AI Drafter 
TaxTMI 
TaxTMI 
2019 (10) TMI 112
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....is, Mr. Manish Chhangani and Mr. Arka Saha, Advocates i/b. Khaitan & Co. For The Respondent : Mr. Kevic Setalvad, Senior Advocate with Mr. Mihir Mody, Ms. Sneha Prabhu, Mr. Ameya Kulkarni and Mr. Sushant Yadav, Advocates i/b. K. Ashar & Co, Mr. Navroz Seervai, Senior Advocate with Mr. Ashish Kamat, Mr. Abhijit Joshi, Mr. Rahul Dwarkadas, Mr. Kunal Doshi, Mr. Areez Gazdar and Ms. Rohini Jaiswal, Advocates i/b. Veritas Legal, Mr. Ravi Kadam, Senior Advocate with Mr. Gaurav Joshi, Senior Advocate, Mr. Rohan Kadam and Mr. Hussain Dhoklawala, Advocates i/b. M/s. Ganesh & Co., Mr. Janak Dwarkadas, Senior Advocate with Mr. Rohit Gupta, Mr. Tomu Francis, Mr. Manish Chhangani and Mr. Arka Saha, Advocates i/b. Khaitan & Co., Mr. Kevic Setalvad, Senior Advocate with Mr. Mihir Mody, Ms. Sneha Prabhu, Mr. Ameya Kulkarni and Mr. Sushant Yadav, Advocates i/b. And K. Ashar & Co. ORDER Per : Justice M.T. Joshi 1. Both the present appeals have been filed aggrieved by the same common order of respondent Securities and Exchange Board of India (hereinafter referred to as 'SEBI') in the matter of complaint filed by the appellant ITC Ltd. making grievance a....
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....between the Company and Brookfield and the promoters. Since the appellants contention that the Director and Promoters of Respondent no.2 Company and Respondent no.17 JMF ARC shall be precluded from voting is not accepted the present Appeal no.357 of 2019 is filed. 2. Aggrieved by the declaration that the Respondent no.17 JMF ARC had committed a technical breach of the Takeover Regulations, Appeal Lodging No.460 of 2019 is filed. 3. The facts leading to the dispute are as under:- Respondent no.2 the Company is and was under financial distress. In the circumstances, it decided to restructure its debts under the Corporate Debt Restructuring (CDR) mechanism. The majority i.e. 14 out of 17 of its lender institutes had agreed for the same. On 20th September, 2012 CDR Empowered Group had approved the CDR package of the Company. Thereafter, a Master Restructuring Agreement was executed on 25th September, 2012 between the Respondent no.2 Company on one hand and State Bank of India (SBI) and other lenders on the other hand. Under the said Master Restructuring Agreement, Respondent no.2 was to comply with certain terms and conditions. It however could not comply with the same. Theref....
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....ement comprising the Asset Sale Transaction and PB Notice was issued. On 22nd April, 2019, the appellant ITC filed a Company Petition before the NCLT complaining of oppression and mismanagement. Since appellant ITC holds 7.92% of the issued capital of Respondent no.2 Company, it sought waiver of the 10% minimum shareholding for minority shareholders to file the proceedings. The Petition is pending before the NCLT. In the meantime, in terms of PB Notice, the appellant has taken inspection of the documents related to the transactions. It is the grievance of the appellant that it was not allowed to obtain copy of the Framework Agreement but only taking of notes was allowed. However, from the submissions and counter submissions of the parties it is evident that besides the Asset Sale Transaction of the Company, additional transaction etc are also sought to be entered into by some of the promoters and their private limited companies like Respondent nos.8 to 12 with Brookfield as part of a composite proposal. The affidavits and counter affidavit would show that the transactions are not only composite but are inter dependent. The transactions are as under:- (i) Approval for....
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....same rent as currently being paid by the Company. This agreement also grants to Brookfield a right of first refusal for the acquisition of the Bengaluru Hotel land. (v) Given that Promoters own the 'The Leela' brand inter alia in respect of real estate projects, Brookfield and certain Promoters will enter into a Joint Venture Agreement for the development of real estate projects using the said brand. (vi) An Intellectual Property Assignment Agreement to be executed between the Promoters/ Promoter Group and their affiliates and LLHPL as may be mutually agreed between the parties and Brookfield. (vii) An Intellectual Property Assignment Agreement between the Company and identified Promoters, and their affiliates, with respect to registrations/applications for registration of the trademark 'Jamavar', as may be mutually agreed between the parties and Brookfield. 6. The sum and substance of the objection of the appellant ITC is that all these transactions are related party transactions which could not be generally put for vote including the Promoters, Directors being related parties as also Respondent no.17 JMF ARC. Further, JMF ARC acting as a Merc....
