizance of. In the second case the question before the Hon'ble Supreme Court was whether in making of notings any contempt had been committed, that the Court held there was no contempt.On facts, these cases are distinguishable. In the instant case the order that was noted in the file was a quasi-judicial order passed by the SEBI Chairman that such a quasi-judicial order, assumes finality when it is made and recorded and leaves the hands of the quasi-judicial authority. 10. U. P. State Electricity Board V City Board, Mussoorie (1985 (2) SCC 16); Surinder Singh V Central Government (1986 (4) SCC 667): Proposition : When Regulations not framed, the act is applicable. In both the cases, Regulations under the relevant Acts had not been framed, therefore, the provisions of the Act were resorted to. There is no quarrel with the proposition. It is however, irrelevant in the facts of the instant case. The cases have been cited in the context that prior to the 1994 Regulations a....
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....dvocates/Solicitors on behalf of their client viz. Sreenivasulu Reddy & Ors. wrote to Chairman SEBI on 27.1.98 requesting SEBI not to reach the final conclusion in Herbertsons Takeover matter until SEBI receives written opinion from "an eminent jurist" which will be forwarded by them to SEBI by 31.1.1998. Bachubhai Munim & Co. Advocates and Solicitors are also representing Vijay Mallya before SEBI as well as SEBI Appellate Tribunal. A confidential letter dated 29.1.98 from "the eminent jurist" to the Executive Director (Legal)of SEBI forwarding a note in regard to Herberstons matter for the perusal and requesting her to go through it very carefully so that it will give her an idea of the issues involved was sent. In the said note it was also recorded that "the eminent jurist" will contact her on the following day. 32. Bachubhai Munim & Co., vide letter dated 10.2.98 to the Chairman SEBI forwarded a copy of the written opinion of "the eminent jurist" dated 10.2.1998 SEBI forwarded MDC's letter dated 20.1.1998 as Investor's complaint to Herbertsons Ltd.. Hariani & Co. Solicitors for Herbertsons Ltd. sent a letter to SEBI in reply to SEBI's letter 3.2.1998 requesting fo....
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....ns which came into effect form 7.11.1994 were repealed by the 1997 Regulations, which came into effect from 20.2.1997. Regulation 47 of the 1997 Regulations deals with "Repeal and Saving". 40. The said clause makes it clear that anything done or any action taken or purported to have been done or taken including the acts set out has to be anything done or action taken under the said regulations i.e. the 1994 Regulations. It is also clear more so from the inclusive acts set out in the Regulation 47(2) of the 1997 Regulations itself that anything done or any action taken pertains to anything done and action taken only by SEBI. It is the case of SEBI that an enquiry had commenced prior to the repeal of the 1994 Regulations. SEBI's contention is baseless and untenable since the 1994 Regulations ( also the 1997 Regulations) do not provide for the conduct of any enquiry (as distinguished from an investigation) and therefore it is impossible for SEBI to have held any enquiry under the 1994 regulations. The said word 'enquiry' has crept in only because the language used in Regulation 47(2)(a) is picked up form a standard repeal clause from other legislations. The only "anythi....
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....997 Regulations do not contain any regulation/provision pertaining to enquiry, a mere letter to the Target Company by SEBI asking for some information on the basis of some newspaper report, and mere use of the word 'enquiry' by the Advocates of KRC in the letter to SEBI in answer to the SEBI's letter to the Target company by no stretch of imagination can be termed as 'enquiry' in respect of the Appellants as envisaged by Regulation 47(2) of the 1997 Regulations. 45. In any event it is not disputed that the letter dated 9.6.1995 from SEBI to the Target Company seeking comments on a newspaper report pertain to only 38% shares which included the 27.21% shares of the Galan Group of companies and the 10.91% share of IMFA. It is an admitted fact that no enquiry of any nature whatsoever had commenced prior to the repeal of the 1994 Regulations pertaining to acquisition of 4.97% shares by Mahameru and 3.83% shares by Shirish, which acquisitions had all been done before 20.2.1997, the date on which the 1994 Regulations were repealed. 46. According to the Appellant the impugned order is erroneous both on facts and in law, exposes non application of mind, is without ....
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.... purpose is three-fold (i) to ensure that the incumbent management of the Target Company is aware of the substantial acquisition,(ii)to ensure that in the process of substantial acquisition, the securities market is not distorted or manipulated, and, (iii) to ensure that the small investors are offered a choice viz., to either off-load their shares at a price generally higher than the prevailing market price or to continue as shareholders under the new dispensation. 50. If a person seeks to acquire substantial shares by subterfuge or in a clandestine manner, it results in the management of the Target Company being taken by surprise, and therefore, it is necessary that the management of the Target Company is made aware of any person acquiring substantial shares in such Target Company. In the instant case, the shares aggregating to 27.21% of the Target Company's paid up capital were acquired by Galan subsidiaries from Vijay Mallya's Companies i.e. the party in control and management of the Target Company, which was, therefore, fully aware of the acquisition of such shares. The 10.91% shares acquired by IMFA, which according to SEBI was allegedly part of the same group, wer....
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.... by IMFA and followed by the subsequent acquisition of 4.97% of shares by Mahameru and 3.83% by Shirish, since all such acquisitions, according to SEBI, were funded by the Appellant. Assuming this to be so, a public offer would have been the most preferred solution as such public offer would have been in the interest of the small investors. In fact, such public offer was ordered to be made but such order was sidelined by SEBI. 53. SEBI's mandate to act as a market regulator is primarily to ensure that the small investors are not prejudicially affected. The Takeover Regulations are therefore required to be implemented with this purpose in mind in a manner to right any wrong or prejudice, and to remedy any breach. Apart from the penalties under SEBI Act (Sec.15H and Sec. 24), as has been specifically conferred by legislature, SEBI has no authority to impose penalties, but only to direct remedial and regulatory measures so as to prevent/correct a breach or to prevent or stop a distortion of the market. SEBI's own understanding of its powers and duties has always been not to straightaway penalize a person for acting in breach of the Takeover Regulations but to seek to correc....
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....ally happen if there is breach of making of the public offer (Regulation 10 of the 1994 Regulations). However, if in the course of the breach of Regulation 10, the acquisition was such that it had distorted the market or resulted in price manipulation, regulation 37(2) or Regulation 42(2) may not be the ideal solution and Regulation 39 (or Regulation 44 of the 1997 Regulations) could then be pressed into service. In the instant case, it is not SEBI's case that there was either distortion of the market or price manipulation or of the management being taken by surprise or the working of the Target Company being affected. Therefore, beginning with the procedure of investigation provided at Regulation 33 in Chapter V of the 1994 Regulations, the process culminates either with a measure for "due compliance" being directed under Regulation 37(2) of the 1994 Regulations (or Regulation 42(2) of the 1997 Regulations) or by taking recourse to Regulation 39 of the 1994 Regulations (or Regulation 44 of the 1997 Regulations), which would only be taken for the purpose of regulation or remedy. The two courses of action are mutually exclusive, i.e., if the "due compliance" direction under Regu....
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....h of the Takeover Regulations. The breach is not either in acting in concert or in acquiring substantial shares, but only in failing to comply with a necessary declaration such as the one as per Regulation 6 or 8 of the 1997 Regulations or the failure to make a public offer upon crossing the threshold limit say under Regulation 10 of the 1994 Regulations). These are only procedural in nature and capable of being remedial as has in fact been directed by SEBI in every single case other than the instant one. Acting in concert is only qua acquisition. A post-acquisition arrangement between several persons or several acquirers would not attract the definition of acting in concert nor amount to an acquisition requiring procedural safeguards as for example, public announcement being complied with. The definition of "persons acting in concert" is only relevant at the time of acquisition or at the time immediately prior to the acquisition. 60. In the instant case, the allegation that the Appellant acted in concert is primarily based on the post-acquisition declaration of 17.4.1997. It would appear from such declaration made under Regulation 6(3) and 8(2) of the 1997 Regulations, that MDC....
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....all, is wholly irrelevant with regard to the alleged breach, namely, the failure to make a public announcement. The reasons, therefore, was only a bonafide, belief that it was not required under Regulation 10, which was reasonable interpretation as even recognized by this Tribunal as the right interpretation in the case of Fascinating Leasing Vs. SEBI. (1998) 17 SCL 204) It is only in the said High Court judgment against which Special Leave has now been granted by the Supreme Court on 5.8.2002, that a different interpretation has been given to the said Regulation 10. 63. In respect of the shares of Mahameru and Shirish, the charge again, is that since the Appellant funded such acquisitions there is action in concert. At the highest, if this inference is correct, again, it is only the Appellant who could be alleged to have acted in concert in Mahameru and Shirish. However, such charge in respect of Mahameru and Shirish is irrelevant as nothing was done nor any action taken in respect of the acquisitions by Mahameru and Shirish, within the meaning of Regulation 47(2) of the 1997 Regulations. That is to say even if the Mahameru and Shirish acquisitions were in violation of the 1994....
