TaxTMI 
TaxTMI 
2013 (6) TMI 917
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.... in passing the Impugned Order dated December 31, 2012 hereinafter referred to as "Impugned Order", against them for the alleged failure to make a public announcement within the stipulated time as required under the provisions of regulations 10 and 11(1) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, hereinafter referred to as "SAST Regulations, 1997", in respect of the acquisition of shares in question by the Company. The promoter group of the Company, inter alia, includes all the four Appellants, their family members, relatives and associate persons/entities. M/s. Khaitan Lefin Ltd., hereinafter referred to as "KLL", and M/s. Oriental Mercantile Company Ltd., hereinafter referred to as "OMCL", became part of the promoter group on March 31, 1998 and March 31, 2000 respectively. The Company had an authorized share capital of INR 17,50,00,000 and a paid-up capital of INR 72,000,000 comprising of 7,200,000 shares with a face value of INR 10 each, at the end of the financial year on March 31, 2006. 2. By the Impugned Order passed by the whole time member of the Respondent, hereinafter referred to as "WTM", the Appellants have been directed to make ....
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....filed their reply vide letter dated June 11, 2012, and during the personal hearing before the Respondent on August 21, 2012, Mr. Vyapak Desai, Advocate, appeared and made submissions on behalf of the Appellants. Subsequently, the Appellants also filed their written submissions on August 24, 2012. 5. It appears from the records that the Company, in order to meet its business requirements, conducted two extraordinary general meetings, each of the two hereinafter referred to as "EGM", for issuance of preferential shares under Sections 81 and 81(1A) of the Companies Act, 1956. The first EGM was held on March 23, 2006 approving issuance of 10 lac equity warrants with a face value of Rs. 10/- each at a premium of Rs. 50/- each on preferential basis to four members of the company i.e. the four Appellants who were admittedly acting in concert. As per law, these warrants were to be converted into equity shares within a period of eighteen months from the date of allotment. 6. Similarly, in the second EGM held on November 29, 2006, the shareholders approved issuance of 25 lac equity shares with a face value of Rs. 10/- each and at a premium of Rs. 121/- each on a preferential basis to s....
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..... The process of acquisition of shares/voting rights was carried out in an extremely transparent and compliant manner. The shareholders duly approved allotment after convening the two EGMs as per procedure established by law. They were informed in the EGM notice itself of the details and purpose of the EGM, specifically identifying the four Appellants who were acting in concert. Thus, the allotment of warrants to the four Appellants was effectuated only after due approval of the shareholders was obtained in the open EGMs. Similarly, disclosures were made by the Appellants in compliance with the instant requirements as laid down by the SAST Regulations, 1997 and SEBI (Prohibition of Insider Trading) Regulations, 1992. 10. The Appellants further submit that the SCN itself and the consequent proceedings are not warranted in this matter since the Appellants kept the Respondent informed of the acquisition in question at all stages. The next contention of the Appellants is that the learned WTM has not correctly applied the provisions of law. The Impugned Order, at the outset, mentions that it has been passed in accordance with the provisions of SAST Regulations, 2011 read with SAST Re....
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....nced on behalf of the Appellants is that it applies to those acquirers who, either by themselves or together with other persons acting in concert, hold atleast 15% of the shares or voting rights in the company, which at the same time must be less than 55%. The provisions make it mandatory for an acquirer to make an open offer if he acquires more than 5% of the company's shares or voting rights in any financial year. Thus, the crux of the submissions is that the creeping limit of acquisition of shares in the target company by an acquirer, whether by himself or with persons acting in concert with him, is the 5% increase in the percentage shareholding/voting rights of the target company. For this purpose, the financial year is to be reckoned as of the end of March 31. This view has also been substantiated by the Bhagwati Committee Report, 2002 on the Takeover Code. Therefore, there has been no violation of regulation 11 of SAST Regulations, 1997. This has been attempted to be demonstrated through a chart which is as under:- *Benchmark holding for considering creeping acquisition. 15. One of the arguments advanced by the Appellants is regarding the unexplained and inord....
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....tion granted from strict enforcement of the said rule, this sub-regulation shall apply as if for the words and figures 'seventy-five per cent (75%)', the words and figures 'ninety per cent (90%)' were substituted. (2A) Where an acquirer who (together with persons acting in concert with him) holds fifty-five per cent (55%) or more but less than seventy-five per cent (75%) of the shares or voting rights in a target company, is desirous of consolidating his holding while ensuring that the public shareholding in the target company does not fall below the minimum level permitted by the Listing Agreement, he may do so only by making a public announcement permitted by the Listing Agreement, he may do so only by making a public announcement in accordance with these regulations : Provided that in a case where the target company had obtained listing of its shares by making an offer of at least ten per cent (10%) of issue size to the public in terms of clause (b) of sub-rule (2) of rule 19 of the Securities Contracts (Regulation) Rules, 1957, or in terms of any relaxation granted from strict enforcement of the said rule, this sub-regulation shall apply as if ....