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....y before its shareholders, afresh. B. The Additional IP Transaction concerning the 'related party transaction involving transfer of 'Jamavar' trademark, shall separately be put to vote by the Company before its shareholders afresh in case such valuation in respect of the 'Jamavar' trademark exceeds 10% of the annual consolidated turnover of the Company, as per the last audited financial statements. The Promoters /Promoter Group of the Company shall not participate in the aforementioned voting process. C. The Company shall make all material disclosures including the litigation relating to the claim of AAI with respect to the Leela Hotel, Mumbai, in the Postal Ballot Notice and in the financial statements in the Annual Report." 8. Aggrieved by the said order of not restraining Promoters/Directors of the Respondent no.2 Company and Respondent no.17 JMF ARC from voting ITC has filed Appeal no.357 of 2019. 9. Aggrieved by decision that Respondent no.17 JMF ARC had committed a technical breach of the Takeover Regulation, it has filed separate Appeal Lodging no.460 of 2019. 10. Both the sides tried to represent before us the motive/intention of the other party q....
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....rights of the directors/promoters of the Company i.e. Respondents no.3 to 16, the reliefs can be modified in terms of the relevant regulations (dealt hereinafter in extenso) in the event, the objection is accepted by us. 12. We have extensively heard the learned Senior Counsels for the respective parties. In our considered view Appeal no.357 of 2019 filed by ITC Ltd. deserves to be dismissed while Appeal Lodging No.460 of 2019 filed by JMF ARC deserved to be allowed for the reasons to follow:- 1. As described already the objection of appellant ITC is to be considered in the context of the provisions of Takeover Regulations and the provisions regarding the related party transactions as found in Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (hereinafter referred as 'LODR Regulations). We first propose to examine the case as regards the breach of the Takeover Regulations. Takeover Regulations a. In view of the Takeover Regulations of 2011 an acquirer acquiring 25% or more shares, voting rights or control in a listed Company has to adopt the route as provided by the Takeover Regulations subject t....
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....er under regulation 3 and regulation 4 subject to fulfillment of the conditions stipulated therefor,- ...................... ........................................ (i) Conversion of debt into equity under Strategic Debt Restructuring Scheme - Acquisition of equity shares by the consortium of banks, financial institutions and other secured lenders pursuant to conversion of their debt as part of the Strategic Debt Restructuring Scheme in accordance with the guidelines specified by the Reserve Bank of India: Provided that the conditions specified under subregulation (5) or (6) of regulation 70 of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009, as may be applicable, are complied with." ..................................... c. Regulation 10(6) in the circumstances provides as under: "(6) In respect of any acquisition made pursuant to exemption provided for in this regulation, the acquirer shall file a report with the stock exchanges where the shares of the target company are listed, in such form as may be specified not later than four working days from the acquisition, an....
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....upports the reasons as found in the impugned order and submits that it is a technical breach. f. Clause 7.2 of Master Restructuring Agreement provides for remedies upon the occurrence and continuation of the event of default from the side of the Company generally. Relevant provisions of Clause 7.2 (e) is as under: "(e) Conversion Right (i) In the event the Borrower defaults in repayment/payment of any installment of principal amount of the Facilities or any interest thereon as the Applicable Interest Rate or any combination thereof, then the CDR Lenders shall have the right to convert (which right is hereinafter referred to as the "conversion right") at its option the whole or part of the Outstandings (whether then due and payable or not) into fully paid-up Equity Shares, at a price as determined in accordance with the Applicable Law from the date (which date is hereinafter referred to as the "date of conversion") and in the manner specified in a notice in writing to be given by the CDR Lenders to the Borrower (which notice is hereinafter referred to as the "conversion notice"). (ii) Any conversion in terms of this Section 7.2 shall be subject to....