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.... 65. On the repeal and savings of the 1994 Regulations, the Appellant has submitted: The expression "anything done or any action taken" in Regulation 47(2) implied only an act or action by SEBI under the 1994 Regulations. 66. The impugned order has borrowed the reasoning contained in the Bombay High Court's order in Shirish (supra) that inasmuch as an enquiry relating to 38% shares said to have been acquired by KRC was pending pursuant to the 9.6.1995 letter issued by SEBI to the Target Company, and that therefore all subsequent acts by SEBI leading upto the impugned order were "saved" by the saving provisions of Regulation 47(2). This is totally erroneous. The "enquiry" contemplated under Regulation 47(2) had to be an enquiry under the 1994 Regulations, that the word "enquiry" appears to have been mechanically included in Regulation 47(2) of the 1997 Regulations and has no meaning since a study of the 1994 Regulations would not disclose any form of enquiry or any reference to an enquiry contemplated therein. This aspect was not placed before or considered by the Hon'ble High Court and in fact the Court made it clear that matters relating to SEBI's jurisdiction ....
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....dicial power upon the file leaving his hand. Merely because the ministerial act of formally intimating the Appellant had not been complied with, despite the Chairman's decision having been made, the quasi-judicial decision of the Chairman, SEBI cannot be robbed of its finality. The Chairman, SEBI has not passed any order expressly setting aside the order of 21.1.1998 and while so, the earlier order directing the Appellant to make an open offer cannot merely be given a go by and a contrary subsequent order passed. When there are two contrary orders passed by the same authority and the earlier order is not set aside, the earlier order would prevail and the latter order would be without jurisdiction, since the Authority would be functus officio. The judgment relied upon by SEBI to the effect that internal notings cannot be looked into or proceeded against, were in respect of administrative notings and not quasi-judicial notings. In any event, they were with regard to issues of contract being concluded where communication was of the essence; and of contempt of court as to whether a noting in a file disagreeing with a court order would amount to contempt. 71. The extraneous facto....
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.... Regulations were inapplicable as IMFA did not hold any share in the Target Company. This was a bona fide view held by IMFA and a possible interpretation of the 1994 Regulations. Such view was subsequently taken by the Hon'ble Tribunal in the case of Fascinating Leasing (supra). The Fascinating Leasing judgment was not appealed against by SEBI. It is only in the Bombay High Court order in Shirish that a divergent view has been expressed as regards interpretation of Regulation 10 of the 1994 Regulations. However, special leave to appeal against this High Court order has been granted by the Hon'ble Supreme Court on 5.08.2002 and the question is now before the Hon'ble Supreme Court. 74. An illustrative list of various SEBI orders was handed over to the Tribunal in course of arguments, reflecting the consistent practice of SEBI in dealing with cases of contravention of the Takeover Regulations, to show that prior to the impugned order and even subsequent thereto, post facto public offers have been directed. In fact post facto public offers had been directed on the same day as the Impugned Order was passed, that for reasons beyond comprehension an exception was made in th....
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.... proceedings in the matter of the show cause notices issued to them till the disposal of the proceedings pending before the Bombay High Court. So far as the findings on law given by the Hon'ble High Court of Bombay (single judge) in its order in suit No.3910/97 (2001) 34 SCL 1 (Bom) and order of the Division Bench dated 28th September 2001 in Shrish on various legal issues, are binding not only on the parties to the said proceedings but also on SEBI and the Tribunal. 78. The facts before this Tribunal are the same as before SEBI and before the Hon'ble Bombay High Court. In spite of the fact that all parties were at liberty to lead evidence both oral and documentary at the inquiry proceedings, and before the Tribunal, no party has produced any further documents or additional facts before SEBI and the Tribunal, that the facts and documents that were before the Hon'ble Bombay High Court were the same facts and documents which were relied upon in the proceedings in the Tribunal. Therefore, even the findings of facts rendered by the Hon'ble High Court with respect of the said High Court Proceedings can be relied upon by SEBI and the Tribunal. 79. In terms of sectio....
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....es of other persons associated with the securities market. The submission on behalf of KRC that he is not a person associated with the securities market is not tenable because there cannot be securities market without a company, its directors, its shareholders/ investors etc. KRC became a director of the Target Company from 21.12.1992 and Vice Chairman from 1.4.1995, that further, KRC having acquired shares of a listed company is a person associated with the securities market . 83. On the question as to when the enquiry commenced, the following submissions were made: There is no procedure provided for the commencement of the inquiry. The moment some evidence/ information comes to the notice of SEBI which may give rise to some suspicion that the SEBI Act or regulations made thereunder have been violated, and it proceeds further on the basis of such evidence to collect material from the parties such enquiry must be deemed to have commenced. SEBI had commenced inquiry when it issued the letter dated 9.6.95 to the Target Company seeking certain details. The inquiry was within the knowledge of KRC. Vide their letter dated 9.1.96 Advocates of KRC stated that "Our client has come to....
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.... acquire shares with any person acting in concert with acquirer. 87. Regulation 2(1)(d) defines the expression "person acting in concert". According to the said Regulation "person acting in concert" comprises persons who pursuant to an agreement or understanding acquires or agrees to acquire shares in a company for a common objective or purpose of substantial acquisition of shares and includes: (i)a company, its holding company, or subsidiaries of such companies or companies under the same management either individually or all with each other;(ii)a company with any of its directors, or any persons entrusted with the management of the funds of the company;(iii)directors of companies, referred to in clause (i) and his associates; and (iv)mutual fund, financial institution, merchant banker, portfolio manager and any investment company in which any person has an interest as director, fund manager, trustee, or as a shareholder having not less than 2% of the paid-up capital of that company. 88. For the purposes of this clause meaning of the expression "associate" has been explained to mean (A)Any relative of that person within the meaning of section 6 of the Companies Act, 1956;(1 ....
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....d any material which may negate the findings of facts recorded by the Hon'ble High Court and found on record by SEBI. 90. On facts the Respondent submitted that the parties and the counsel appearing for both the Appellants have not disputed the facts and in fact have proceeded on the basis that facts relating to acquisition of shares to the tune of 27.21% of the Target Company by KRC, 10.91% by IMFA, 4.97% of by Mahameru and 3.83% Shirish and the Creeping Acquisitions are not in dispute. 91. On the question of acquisition of 27.21% it has been submitted that on 14.12.1993, on the basis of negotiations between KRC and Shri Vijay Mallya, KRC through six companies owned and or controlled by him namely (i) Veneer Investments and Finance Pvt. Ltd, (ii) Algid Investment and Finance Pvt. Ltd (iii) Airedale Investment & Trading Pvt. Ltd. (iv) Beethoven Traders Pvt. Ltd, (v) Darrel Traders Pvt. Ltd and (vi) Stingray Traders Pvt. Ltd purchased 22,15,800 equity shares of HL representing 26% of the total equity share capital from four companies owned and controlled by Shri Vijay Mallya namely (i) M/s Enterprise Investment Ltd. (ii) M/s Endeavour investment Ltd, (iii) M/s United Brewe....
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....ontrolled by Shri Ram Raheja. Even though shares were purchased over a period of time all the said shares were lodged for registration on the same day i.e.7.12.1995 as recorded in the minutes of the Board Meeting of the Target Company held on 16.12.1995. In the Board meeting held on 16.12.1995, the transfer of said shares was kept pending as the quantity of shares lodged for transfer was voluminous. Later on in the Board meeting held on 3.1.1996 the said shares were not registered in view of the fact that the Board of Directors of the Target Company felt that the same were purchased in breach of SEBI Regulations and Listing Agreement, besides regulatory provisions of other laws. However thereafter the Board decided to register the said shares in the name of IMFA. IMFA by its letter dated 7.12.95 had also sought clarifications from SEBI as to whether its purchases were in violation of SEBI Regulations. On 21.5.1996, SEBI had intimated IMFA that IMFA had breached the Regulations and had called upon them to comply with the said Regulations. There were internal deliberations between IMFA and the Target Company relating to the reply that was to be given to SEBI's said letter dated 2....
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....and certain other companies belonging to KRC group and was also the husband of the sister of KRC's wife and as such appears to be a nominee or acting in concert with KRC. The shares were purchased out of funds provided by KRC and MDC through companies under their control. Since the loans advanced could not be repaid, Shri Ram Raheja sold his entire share holding in IMFA to MDC and MDC therefore obtained control to the said 10.91% shares of the Target Company purchased by IMFA. It is therefore clear that KRC and MDC were acting in concert with each other and it devised the aforesaid Scheme for purchase of shares of the Target Company. 93. With reference to purchase of 4.97% shares of the Target Company by Mahameru it was submitted that between 14.11.1995 and 28.10.1996 Mahameru purchased through the open market 4,73,100 shares of the Target Company. Funds for the aforesaid purchase were made available by MDC from his proprietary firm of M/s. Royal Wines. The said loans were supposed to be secured by issue of zero rated Fully Convertible Debentures. The said debentures were in fact never issued. The Appellants had claimed that the said loans were advanced on the evaluation of ....
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....ontrol of 3.83% shares of the Target Company owned by Shirish. After the said takeover, the said Promissory Notes were returned duly cancelled. From the aforesaid facts, it is clear that purchase of shares through Shirish through loans advanced by firm owned by MDC and subsequent take over of Shirish by MDC through his investment company Seven Star Trading Company was only a device under which the said shares were in fact purchased by MDC acting in concert with KRC pursuant to the common objective of effecting substantial purchase of shares of the Target Company. 95. The transactions between MDC, IMFA, Mahameru and Shirish were not merely loan transactions or investment decisions. In all the cases the three companies had invested mainly in sizable amount in the Target Company's shares with the aid of the funds provided by KRC/MDC through their concerns and companies. The alleged FCDs were never issued and even the promissory notes were cancelled and returned after the takeover of IMFA, Mahameru and Shirish. 96. On Creeping Acquisitions the Respondent has submitted that certain further acquisitions of shares of the Target Company were made by KRC and MDC in concert with ea....