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.... control acquired is equal to or less than the control exercised by person(s) prior to such acquisition of control, such control shall not be deemed to be a change in control. 2(e) "person acting in concert" comprises, - (1) persons who, for a common objective or purpose of substantial acquisition of shares or voting rights or gaining control over the target company, pursuant to an agreement or understanding (formal or informal), directly or indirectly co-operate by acquiring or agreeing to acquire shares or voting rights in the target company or control over the target company, (2) without prejudice to the generality of this definition, the following persons will be deemed to be persons acting in concert with other persons in the same category, unless the contrary is established : (i) a company, its holding company, or subsidiary or such company or company under the same management either individually or together with each other; (ii) a company with any of its directors, or any person entrusted with the management of the funds of the company; (iii) directors of companies referred to in sub-clause (i) of clause (2) and their ass....
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.... an allotment is in breach of regulation 10, 11 or 12; (d) directing the target company or the depository not to give effect to transfer or further freeze the transfer of any such shares and not to permit the acquirer or any nominee or any proxy of the acquirer to exercise any voting or other rights attached to such shares acquired in violation of regulation 10, 11 and 12; (e) debarring any person concerned from accessing the capital market or dealing in securities for such period as may be determined by the Board; (f) directing the person concerned to make public offer to the shareholders of the target company to acquire such number of shares at such offer price as determined by the Board; (g) directing disinvestment of such shares as are in excess of the percentage of the shareholding or voting rights specified for disclosure requirement under regulation 6, 7 or 8; (h) directing the person concerned not to dispose of assets of the target company contrary to the undertaking given in the letter of offer; (i) directing the person concerned, who has failed to make a public offer or delayed the making of a public offer in terms of ....
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.... Order are as under:- 11. Functions of Board. - (1) Subject to the provisions of this Act, it shall be the duty of the Board to protect the interest of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit. Section 11-B deals with power to issue directions. 11-B. Power to issue directions. - Save as otherwise provided in section 11, if after making or causing to be made an enquiry, the Board is satisfied that it is necessary - (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 of 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 matter specified in section 11-A, As may be appropriate in the interests of investors in securities a....
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....mittent fall in shareholding or voting rights whether owing to disposal of shares held or dilution of voting rights owing to fresh issue of shares by the target company. (ii) in the case of acquisition of shares by way of issue of new shares by the target company or where the target company has made an issue of new shares in any given financial year, the difference between the pre-allotment and the post-allotment percentage voting rights shall be regarded as the quantum of additional acquisition (3) For the purposes of sub-regulation (1) and sub-regulation (2), acquisition of shares by any person, such that the individual shareholding of such person acquiring shares exceeds the stipulated thresholds, shall also be attracting the obligation to make an open offer for acquiring shares of the target company irrespective of whether there is a change in the aggregate shareholding with persons acting in concert. Power to issue directions. 32. (1) Without prejudice to its powers under Chapter VIA and section 24 of the Act, the Board may, in the interest of investors in securities and the securities market, issue such directions as it deems fir under sect....
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....er but has delayed making payment of the open offer consideration to shareholders, to pay interest at such rate as considered appropriate by the Board for the delayed period; (k) directing any person to cease and desist from exercising control acquired over any target company without complying with the requirements under these regulations; (1) directing divestiture of such number of shares as would result in the shareholding of an acquirer and persons acting in concert with him being limited to the maximum permissible non-public shareholding or below. (2) In any proceedings initiated by the Board, the Board shall comply with principles of natural justice before issuing directions to any person. (3)The Board may, for failure to carry out the requirements of these regulations by any intermediary registered with the Board, initiate appropriate proceedings in accordance with applicable regulations. 19. We now come to the case of the Respondent which is twofold:- i. Since, as a result of the acquisition, the individual shareholding of KLL increased from 10.52% to 17.16%, it was required to make a public announcement in accordance with the ....
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....etheless, in certain cases they might overlap triggering two or more of these regulations. The Respondent has also referred to the decision of this Tribunal in the matter of Hanumesh Realtors Limited passed in 2012 in which it was held that if an acquirer exercises more than 5% of the voting rights in a financial year then, as per regulation 11(1) of the SAST Regulations, he is obliged to make a public announcement. With respect to the violation of regulation 11(1) of the SAST Regulations, 1997, it is further submitted by the Respondent that the following 3 ingredients need to be satisfied: (i) "The acquirer together with persons acting in concert holds shares between 15% to 55% in the target company, (ii) The acquirer acquires additional shares or voting rights by himself or through or with persons acting in concert, (iii) The additional acquisition entitles the acquirer to exercise more than 5% of the voting rights in any financial year ending on 31st March. It is stated by the Respondent that the first two ingredients required to constitute a violation under the said regulation are admittedly satisfied in the instant case. However, regarding the thi....