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....scheme and, therefore, fit for exemption under Regulation 10 read with sub-Regulation 6 as reproduced supra. j. It is the case of Respondent no.17 JMF ARC that necessary disclosures were made and in such circumstances in our view there is not even a technical breach of the Takeover Regulations. The case of the appellant that Respondent no.1 SEBI should have given direction to the Respondent no.17 JMF ARC under Regulation 32 to desist from voting in the disputed resolution process cannot be accepted. In this scenario reliance of the appellant in the ratio of Karvy Financial Services Ltd., Appeal nos.479 of 2016 and 349 of 2017 decided on 26.4.2018 that the exemption should be sought before acquisition is not applicable to the present case as in Karvy, this Tribunal was not dealing with statutory exemption under Regulation 10, but was on the grant of discretionary exemption under Regulation 11 of the Takeover Regulations. Similar is the case of the Regaliaa Realty Ltd. (2016) SCC Online SEBI 302 decided by Whole Time Member of SEBI. Laurel Energetics Pvt. Ltd. (2017) 8 SCC 541 relied in by the appellant was on interpretation of the Regulation 10(1) of the Takeover R....
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....ransactions. 23. (1) The listed entity shall formulate a policy on materiality of related party transactions and on dealing with related party transactions including clear threshold limits duly approved by the board of directors and such policy shall be reviewed by the board of directors at least once every three years and updated accordingly. Explanation.- A transaction with a related party shall be considered material if the transaction(s) to be entered into individually or taken together with previous transactions during a financial year, exceeds ten percent of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity. (1A) Notwithstanding the above, with effect from July 01, 2019, a transaction involving payments made to a related party with respect to brand usage or royalty shall be considered material if the transaction(s) to be entered into individually or taken together with previous transactions during a financial year, exceed two per cent of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity. (2) All related....
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....saction or not. Thus, all the related parties are prohibited to vote to approve such related party transaction irrespective of the fact that a particular related party may not be a party to a particular transaction. e. In order to attract the provisions of sub-regulation 4 of Regulation 23 as quoted above it is necessary that (1) It shall be a related party transaction. (2) It should be material. (3) It shall be put for approval to the shareholders through resolution. (4) None of the related party can vote to approve irrespective of the fact as to whether a specific related party would be involved in the particular transaction or not. f. The definition of related party under Section 2(zb) of the LODR Regulation reads as under:- "2(zb)―related party means a related party as defined under sub-section (76) of section 2 of the Companies Act, 2013 or under the applicable accounting standards: Provided that any person or entity belonging to the promoter or promoter group of the listed entity and holding 20% or more of shareholding in the listed entity shall be deemed to be a related party: Provided fur....
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....t influence" means control of at least twenty per cent of total share capital, or of business decisions under an agreement; j. The first of the ingredient of the Regulation 23 of the LODR Regulation naturally is that the prohibition would be attracted to the related party transactions. The definition of the same is found in sub-regulation 2(zc) of the LODR Regulations which reads as under:- "2(zc) "related party transaction" means a transfer of resources, services or obligations between a listed entity and a related party, regardless of whether a price is charged and a "transaction" with a related party shall be construed to include a single transaction or a group of transactions in a contract:" Provided that this definition shall not be applicable for the units issued by mutual funds which are listed on a recognised stock exchange(s);" k. In this connection, it would be beneficial to advert attention to the similar definition found in Section 188 of the Companies Act, 2013. The relevant provisions is as under: "188. Related party transactions. (1) Except with the consent of the Board of Directors given by a resolution at a meet....
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....that in the present case each and every transaction i.e. whether asset sale transaction of the Company or additional transactions are between either the Company and Brookfield or the promoter and Brookfield. None of the transactions is "between related party and the listed entities" or "of the Company with a related party." p. Mr. Khambatta and thereafter Mr. P.N. Modi in rejoinder strenuously submitted that the additional transfer is nothing but benefits to be derived by promoter in composite agreement and Respondent no.17 would also gain from the entire transaction. Therefore they submitted that narrow interpretation could infact stifle the purpose of the provisions. q. Upon hearing both sides, in our view, the language of the provisions needs no interpretation as the language of the same is plain. While SEBI as a regulator define related party transaction as a transaction "between a listed entity (Company) and a related party" the Parliament define the term as per Section 188 of the Companies Act, 2013 as "a transaction of a Company with a related party". None of the provisions leave any scope for interpretation of the same as suggested by Mr. Khambatt....