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....ver of the Target Company 98. Apart from the fact that the aforesaid facts relating to the purchase of shares of the Target Company have been admitted and or in any event are not disputed. The facts and circumstances available on record clearly show that MDC and KRC had been acting in concert in respect of the impugned acquisitions. It is submitted that proof of acting in concert can be inferred from surrounding circumstances and also be proved by circumstantial evidence. In Moti Chand Vs. Ikram Ullah (AIR 1916 P C 59) the Privy Council held that policy of law is not to be defeated by device and arrangement or agreement and all such device and agreements which are in contravention of policy of law are illegal. In Commissioner Vs. E.C. Commercial Co (AIR 1967 S.C. 768), the Hon'ble Supreme Court has inter-alia held that it is sufficient after having regard to the relation, conduct and common intention to infer that persons must be acting together. Evidence of actual concerted acting is normally difficult to obtain and is not insisted upon. In M/s McDowell & Co. V/s Commercial Tax Officer (AIR 1986 S.C. 649) the Hon'ble Supreme Court has inter alia, held that the proper wa....
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.... done or ordered to be done under the Act. 101. Without prejudice to the aforesaid, the word "Enquiry" under Regulation 47 does not necessarily mean formal enquiry commencing with a Show Cause Notice and enquiry, as held by the Hon'ble Bombay High Court (D B) in Shirish would include enquiries made with any person in relation to information received from any person or source relating to violation or breach of clauses 40A and 40B of the Listing Agreement and 1994 Regulation and 1997 Regulations. The Hon'ble High Court has also inter alia, held that there is no merit in the submission that in view of the repeal of 1994 Regulations, the present proceedings do not lie. In the circumstances SEBI is entitled to carry on with the enquiry commenced under the 1994 Regulation and complete the same and pass an order under the 1997 Regulation. 102. On the contention that SEBI could not have exercised powers under Regulation 44 of the 1997 Regulations without complying with the provisions of Regulations 33 to 37 of the 1994 Regulations, the Respondent submitted that since the facts relating to acquisition were not disputed either by KRC or MDC the question of SEBI initiating inves....
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....le offer as required under Regulations immediately. The issue of prosecution will be decided later" On 20.1.1998 MDC by his letter dated 20.1.1998 inter alia stated that without prejudice to his earlier stand, he was now prepared to make a public offer and was going ahead with appointment of a merchant banker who will contact SEBI. Nothing further however appears to have been done pursuant to the said letter. MDC by his letter dated 16.3.1998 recorded the meeting held with the Chairman on 31.12.1997 and stated that he had taken necessary steps to go ahead with the public offer including selection of merchant banker and was only awaiting confirmatory letter from SEBI.. If as alleged by KRC and MDC that decision had been taken by SEBI on 31st December 1997 and noted in the files on 21.1.1998, and since the said decision had been communicated by KRC to MDC who was present at the said meeting there was no need to seek any confirmation from SEBI. This itself clearly shows that at the relevant time, neither KRC nor MDC considered the discussions held with Chairman on 31.12.1997 by KRC on behalf of MDC. In the meantime, SEBI by its letter dated 24.3.1998 had called upon MDC to furnish var....
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....an on 31.12.1997 and the recording on the file on 21.1.1998 is an order is incorrect. 106. The Appellants had been under obligation to make the public offer and are not supposed to wait for any direction. At every stage the Appellants had been offering to make public announcement but had not been doing so. Vide letter 23.12.98 enclosing an opinion dated 22.11.98 it was suggested by and on behalf of the Appellants that they could withdraw their unilateral offer to make public announcement. Vide para 172 of the Single Judge order in Sreenivasulu Reddy (supra) it is found that "what is further interesting to note is that after the decision of SEBI's Appellate Tribunal in case of Fascinating Leasing Company (decided on July16, 1998), MDC withdrew his offer to make public announcement, which is what he ultimately wrote to SEBI on 22.11.98. Thus, the unilateral offer made by him on 20.01.98 was withdrawn by him on 22.11.98, alleged on the basis of non-confirmation by SEBI......". MDC was required to comply with the provisions of the Regulations which do not require SEBI to give any alleged confirmation. The notation was not an order of SEBI. In any event, without prejudice to the ....
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.... only, is not maintainable, that the SEBI has been established with object inter alia to develop and regulate the securities market also. The list submitted by the Counsel for the Appellant wherein certain SEBI orders directing making of public announcement are mentioned contains almost all cases where exemption from applicability of Regulations 10,11 and 12 of the 1997 Regulations (i.e. exemption from making open offer) were applied for and applications for exemption having been rejected the Applicants had been directed to comply with the provisions of the Regulations and make the open offer. The other cases relate to cases where there had been a change in control and non compliance with the Regulations i.e. obligations to make an open offer or the cases which involved restructuring of the companies at international level. In these cases the facts are different. The Appellants' case is not that of change in control or international restructuring or non applicability of exemption provisions. Further, the orders in all the cases are based on the facts and circumstances of individual cases and directions suitable to the facts of each case are passed. In certain cases, of violatio....
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....so noticed that the Appellants are required to disinvest their holding in the Target Companay's capital in such quantity so that their holding after such disinvestment will be less than 10% of the paid up capital of the Target Company. According to the Respondent KRC and MDC have acquired a total of 47.48% shares in the paid up capital of the Target Company during the period 1993 to 1997. The issued and paid up capital of the Target Company is Rs. 9,52,23,230/- divided into 95,22,323 equity shares of Rs. 10/- each. The impugned order therefore requires the Appellants to unload in one go about 37.48 per cent (about 35.69 lakh shares)of the Target Company's shares ( that is after retaining maximum upto 10% of the shares acquired). Therefore, about 35.69 lakh shares of the Target Company at the rate of ten rupees per share are required to be sold in the open market in one go. The Respondent has also directed to initiate adjudication proceedings against the Appellants under section 15A of the SEBI Act for violation of regulation 6 and 8 of the 1997 Regulations and also under section 15H for violation of regulation 10 of the 1994 Regulations. 111. The quantum of shares acquir....
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....7.11.1994 to 20.2.1997. i IMFA purchased 10,39,341 shares representing 10.91% of the paid up capital of the Target Company during the period 27.10.1994 to 22.11.1995. ii Mahameru purchased 4,73,100 shares representing 4.97% of the paid up capital of the Target Company during the period 14.11.1995 to 28.10.1996. iii Shirish purchased 3,64,750 shares representing 3.83% of the paid up capital of the Target Company during the period 27.8.1996 to 13.2.1997. Acquisition after the repeal of the 1994 Regulations and during the currency of the 1997 Regulations: The 1997 Regulations came into operation with effect from 20.2.1997. i IMFA purchased 54,000 shares representing 0.56% of the paid up capital of the Target Company. ii Beethoven Traders P. Ltd. purchased 1,25,000 shares representing 1.31% of the paid up capital of the Target Company between 10.9.98 and 19.9.98. iii Darrel Traders P. Ltd. purchased 25,800 shares representing 0.27% of the paid up capital of the Target Company on 16.12.1998. 113. Thus it is noticed that 27.21% shares were acquired prior to the notification of the 1994 Regulations, 19.71% shares d....
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....to make an offer to the company and also notified to the stock exchange." "40B. Take-over offer - (1) The company also agrees that it is a condition for continuous listing that whenever a take-over offer is made to or by it whether voluntarily or compulsorily, the following requirements shall be fulfilled. (2) A public announcement of a take-over offer shall be made both by the offeror company and the offeree company when - a any person in his own name or in the name of any other person acquires, whether by a series of transactions over a period of time or otherwise, securities which, when aggregated with securities already held or acquired by such person, shall carry 10% or more of the total voting rights of the offeree company, or b secure the control of management of a company, by acquiring or agreeing to acquire, irrespective of the percentage of the voting capital, the securities of the directors or other members who, by virtue of their shareholdings together with the shareholding of their relatives, nominees, family interest and group, control or manage the company, or (3) If the offer is made by a person other than the ultimate of....
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....aining security holders of the transferee company shall be to acquire from them an aggregate minimum of 20 per cent of the total securities of the company. Such offer, however, shall not result in the public shareholding being reduced to less than 20 per cent of the voting capital of the company, subject to (10) below. (10) From each of the security holders accepting such offer, the acquirer shall acquire his full holding upto 100 securities of the face value of Rs. 10 each or upto 10 securities if the face value is Rs. 100. (11) When the directors of an offeree company sell securities to a purchaser as a result of which the purchaser is required to make an offer, the directors shall ensure that as a condition of sale, the purchaser undertakes to fulfill his obligations. (12) The board of directors of the offeree company shall not, without the approval of the shareholders in general meeting: a issue any authorised but unissued securities, b issue any securities carrying rights of conversion into or subscription for securities, or c sell, dispose of or acquire or agree to sell, dispose of or acquire, assets of a substantial amount. (13) N....