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....ding on March 31, 2007. The learned WTM has interpreted regulation 11(1) and the word 'acquirer' as defined in regulation 2(1)(b) of the SAST Regulations, 1997 to mean that the person acquiring shares becomes liable to make a public announcement on the date of agreement to acquire shares so as to make the shareholding calculable as per the shareholding of the acquirer immediately prior to the acquisition. As such, in order to determine whether or not the Appellants breached the threshold of 5%, the shareholding of the Appellants as on the date of acquisition of additional shares should be taken into account. 24. It is also stated by the Respondent that the 5% creeping acquisition benchmark should be determined irrespective of the sale of 1,30,000 shares by the Appellants in April-May 2006 along with allotment of 25,00,000 shares to strategic investors and hence, should be calculated on the basis of the gross acquisition as opposed to it being calculated post netting the dilution and/or disinvestment. On the basis of this interpretation the Impugned Order has come to the conclusion that the acquisition of shares of the Company by the acquirers on March 12, 2007 crossed th....
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....shareholding of KLL went up from 10.52 % to 17.16 % on March 12, 2007. Therefore, in terms of Regulation 10 of the SAST Regulations 1997, KLL, individually, should have made a public announcement of an open offer with respect to the shares of the Company. Thus, according to the Respondent a breach has been committed by KLL in respect of the provisions of regulation 10. 29. A perusal of regulation 10 reveals that it deals with the subject "Acquisition of 15% or more of the shares/voting rights of any company". It provides that no acquirer shall acquire shares/voting rights which taken together with shares/voting rights earlier held by him or by persons acting in concert with him which may entitle such acquirers to exercise 15% or more of the voting rights in a company. And if all these requirements are met, a public announcement to acquire shares of such a company is a must. The point to be noted here is that KLL has not acquired the shares in question individually. Admittedly, KLL has acted in concert with the other three Appellants for the said purpose. Therefore, for determining the crossing of the threshold limit of 15% prescribed by Regulation 10, it is the collective holdin....
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....spective of its aggregate shareholding with persons acting in concert if the shareholding of such individual person exceeds the threshold limit prescribed by regulation 10. It is pertinent to note that such a specific and unambiguous provision making an individual liable to make a public offer in case the individual shareholding increases during the course of the acquisition even while acting in concert with other persons is conspicuously missing in the SAST Regulations, 1997. KLL was, therefore, not required to make a public offer and the finding in the Impugned Order qua appellant no. 3, i.e., KLL is hereby set aside. At any rate, since the amendment of the Takeover Code and the inclusion of regulation 3(3) in the SAST Regulations, 2011 the discussion regarding the applicability of regulation 10 of the SAST Regulations, 1997 has been rendered academic. Having said that, in the facts and circumstances of the present case, KLL cannot be called upon to make an open offer by applying regulation 3(3) of the new Takeover Code retrospectively. 31. As regards the finding of the Respondent against the Appellants in respect of the violation of Regulation 11(1) of the SAST Regulations 19....
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....a violation of the provisions of Regulation 11(1) of SAST Regulations, 1997 and we find no fault with the Impugned Order in this regard. However, the point to be analysed is whether or not the Appellants ought to be called upon to make a Public Offer at this belated stage or whether a monetary penalty should be imposed to meet the ends of justice by modifying the Impugned Order. 33. In this connection, the Appellants have relied upon the case of Ushdev Trade Ltd. vs. SEBI in which one promoter group company transferred its entire shareholding of 18.74% in the target company to another promoter group company in an off-market transaction. This transfer of shares did not lead to any change in control over the target company. SEBI, after investigating the transaction, held the Appellant guilty of violating Regulation 10 of the SAST Regulation, 1997, i.e., acquiring more than 15% stake in the target company without making an open offer. The Appellant submitted that the purchase of shares was an inter-se transfer between two promoter group companies and the open offer was not made owing to a genuine belief that the obligation to do so had not accrued. This Tribunal held that the objec....
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....violation of Regulation 11(1) of the Takeover Code of 1997. For this violation, we are of the opinion that a suitable monetary penalty, must be imposed instead of calling upon the Appellants to make a combined public announcement to acquire shares of the Company at this belated stage. The requirement of making a public announcement would be totally superfluous in the facts and circumstances of the case and would not beget any good. The objective of the preferential allotment of shares in question was only to address the working capital requirements of the Company for its smooth day to day functioning. Therefore, a stable, low-cost funding-source, such as preferential allotment, was undertaken in the larger interests of the Company and, in effect, its shareholders. In this connection, it is pertinent to note that the allotment of preferential shares in question was made after seeking approval of the shareholders of the Company in two duly convened EGM's held on March 23, 2006 and November 29, 2006. 36. Lastly, the acquisitions/ incidents pertain to the year 2006-2007. The show cause notice was issued by the Respondent on March 26, 2012. After holding proceedings against the A....