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....sary, -- (i) in the interest of investors, or orderly development of securities market; or (ii) to prevent the affairs of any intermediary or other persons referred to in section 12 being conducted in a manner detrimental to the interest of investors or securities market ;or iii to secure the proper management of any such intermediary or person, it may issue such directions, -- a to any person or class of persons referred to in section 12, or associated with the securities market, or b to any company in respect of matters specified in section 11A as may be appropriate in the interests of investors in securities and the securities market." Section 11B was incorporated in the Act with effect from 25.1.1995 vide "Securities (Laws) Amendment Act, 1995". 119. Chapter VIA of the SEBI Act provides for penalties and adjudications. SEBI has invoked Section 15A and 15H for the purpose of imposing monetary penalty. The Text of these two sections are as follows: "15A. If any person, who is required under this Act, or any rules or regulations made thereunder,-- a to furnish any document, return or report to the Board, fails to furnish the....
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....ial Acquisition of Shares and Takeovers) Regulations, 1994 through a notification dated 7.11.1994. Since this Regulation was found wanting in certain aspects, an expert committee under the Chairmanship of Justice P. N. Bhagwati was appointed in November 1995 by SEBI, "to examine the areas of deficiencies in the 1994 Regulations and to suggest amendments in the Regulations with a view to strengthening the Regulations and making them more fair, transparent and unambiguous and also protecting the interest of investors and of all parties concerned in the acquisition process". The committee viewed that the Regulations for substantial acquisition of shares and takeovers should "operate principally to ensure fair and equal treatment of all shareholders in relation to substantial acquisition of shares and takeovers". The committee also recognised that the process of takeover is complex and is inter-related to the dynamics of the market place and felt that it would be impracticable to devise regulations in such detail as to cover the entire range of situations, which could arise in the process of substantial acquisition of shares and takeovers. The committee viewed that instead there should....
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....entrusted with the management of the funds of the company; iii directors of companies referred to in sub-clause (i) and his associates; and iv mutual fund, financial institution, merchant banker, portfolio manager and any investment company in which any person has an interest as director, fund manager, trustee or as a shareholder having not less than 2% of the paid up capital of that company. Explanation: For the purpose of this clause "associate" means (A)any relative of that person within the meaning of section 6 of the Companies, 1956 (I of 1956) (B) the director or his relative whether individually or in aggregate holding more than 2% of the paid up equity capital of such company. Regulation 2(1)(i) "Shares" means share in the share capital of a company carrying voting rights and includes any securities which would entitle the holder to receive shares with voting rights." Regulation 9. Acquisition of 10% or more of the shares of any company through negotiation.-(1) Any acquirer who holds shares carrying ten per cent or less of voting rights in the capital of the company shall not through negotiations acquire any further shares, which, when ta....
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....referred to in sub-regulation (1) may be as follows: (a) to investigate into the complaints received from investors, intermediaries or any other person on any matter having a bearing on the allegations of substantial acquisition of shares and takeovers; and (b)to investigate suo motu upon its knowledge or information, in the interest of securities business or investors interests, for any breach of the regulations. Regulation 34 Procedure for investigation - (1) Before undertaking any investigation under regulation 33 the Board shall give a reasonable notice to the person concerned for that purpose. (2) Notwithstanding anything contained in sub-regulation (1), where the Board is satisfied that in the interest of the investors or in public interest no such notice should be given, it may by an order in writing direct that the investigation be taken up without such notice. (3) On being empowered by the Board, the investigating authority shall undertake the investigation and the person against whom an investigation is being carried out shall be bound to di....
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.... (2)No acquirer shall acquire shares or voting rights which (taken together with shares or voting rights, if any held by him or by persons acting in concert with him) entitle such acquirer to exercise more than 51% of the voting rights in a company, unless such acquirer makes a public announcement to acquire shares of such company in accordance with the Regulations. 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 holding companies, whether listed or unlisted, whether in India or abroad. Regulation 38. Board's right to investigate: The Board may appoint one or more persons as investigating officer to undertake investigation for any of the following purposes, namely:- a to investigate into the complaints received from the investors, 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 informatio....
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....g of any of the securities acquired in violation of these regulations; c directing the person concerned to sell the shares acquired in violation of the provisions of these regulations; d taking action against the person concerned. Regulation 45. Penalties for non-compliance: (1) Any person violating any provisions of the regulations shall be liable for action in terms of the regulations and the Act. (2)If the acquirer or any person acting in concert with him, fails to carry out the obligations under the regulations, the entire or part of the sum in the escrow account shall be liable to be forfeited and the acquirer or such a person shall also be liable for action in terms of the regulations and the Act. (3) The board of directors of the target company failing to carry out the obligations under the regulations shall be liable for action in terms of the regulations and the Act. (4)The Board may, for failure to carry out the requirements of the regulations by an intermediary, initiate action for suspension or cancellation of registration of an intermediary holding a certificate of registration un....
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....s were also purchased on 14.12.1993, though converted to shares only on 11.8.1997. According to the definition of the expression "shares" provided in the 1994 Regulations "Shares" means "share in the share capital of a company carrying voting rights and includes any securities which would entitle the holder to receive shares with voting rights." (emphasis supplied) The debentures purchased being convertible to equity shares with voting rights, in terms of the said definition, are also to be considered as "shares". These "shares" were also purchased on 14.12.1993, prior to the notification of the 1994 Regulations. It is noticed that Hon'ble Bombay High Court also in its order in the Notice of Motion (Shirish) cited stated earlier has held that as the debentures were purchased before the 1994 Regulations came into force, the shares arising out of conversion of those debtor's can not be considered as acquisition of shares under the 1994 Regulations. The Respondent has also admitted this factual position. 129. According to the Respondent's version, the Appellants through Galan subsidiaries acquired 27.21% shares, of the Target Company that Galan was jointly owned a....
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....t, KRC and MDC being investors in listed securities of the Target Company are certainly persons associated with the securities market and as such amenable to the measures taken by the Respondent under the SEBI Act and the Regulations. 132. The Appellants had contested the Respondent's version that Galan at the relevant time was jointly owned and controlled by KRC and MDC. According to them Galan was exclusively owned by KRC and though this fact was placed before SEBI, it was expected to deal with the same, and not to go by the wrong information inadvertently furnished earlier. Since the Hon'ble High Court had directed SEBI to examine the facts afresh, SEBI was duty bound to verify the factual position, and further that since SEBI had charged the Appellants, it was for SEBI to prove its case on being disputed by the Appellants. According to the Appellants on 14.12.1993 Galan was wholly owned and controlled by KRC and that by SEBI's own admission the funds for the acquisition of shares were also made available by KRC, and therefore, it was not tenable to hold that 27.21% shares were acquired by KRC and MDC by concerted action. According to the Appellants Listing Agreem....
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....the admitted factual position that it was KRC controlled Galan companies acquired shares of the Target Company with the funds provided by him, I do not consider it necessary for the limited purpose of considering the sustainability of the impugned order to the extent it relates to the said acquisition of 27.21% go into the details of the ownership and management of those subsidiaries. The fact is that they are subsidiaries of Galan. Galan was controlled by KRC. Whether MDC owned 20% capital of Galan on 14.12.1993 or subsequent to the said date is of not much relevance to decide the limited question referred to above. I do not also consider it necessary to find out as to whether the said acquisition was in violation of the requirements of clause 40A and 40B in the light of my views on SEBI's powers in this regard stated in the following paragraphs. 134. Listing means admission of the securities of a company to trading privileges on a stock exchange. The principal objectives of listing are to provide ready marketability and impart liquidity and free negotiability to securities, ensure proper supervision and control of dealings therein and protect the interests of shareholders ....
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....ares are listed. 135. From the text of clauses 40A and 40B extracted in the earlier part of this order it could be seen that the conditions in the said clauses are accepted by the company "for continued listing" of the security, thereby implying that if the conditions are not complied with it will not be entitled to have the benefit of continued trading of its securities on the concerned stock exchange. That means its securities would be delisted. Shri Kapadia, learned Counsel appearing for the Appellants had submitted that reference to "any person" in clause 40B (2)(a) includes also entities other than the listed companies. I have very carefully perused clauses 40A and 40B I do not find anything therein even to suggest that the requirements of the said clauses are applicable to entities which are not listed with the stock exchanges. On a harmonious reading of the full text of clauses 40A and 40B of the Listing Agreement, it is obvious that expression "any person" appearing in the said clauses cannot be any entity other than the company. Listing Agreement is executed by those companies whose shares are listed on stock exchanges. In the event of violation of the terms and conditi....
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....s cannot bestow statutory powers on SEBI. SEBI's power flows from the relevant statutes and not at the pleasure of companies listed on the stock exchanges. In my view for the reasons stated, Galan companies, cannot be subjected to any action under the SEBI Act even if it is found that the requirements of 40A and 40B of the Listing Agreement were not complied with in respect of the acquisition of 27.21% shares of the Target Company. I fully agree with Shri Kapil Sibal's submission that for non compliance if any, of the provisions of the SCRA, SEBI cannot invoke the provisions of section 11(h)(2) or section 11B of the Act and direct disinvestment of shares acquired by Galan companies. The Respondent's reliance on the decision in U.P. State Electricity Board (supra) and Surinder Singh(supra)in support of the proposition that when Regulations are not framed, the Act is applicable is of no support to the present case in view of the facts of the case. Shri Rohit Kapadia had cited the two authorities in the context that prior to the 1994 Regulations, action could have been taken under Section 11(2)(h) of the SEBI Act. The Hon'ble Supreme Court had held in the said cases th....
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....or of Galan at the relevant time. But that by itself does not suggest that he was controlling Galan with KRC who held 100% of the Galan's paid up capital. Further by SEBI's own version funding for the purchase of the said shares was also made by KRC. It is not SEBI's case that MDC also funded the acquisition. There is no material on record to establish that KRC and MDC acquired the shares by acting in concert. The fact that Shri Ram Raheja, husband of KRC's wife's sister was also a director of Galan apart from KRC and MDC does not in any way help establish that MDC was acting in concert with KRC and therefore he also should be considered as an acquirer of the said shares at that point of time. On the contrary Shri Rama Raheja's presence in the Board supports that Galan was a KRC company. The fact that MDC is the maternal uncle of KRC is also of not much help in this regard. There is nothing on record to show that on 14.12.1993 MDC was an acquirer or a person acting in concert with KRC for the purpose of acquiring the shares of the Target company. From his subsequent conduct or involvement after 2 years in acquiring Target Company's shares it cannot be in....
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....alan. It has been stated by the Respondent that KRC through Galan and the companies controlled by him provided funds to the extent of Rs. 1.31 crores to IMFA. No doubt the Appellant had submitted that the show cause notice did not allege any such funding by KRC and that the Respondent has relied in this regard on a statement made by the Plaintiff's Counsel in the suit before the Hon'ble Bombay High Court. I find that the Appellant has except for challenging the funding on technicalities has not categorically refuted the said version of their funding. Though the loans were said to have been secured by issue of zero rated debentures, it appears that the debentures were never issued. The only quoted investment of IMFA was in the shares of the Target Company. Later on a sum of Rs. 4.13 crores was made available to IMFA by MDC through his proprietary concern Royal Wines, and the said amount was also utilised for the acquisition of the shares. The above funds were also advanced by way of interest free loans without any specified period of repayment and without any security. As stated earlier, there is nothing on record indicating that the fully secured debentures were ever issued....
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....quisition of these companies by Seven Star of MDC is really striking. The commonality involved is difficult to believe was a mere coincidence. 142. According to the Respondent the factual position do lead to the conclusion that KRC and MDC acted in concert with Airedale, IMFA, Mahameru, Shirish, Algid, Beethoven, Darrel, Stingray and Veneer to acquire the shares of the Target Company over a period of time, that since they were acting in concert the acquisition by each one of them must be considered to be the acquisitions of others as well. The funds for the acquisition of the shares whether through Airdale, Algid, Beethoven, Darrel, Stingray and Veneer or through IMFA, Mahameru and Shirish originated from entities controlled either by KRC or MDC or both, that advancing of funds to IMFA, Mahameru and Shirish can not be said to be by way of investment because the facts disclose that the amounts were advanced free of interest and without any security and were used for acquiring the shares of the Target Company. The Respondents had further stated that if the shares were purchased only as a matter of investment they should have been sold when the market was favourable, but that was n....
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....nd the person acting in concert should acquire shares simultaneously. Acquisition can be in different spells in different quantities. But nexus of the acquirer and the person acting in concert is relevant. That nexus as the Bhagwati Committee put is "the commonality of objective and the community of interest" If it is established that two or more persons with a common objective are acquiring shares in a company, it can be safely concluded that they are acting in concert. The commonality of objective is not amenable to any litmus test. The facts and circumstances provide the clue. The conclusion could be on inference also. Not on imagination. Inference is not imagination. An inference is a deduction as to the existence of a fact which human experience teaches us can reasonably and logically be drawn from proof of other facts. No doubt an inference must be based on probability and not on mere possibilities or on surmise or conjuncture, and must be drawn reasonably and supported by the facts upon which it rests. Following few paragraphs provide the answer, in this regard. 145. The Appellants had submitted that any interpretation of the provisions of the SEBI Act and the Regulation ....
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....the purpose. The object of the SEBI Act and the Regulations need also be followed while interpreting various provisions of Act and the Regulations. In this context it is noted that scope of the expression acquirer, persons acting in concert, holder of shares and the reach of section 10(2) was considered in detail by the Hon'ble Bombay High Court while deciding the appeal filed by Shirish (supra) The interpretation of law made by the Hon'ble Bombay High Court is binding on this Tribunal. The fact that the impugned order is under appeal before the Hon'ble Supreme Court does not take away the binding nature of the decision of the Hon'ble High Court, as far as this Tribunal is concerned. 148. It seems that the issues raised by the Appellants on the concepts of acquirer, persons acting in concert, etc. and reach of section 10(2) raised in the present appeals were raised before the Hon'ble Bombay High Court also in Shirish. The Appellants had inter alia urged that as per regulation 2 (1)(b) the acquirer must himself be an acquirer of shares in the listed company, that it also makes it imperative that apart from the acquirer the person acting in concert must also ac....
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....rishna Gupta case (supra), it held that the right to vote was not affected by a pledge of the shares or the receiver being appointed in respect thereof. In Worldwide Agencies case (supra), however the court clearly held that a "member" may be a "holder" but a "holder" may not be a member of the company. It is, therefore, possible to give to the words "who holds shares" a meaning different than the one assigned to it under the Act as including a person who holds the shares by reason of his having purchased the same with a right of registration of those shares on the strength of the blank transfer forms, but in whose favour the shares have not actually been registered. The question that arises is that whether in the scheme of the 1994 Regulations, "who holds shares" must be given a narrow meaning as canvassed by Mr. Chidambaram or the wider meaning so as to include the holder of a share whose name is not on the register of members. 69. In our view, on a contextual and purposive interpretation, and having regard to the object sought to be achieved by the Act and the Regulations, the words "who hold shares" must be given a construction so as to include a person who holds shares with....
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.... a blank transfer form with a right of registration but who has not actually got the shares registered in his name. In fact this Tribunal in Sharad Doshi V Adjudicating Officer [ (1998) 16 SCL 269) ] had held that "holder" in the regulations means a person who has acquired shares notwithstanding they are not registered. In Fascinating Leasing, acquisition was in one go and not in different lots. But in IMFA's'case it is noted from the facts on record that it had purchased 10.91% shares involving several transactions during the period 27.10.1994 - 21.11.1995 and not in one go as was the case in the acquisition by Fascinating Leasing. The fact that these shares were tendered for transfer in one lot is not of relevance, as the trigger point is acquistion of shares making the acquirer the holder of the shares. 151. Appellants' submission that IMFA, when it acquired shares was not holding any shares in the Target Company and as such regulation 10 was not applicable, is untenable in the light of the facts of the case and the interpretation of the expression "holder of shares" given by the Hon'ble Bombay High Court in Shirish (supra) 152. The Appellants had contended....
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....erted plan had come into existence much before the acquisition of these three companies by the defendants No.11, and it was in pursuance of such a common plan that funds were made available to the three unlisted companies who acquired the shares of Herbertsons Ltd., and later, handed over those companies to the defendant No.11. Since an acquirer by definition includes any person acting in concert with the acquirer, the acquisition by these three unlisted companies of the shares in Herbertsons Ltd., were in fact acquisition by the acquirer within the meaning of regulation 10. When two or more persons acquire shares in the company, acting in concert with each other, each one of them is an acquirer within the meaning of regulation 2(b) of the 1994 Regulation. If this Court ultimately finds that the defendants were acting in concert with each other pursuant to a common plan to acquire substantial shares of Herbertsons Ltd., the acquisition of these unlisted companies by the defendant No.11, at a later stage, would not help the defendants because the initial acquisition by the aforesaid three unlisted companies would itself be an acquisition of shares by an acquirer in breach of the pro....
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.... the 1994 Regulations did not cover the concept of 'indirect acquisition' of a company through acquisition of unlisted investment companies which was a possible route of acquisition of a listed company. This deficiency was sought to be remedied and the concept of indirect control or acquisition was introduced for the first time in the 1997 Regulation which came into force on 28-2-1997. Regulations 2(d), (c) and (o) specifically introduced the concept of indirect acquisition and control. The Regulations also did away with the requirement of an acquirer being an existing shareholder. According to him, the validity of acquisition of the defendant Nos. 3 to 5 has to be determined on the plain terms of the 1994 Regulations which were clearly inapplicable to the acquisition of the defendant Nos.3 to 5. 157. As noticed earlier, Mr. Nariman also agrees that the provisions of the 1994 Regulations must be understood on their own, and in fact he went to the extent of submitting that the aid of a subsequent law cannot be taken for interpretating an earlier law. He, therefore, submitted that one need not look at the 1997 Regulations. Even without the aid of the 1997 Regulations, it m....
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....planation, to which the Regulations of 1994 may not have applied, such as Sesa Goa's case (supra), it is not necessary for us to delve into this question further as this issue does not arise in this case. 161. I have perused the Sesa Goa case relied on by the Appellants. In my view Sesa Goa is not a parallel one, in view of the fact that the Appellants were acting in concert with each other for the purpose of acquisition of shares of the Target Company. It is noted that the Hon'ble Bombay High Court in Shirish had held that if it is held that the Appellants and the companies involved (not the Target Company) were acting in concert with each other, each one of them must be deemed to be an acquirer and the question of direct or indirect acquisition does not arise. The facts on record, as discussed in this order, establish that the Appellants and the companies viz. IMFA, Mahameru and Shirish acted in concert with each other in the acquisition of the shares of the Target company. The Appellants' contention that the acquisition is saved under regulation 3(d) in my view, is untenable. 162. The Appellants' contention that in terms of regulation 2(1)(b) apart from the....
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....to MDC. In this context, in the light of the said version of the Appellants, and also in the light of the Hon'ble Court's direction to consider the matter pending before it in the light of the additional evidence if any adduced, it was incumbent on the part SEBI to consider the Appellants' version and ascertain as to whether Galan at that point of time was an exclusive outfit of KRC or it was jointly owned by KRC and MDC. It is seen from the order that SEBI had noted the Appellant's contention that Galan was an exclusive outfit of KRC on 14.12.1993. SEBI has not disproved the said contention SEBI's contention that it has gone by the Appellants' letter dated 2.4.1998 and the factual position stated by the Appellants in its affidavit would have been sufficient, if the Appellant had not brought out the factual position at variance with the factual position stated earlier, in the proceeding before SEBI. Both the statements are made by the same persons and SEBI cannot accept the one ignoring the other, without proper verification. It is not the "toss" of the coin that decides a disputed fact. Knowledge of acquisition of shares by itself is not sufficient to hold ....
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....arget Company's capital, KRC ceased to be a member of Galan. But his family (wife and daughter) was still holding 50% of Galan's shares. He continued to be a director of the company, despite transfer his shares. KRC and MDC became equal owners of Galan from 22.11.1996. In this context it is also noted that KRC and MDC and Shri Ram Raheja were directors of Galan at all the relevant times. Shri Ram Raheja is the husband of KRC's wife's sister. Whether Ram Raheja is a relative in terms of section 6 of the Companies Act is not relevant. Given the need to give a contextual and purposive interpretation of the expression relative in clause B of the explanation to regulation 2(1)(d), it is felt that the scope of the said definition can not be restricted only to the list of few relatives specified in section 6 of the Companies Act. It is the proximity and closeness of the person that matters in the context. In this connection it is also considered relevant to have a look at the structure of Galan's six subsidiaries in whose name the shares were purchased. They are Airedale, Algid, Beethoven, Darrel, Stingray and Veneer. It is noted that Galan has three subsidiary compani....
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....mation as stated by the Counsel of the plaintiff before the Hon'ble High Court, in the suit referred to earlier. MDC had also provided funds to the tune of Rs. 4.13 crores, through his proprietary concern Royal Wines. Funding of IMFA's purchase of the Target Company's shares by KRC and MDC is a factor to be noted. The Respondent's version that the loans though said to be secured by issue of zero rated debentures, the debentures were never issued, remains unrebutted. Further it is also on record that the sum of Rs. 1.31 crores from the companies of KRC and the sum of Rs. 4.13 crores from the proprietary concern of MDC were advanced without specifying any period of repayment and without any security. It is noted that IMFA's capital was just Rs. 400,200. IMFA had no known financial resources to purchase such a huge quantity of shares involving few crores of rupees. Huge advance of such amounts to such a company, without any security itself in my view can not be considered as a normal transaction of investment. IMFA was taken over by Seven Star, a company belonging to MDC on 29.7.1996 along with its investment of 10.91% shareholding in the Target Company. This takeo....
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....d by issue of zero rated debentures, the records before me do not show that such debentures were ever issued. It is also noted that the shares were acquired during 14.11.1995 - 10.8.96. On Mahameru completing its mission of purchase of 4.97%, without any delay MDC acquired the shares of Mahameru on 13.2.1997. 168. It is noted that Shirish finance in its name purchased 3,64,750 shares of the Target Company during the period 27.8.1996 and 13.2.1997. Shirish's share capital, as in the case of Mahameru, was also just two hundred rupees only. Its entire capital was held by Shri S. J. Chhabria and his wife. The company was registered on 19.8.1996. Shri S. J. Chhabria is not an outsider. Though not a relative in terms of section 6 of the Companies Act, the said S. J. Chhabria is a cousin of KRC and nephew of MDC. He was also a director in Airedale, Algid and Beethoven Shri S. J. Chhabria's proximity to KRC and MDC is thus clear. 169. In this case also MDC advanced a sum of Rs. 1.35 crores to Shirish through one of its companies as interest free loan and without any securities. It is noted that even on 13.2.1997 MDC through one of his companies had advanced a further sum of R....
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....n 18.2.1997. It can be inferred from the circumstances that these companies were hurriedly taken over to save the so-called indirect acquisition of shares of the Target Company from the scope of the proposed new Regulations. This is only an inference. As stated earlier, as there was no other convincing reason to take over these companies within such comparatively short span of time from the date of providing funds. 171. The Appellants had attempted to establish that the acquisition of shares by Galan subsidiaries IMFA, Mahameru, Shirish are independent of each other, that KRC and MDC are not relatives in terms of section 6 of the Companies Act etc. In my view the first test and perhaps the prime test to ascertain as to whether a person had acted in concert with another in the acquisition of shares is the one provided in the opening portion of the definition "person acting in concert" appearing in regulation 2(d) of the 1994 Regulations. According to the said regulation: " 'person acting in concert' comprises persons who, pursuant to an agreement or understanding acquires or agrees to acquire shares in a company for a common objective or purpose of substantial acquisit....
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....n the basis of these facts, Mr. Nariman submitted that Imfa Hodlings P. Ltd., was almost a proprietary concern of Ram Raheja who was related to K.R. Chhabria, being his co-brother. The defendant nos.2 and 6 to 10 companies were companies of which Galan Finvest P. Ltd., was the ultimate holding company, and in the latter, at one stage, K.R. Chhabria, the defendant No.1 and M.D. Chhabria, the defendant No.11 along with their family members held 80 per cent and 20 per cent shares respectively, and after November 1996, they held 50 per cent shares each. The Chhabrias, acting through Galan Finvest P. Ltd., and the companies controlled by them provided funds to the extent of Rs. 1.31 crores to Imfa Holdings P. Ltd., which was a company controlled by Ram Raheja, the co-brother of the defendant No.1. Some amount was also made available by a company controlled by M.D. Chhabria, the defendant No.11. Mr. Nariman then submitted that the nature of transaction entered into with Imfa Holdings P. Ltd., does not appear to be a purely business transaction by way of investment, as submitted by Mr. Chidambaram, on the advice given by a professionally qualified Chartered Accountant Mr. Ashok Kukerja....
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....1. Another circumstance which is equally evident is that Imfa Holdings P. Ltd., had a share capital of only Rs. 4,00,200, and did not have the means to acquire such large number of shares of Herbertsons Ltd. 97 We are satisfied that the circumstances established on record prima facie do lead to the inference that the defendant Nos. 1 and 11, acting in concert with the defendant Nos.2 to 10, acquired the shares of Herbertsons Ltd., over a period of time. Since they were acting in concert, the acquisition by each one of them must be considered to be the acquisition of the others as well. The funds for the acquisition of the shares, whether through the defendant Nos. 2 and 6 to 10 or through defendant Nos. 3 to 5, originated from the companies controlled either by the defendant No. 1 or the defendant No.11. Advancing of funds to the defendant Nos. 3, 4 and 5 cannot be said to be by way of investment because the facts disclose that the amounts were advanced free of interest and without any security, and for acquiring the shares of Herbertsons Ltd., the defendant Nos. 3, 4 and 5 were also managed by persons known to the defendant Nos. 1 an 11 and associated with them in their various....
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....nce is placed on the reports of Mr. A.T. Kukreja and Arup Mitra & Co., qualified Chartered Accountants. It was argued that the professionally qualified Chartered Accountants had prepared two schemes, one of which was accepted by M.D. Chhabria, and the scheme prepared by the professionals shows that he would get a return of 25 per cent on investments. 175. We have carefully perused the reports submitted by these two Chartered Accountants. In their recommendation to M.D. Chhabria, they had suggested that the borrower must give a commitment to give minimum return of 45 to 50 per cent at the end of two years. They had suggested the issuance of zero rated unsecured FCDs with no premium. Each debenture was to be of Rs. 100 each, with a right to convert it into 10 shares of Rs. 10 each, after a period of two years. The experts expected that the FCDs issued be taken over after two years at a premium of 45 to 50 per cent before conversion, which will give an earning of 25 per cent per annum. Based on anticipation of professional experts, it was sought to be argued before us that M.D. Chhabria, the defendant No.11, was assured a return of 25 per cent on his investment. All that can be sta....
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....of Herbertsons on the strength of the funds advanced to them by the companies under the control of the defendant No.1 and the defendant No.11. It is premature at this stage to speculate as to the source from which they procured further funds to purchase the shares of Herbertsons Ltd., or the circumstances in which one of them, Imfa, the defendant No.3, invested some amount in the purchase of shares of Samudra Shoes. These are matters which will have to be decided on evidence. What is apparent is that the acquisition of Herbertson's shares was substantially funded by the defendant No.1, defendant No.11 and the companies and concerns under their control. Similarly, all transactions and the events that followed lead as to hold prima facie that it was a well thought out plan to acquire shares of Herbertsons Ltd., with the parties acting in concert".(emphasis supplied) 178. It is true that the Hon'ble Bombay High Court had also made it clear in Shirish that : 102."On the basis of the facts on record as at present the conclusion appears to be inescapable that defendant No.1 (i.e. KRC) and 11 (MDC) were acting in concert with the companies under their control viz. Defendant ....
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....ted in concert or not. The fact that the declaration was made post acquisition does not matter. It is a declaration of fact. That is all. The Appellants knew what they were declaring. Such a statutory declaration can not be easily discarded. In this context KRC's explanation to SEBI in the circumstances in which such declarations were filed is also worth noting. In his letter dated 2.4.98 he had stated that -" However, for the purpose of record, I would like to state that under legal advise, I had filed with Herbertsons Ltd., declarations under regulation 6(3) and 8(2) of the Takeover Code, 1997 which was introduced with effect from 28.2.1997, since the definition of the words "promoter" "acting in concert" and 'control' in the 1997 Takeover Code are so vague and ambiguous and at the same time so wide and encompassing and in view of the fact that I enjoy the position of Executive Vice chairman of Herbertsons Ltd., inter alia due to the support of Mr. M. D. Chhabria who owns/controls 47.48% of the shareholding of the Herbertsons Ltd., This admission of allegiance to MDC by KRC clearly indicates their association and relationship and vis-à-vis the action of acquisi....
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....en stated in the earlier part of the order. In my view in the light of the factual and legal position discussed above the acquisition of shares during the currency of the 1994 Regulations attracted compliance of the requirements of regulation 10(2) by the acquirers. 181. The Respondent's contention that the acquisition of 0.56% of shares of the Target Company by IMFA, 1.31% by Beethoven and 0,27% by Darrel during the currency of the 1997 Regulations cannot be considered as creeping acquisitions in terms of regulation 11 of the 1997 Regulations on the ground that the acquisitions preceding the said acquisitions were illegal and void is untenable in the light of the finding that KRC and MDC acted together and KRC was already holding 27.21% shares and there was nothing to the effect that the acquisition of the 27.21 per cent shares was illegal. As per regulation 11(1) as it then existed, no acquirer who together with persons acting in concert with him has acquired in accordance with the provisions of law not less than 10 per cent but not more than 51 per cent of the shares or voting rights, in a company, shall acquire, either by himself or through or with persons acting in conc....
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....m measure. Because in that case the position is irretrievable and in case SEBI subsequently hold in favour of the acquirer it may not be able to put the acquirer in the same position as he was when the proceeding was commenced. An order of the instant nature cannot be issued under regulation 39/44 based only on a prima facie view. Therefore, it is difficult to accept that the impugned order is an interim order based on a prima facie finding. 185. The Appellants had also alleged that SEBI has wrongly taken guidance and based its order on the prima facie observations of the Hon'ble Bombay High Court in Shirish, at an inter locutory stage whilst passing the impugned order. This was denied by the Respondent. According to the Respondent it has only taken into consideration the "comments of the Bombay High Court enunciated in the said order", that the order is not based on the prima facie findings of the court. I do not find anything wrong on the part of SEBI relying on the observation of the Hon'ble High Court in the parallel set of facts and circumstances. SEBI or for that even this Tribunal can not take a view at variance from the Hon'ble High Court's view, in the a....
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....information. Sd/- L.K. Singhvi 20/1/98 The file was thereafter forwarded to the Chairman, SEBI who recorded his decision on 21.1.1998 in the SEBI file and which, reads as under: "We may ask the acquirer(s) to file the offer as required under the Regulations immediately. The issue of prosecution will be decided later. Sd/- D.R. Mehta, 21.1.1998." Thereafter the file was forwarded to Mr. P. Kar, Executive Director who recorded his direction to issue a letter instructing the acquirer to file the offer document and recorded as under:- "Please issue a letter as instructed asking the offeror to file the offer document. The draft letter to the offeror may be shown to ED (Law) because of legal issue involved. Sd/- P. Kar 21.1.98." (ii) Having come to know of such order/direction of SEBI, Vijay Mallya, through the letter of the Advocates of the Balaji/Reddy Group dated 27.1.1998 addressed to the Chairman SEBI inter alia requested SEBI not to reach any final conclusion in the matter on the ground that the Balaji/Reddy Group is about to forward an opinion of an emend jurist in the matter. (iii)....
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....ily. Respondent had denied the allegation that SEBI has been biased towards Dr. Vijay Mallya. According to the Respondent "normally an acquirer who has acquired shares in violation has to make a public offer in terms of the Regulations. However, in some cases such direction may amount to further consolidation of illegal acquisition by defaulting acquirer instead of acting as a deterrent. Therefore, even though such alternative action was proposed by SEBI, but eventually no such direction or formal order for public offer was issued". 188. The Respondent has not denied the fact of taking a view by it requiring public offer by the Appellants. It is also true that SEBI had forwarded to the Target Company MDC's letter dated 20.1.1998 seeking clarification from SEBI by viewing the said letter as a complaint warranting redressal by the Target Company. This action looks strange. However, in the context, I would like to state that in the present appeals we are considering the validity of the impugned order. If the said order is found sustainable, the order has to be upheld. Otherwise the order has to be set aside. For the purpose of deciding the present appeals, I do not consider it ....
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.... on 19.2.2002. SEBI has not denied that it had earlier viewed that it was a case warranting public announcement by the Appellants. However its contention is that no such direction was issued, that it is at liberty to carry forward the enquiry in case it was considered necessary and pass appropriate order depending on the outcome of such enquiry. Both the parties had cited authorities in support of their contention as referred to in the earlier part of the order. I have considered those authorities. I am inclined to agree with the Appellants' submission, that the authority passing a quasi judicial order, in the absence of review power specifically vested in it by statute, can not review the order. SEBI Act, does not empower SEBI to review its orders. But the question here is whether SEBI had passed any such order in that sense. In the light of the facts of the case, I am not inclined to accept the Appellants' version that it was an order as contented passed in the matter not subject to review or variation by SEBI. At the best what the Chairman recorded on file on 21.1.1998 could be considered as a clarification which the Appellant was seeking from SEBI with reference to the ....
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....n referred to in their respective submissions earlier. The scope and reach of the repeal and saving provision in regulation 47(2) of the 1997 Regulations is not disputed. The dispute is as to in the light of the facts specific, regulation 47(2) is available or not. I do not see any help from the various authorities cited by the parties in resolving the said dispute. 191. As stated earlier the 1994 Regulations brought into force on 7.11.1994 was repealed by the 1997 Regulations brought into force from 20.2.1997. Regulation 47 of the 1997 Regulations is on "repeal and saving". Sub regulation (1) repeals the 1994 Regulations. Sub regulation (2) is the saving clause which reads as under: "2. Notwithstanding such repeal a Anything done or any action taken or purported to have been done or taken including approval of letter of offer, exemption granted, fees collected, any adjudication, enquiry or investigation commenced or show cause notice issued under the said regulations shall be deemed to have been done or taken under the corresponding provisions of these regulations; b An application made to the Board under the said regulations and pending before it shall be deemed to have ....
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....anaging Director of IMFA seeking to initiate prosecution under section 24 of the SEBI Act for the alleged violation of the 1994 Regulations relating to acquisition of shares in the Target Company. As stated earlier show cause notice was addressed to the Appellants specifically on 8.1.1999. 194. The Appellants' contention that in the show cause notice dated 9.10.1996 to Shri Rama Raheja and the P1 show cause notice dated 31.3.1997 addressed by designation to the Managing Director of IMFA (Shri Ram Raheja had ceased to be the Managing Director of IMFA by that time)no allegation was made against the Appellants and as such they are not show cause notices as far as the Appellants are concerned is difficult to accept. It is an admitted fact that SEBI had taken cognizance of the acquisition of shares by KRC on 14.12.1993, and had made enquiries by writing to the Target Company on 9.6.1995 and the said enquiry was pursued and in the process show cause notice was issued to Shri Ram Raheja/IMFA Managing Director and to the Appellants. The expression enquiry has not been defined in the Act or in the 1994 Regulations or in the 1997 Regulations. Therefore, the expression has to be unders....
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....roduces a legal fiction whereby anything done or action taken under the Regulations of 1994 shall be deemed to have been done or taken under the corresponding provisions of the Regulations of 1997. The effect of the fiction is that the Regulation of 1997, had come into force when such thing was done or action taken." 195. It is seen from the order that the Hon'ble Court noted the facts presented by the Plaintiffs and also their submission and observed that "The date of commencement of the enquiry is, therefore, not the date on which notices are issued, but the date on which the enquiring authority takes cognizance of the violations and proceeds in the matter together further information and evidence". The Hon'ble Court viewed that "in the instant case, on the basis of material on record, we find that the earliest communication was addressed to Herbertsons Ltd., by SEBI on 9.6.1995." and also viewed that "we find that there is material to support the submission of Mr. Nariman". (i.e. the enquiry commenced under the 1994 Regulation). However, it was also stated by the Hon'ble Court that "we express this view on the basis of the material on record and it may be possible....
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....s the admission of the trigger of the threshold limit. It was also submitted that if the 1997 Regulations contained a more onerous covenant or penalties not provided for in the 1994 Regulations they could not be made applicable for alleged violations of the 1994 Regulations by virtue of the deeming provision of the saving clause in regulation 47(2) in the 1997 Regulations. According to the Appellants Chapter V of the 1994 Regulations prescribing the procedure to be followed for issuing directions is a protective mechanism, that as the protection of Chapter V procedure is available to any person alleged to have violated the 1994 Regulations, such protection has to be read into the 1997 Regulations. 199. According to the Respondent since the Appellants had not disputed the facts relating to the acquisitions, the question of initiating investigation under regulation 33 and 34, preceding action under regulations 35 to 37 did not arise. It was also submitted citing this Tribunal in Rhodia that exercise of powers under regulation 44 is not relatable or confined to evidence of any investigation under the Regulations. According to the Respondent it is empowered to exercise powers under ....
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....ard. In the instant case there is nothing on record to show that SEBI had appointed an investigating authority in terms of the Regulations. Therefore, there is no question of SEBI relying on an investigiation report which the investigating authority is required to submit. Therefore, the authority in AK Roy and other two cases referred to above cited by the Appellants has no application to the case. If SEBI had relied on any investigation report, SEBEI was required to follow the procedure prescribed for the purpose. But SEBI has not relied on any investigation report. SEBI has not failed to comply with the prescribed procedure as alleged. 201. It is also noted that the impugned order is not issued under regulation 37. As per the impugned order it is issued under "Sections 11, 11Bof the & SEBI Act and Regulation 39 of the 1994 Regulations and corresponding provisions of regulation 44 and regulation 45 of the 1997 Regulations. In this context it is considered necessary to look at the said three regulations. 202. Regulation 39 of the 1994 Regulations-- Directions by the Board. - On receipt of the report under regulation 36, the Board may without prejudice to its right to initiate....
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....ference to the charges. They were also given adequate opportunity to present their case orally before the Respondent. It is on record that the Appellants had responded to the show cause notice and detailed replies were filed with SEBI. They had also made oral submission through their counsel and also filed written submissions. Therefore, it cannot be said that the Appellants were denied of the protective measure otherwise available before issuing the impugned order. For the reasons stated above and also after taking into consideration the provisions of regulation 47(2) I do not find any infirmity in the process of issuance of the impugned order. 206. The Respondent vide its order dated 19.2.2002, in addition to the direction to divest the shares acquired by the Appellant, had also directed to initiate 207. (ii)Adjudication proceedings against KRC and MDC and persons acted in concert with them under section 15A of the Act for violation of the provisions of Regulation 6 and 8 of the Regulations, 1997 and also initiate adjudication proceedings against the said persons under section 15H of the Act for violation of the 1994 Regulations. 208. Chapter VI A on "Penalties and Adjud....
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....rder directing the Appellants to make disinvestment of the shares acquired by it is a remedial measure and not a penal action. The learned Counsel had also refuted the Appellants' contention that reference to "deterrent" in the order suggest that the impugned order is penal. According to him a deterrent order need not necessarily be penal, that deterrence means the act or process of discouraging certain behaviour. 211. SEBI has relied on the observation made by the Hon'ble Bombay High Court in Shirish (supra) that the requirement of Regulation 9 and 10 are mandatory in character and as such any breach thereof renders the transaction void, and since the Appellants have not complied with the requirements of regulation 10, the acquisitions made by them are not legally valid. SEBI, based on the said perception issued the impugned direction. It has not given any other reason. However, the learned Counsel appearing for SEBI had submitted that though failure to comply with the regulation renders purchase of shares beyond the stipulated limit illegal and void, since it was impractical to restore the shares to the original sellers and obtain the consideration paid to them back, S....
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....of the section for issuing directions under section 11B to cover imposition of penalties, the limitation stated above need be kept in mind.", that "the power under section 11B is restricted to issue appropriate direction for the purpose of protecting the interests of investors etc. mentioned in the section." According to the Appellants the impugned direction requiring disinvestment of the shares acquired allegedly without making a public announcement as per regulation 10, is an unprecedented one as SEBI never in the past or even after the issuance of the impugned order directed any acquirer to disinvest the shares, that consistently SEBI used to direct the acquirer to make a public offer. It was also submitted that the impugned order is neither in the interest of shareholders nor in the interest of the securities market. 213. I do not find Skipper's case any support to SEBI's decision directing disinvestment of shares, as the facts and circumstances based on which the Hon'ble Supreme Court decided Skipper case are entirely different from the facts and circumstances of the present case. The charge against the Appellants is that they acquired shares without making publ....
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.... of the Regulations. So the Regulation empowers SEBI to issue such directions for justifiable reasons. Vies of regulation 39/44 is not under challenge in the present appeal. In Sterlite, the order was not made by SEBI in terms of any such regulations, but only in terms of section 11B. So the ratio in Sterlite has no application in the present case. SEBI has already provided measures to regulate substantial acquisition of shares and takeovers by notifying the regulations and the regulations specifically provide for the nature of the directions empowered to be issued. Therefore, the governing regime for the purpose is the regulation notified and nothing else. 216. Obviously the impugned direction is issued in terms of regulation 39/44 as it specifically provides for issuing directions to the person concerned to sell the shares acquired in violation of the provisions of the Regulations. The text of these regulations has been furnished in the earlier part of this order. The Appellants' contention that SEBI has no power to fix the sales price is unfounded. Fixing the sales price is incidental to the direction to sell the shares. But the sale price can not be fixed whimsically or ....
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....ect the interest of investors and in the interest of securities market. The Appellants' contention that the impugned direction in any case cannot reach them for the reason that they are neither intermediaries referred in section 12 nor "persons associated with the capital market", is untenable in the light of the Hon'ble Gujrat High Court's observation in [(Karnavati Fincap V SEBI (1996) 23 CLA 113 (Guj). In the said case the Hon'ble Gujrat High Court had held that " It is inconceivabe to think that a buyer or seller of a scrip is not a person associated with the securities market, where or through which he transacts his business whether as trader or as investor of selling or buying the required scrip. 218. The Hon'ble Bombay High Court (DB) in Shirish after referring to certain authorities had observed that - "it will be found that the legislative intent was to prohibit acquisition of shares in breach of the Regulations. For the violation of the relevant Regulations, an acquirer could be prosecuted and sentenced to a term of imprisonment. He was also liable to pay a penalty, apart from prosecution. The whole purpose of the Act is to protect the righ....
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....ation 39/44 in the instant case has to be tested with reference to the objective of the SEBI Act and the duty cast on SEBI. In my view the provisions of the law need be interpreted keeping in mind the objective of the Act and the obligation cast on SEBI to protect the interest of investors. In this context it is noted that the Hon'ble Supreme Court in Director of Enforcement V Deepak Mahajan [(1994) 3 SCC 440)] had observed that "True, normally courts should be slow to pronounce the legislature to have been mistaken in its constantly manifested opinion upon a matter resting wholly within its will and take its plain ordinary grammatical meaning of the words of the enactment as affording the best guide, but to winch up the legislative intent, it is permissible for courts to take into account of the ostensible purpose and object of the real legislative intent otherwise, a bare mechanical interpretation of the words and application of the legislative intent to devoid of concept of purpose and object will render the legislature inane. .........Authorities a few of which we have referred to above show that in given circumstances it is permissible for courts to have functional approac....
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....vers should operate principally to ensure equal treatment of all shareholders in relation to substantial acquisition of shares and takeovers...............The objective of the Regulations should therefore, be to provide an orderly frame work within which such process could be conducted. The Regulations should also help in evolving good business standards as to how fairness to shareholders can be achieved, as maintenance of such standards is of importance to the integrity of the financial market and they should not concern themselves with issues of competition or financial or commercial advantages or disadvantages of takeover." (emphasis supplied) 224. The Committee had also viewed that "Equality of treatment and opportunity to all shareholders" and "protection of interests of shareholders" should guide the interpretation and operation of the Regulations. 225. It appears that it is in the context of the objective of the SEBI Act and the Regulations and the functional/practical difficulties involved in restoring the shares acquired by the Appellants to their original owners and obtaining back the consideration paid for the purchase of shares, the Hon'ble Court having viewed....
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....#39;s direction to the Appellants to disinvest their holding in the open market is a measure to protect the interest of investors in securities or is in the interest of securities market need be considered for the purpose of determining the validity of the order. 226. The Appellants were holding 47.48% of the shares in the Target Company. The direction is to sell shares held in excess of the limit prescribed in regulation 10(2) i.e. the holding in excess of 10% of the Target Company's capital. If SEBI's direction to disinvest the shares held by the Appellants is effected, about 38% of the equity shares of the Target Company will have to be offloaded in the market for sale at the rate of Rs. 10/- per share. Target Company's paid up capital consists of 95,22,323 shares -- 38% of the same means about 36 lakh shares. One need not be a stock market expert or financial wizard to gauge the adverse consequences of offloading such a huge quantity of shares in one go at such a price for sale in the open market. SEBI has not explained in its order as to in what way offloading of such huge quantity of shares would benefit the securities market or the shareholders of the Target C....
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....ef or remedy to the aggrieved shareholders. In my view SEBI's direction is not in tune with the objective of the Act and the Regulations and duty cast on SEBI to protect the interests of investors. Since it has been established that the Appellants have violated the requirements of regulation 10(2) they cannot escape from the obligation towards the shareholders of the Target Company and the attendant penal consequences. Even at this belated stage they can be directed to meet their obligation to benefit the shareholders of the Target Company and also to compensate the shareholders for the loss they have sustained. I do not think at this point of time remanding the matter to SEBI for the purpose, will be of any use but cause only further delay in providing the benefit to the shareholders for which they are entitled. The Tribunal is empowered to modify the impugned order. Accordingly it is felt that the impugned direction need be modified to be in tune with the objective of SEBI Act and Regulations regulating substantial acquisition of shares and Takeovers. 227. For the reasons stated above, the Appellants are directed to make a public offer to acquire shares of the Target Compa....