TaxTMI 
TaxTMI 
2001 (8) TMI 1446
X X X X Extracts X X X X
X X X X Extracts X X X X
....r cent of the equity capital of the company. On 15-9-1997, they were allotted 20 lakhs equity shares (18.82 per cent) on preferential basis. As a result of the said allotment promoters' holding in the company's capital increased to 71.77 per cent. The company's shares are listed on stock exchanges at Hyderabad, Chennai and Mumbai. In the context of the said preferential allotment and consequential rise in the promoter holding in the company's capital, the SEBI appointed an Adjudicating Officer to enquire into the alleged contravention of section 15A of the Act, read with regulations 3(3), 3(4) and 3(5) of the Regulations and adjudge monetary penalty, if so considered necessary. The Adjudicating Officer, after enquiry, viewed that though the requirements of regulation 3(3) have been substantially complied with, the appellants had failed to comply with the requirements of the provisions of regulations 3(4) and 3(5) and imposed a sum of Rs. 1,25,000 as monetary penalty. 3. Shri Prabhakar Govind Kinikar, authorised representative of the appellants explained briefly the background of the case and stated that the Regulations are not applicable to the case and as such i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ontrol. According to Shri Kinikar whether the person is an acquirer or promoter at any given point of time, is a question of facts and circumstances of each case. The learned representative submitted that an acquirer ceases to beso, on his acquiring control over the company and on acquiring control he assumes the status of a promoter and acquisition of shares by such a promoter is not subject to the provisions of regulations 10, 11 and 12 of the Regulations. 6. With reference to the respondent's observation that the intention of acquisition does not have any relevance to the act of acquisition per se. Shri Kinikar submitted that the Regulations need be interpreted taking into consideration the objective proposed to be achieved by it. In this context he referred to the following observations in Justice Bhagwati Committee report (para 2.22) : " 'Person acting in concert' have particular relevance to public offers, for often an acquirer can acquire shares or voting rights in a company 'in concert' with any other person in a manner that the acquisitions made by him remain below the threshold limit, though taken together with the voting rights of persons ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....not arise in view of the position already held by them. In this context in support, he cited the observation of Justice Bhagwati Committee report that "not only acquisition of shares but also voting rights in a company or control over a company, however, such control be exercised - directly or indirectly - must be covered under the regulations and the present definition of 'acquirer' expanded to include these situations". Shri Kinikar stated that the Adjudicating Officer has not addressed the issues raised by the appellants, as quoted in paras 6.2 and 6.21 in the order, and the finding is deficient in this regard. 8. Shri Kinikar's another submission is that regulations 11 (2), 3(4) and 3(5) are applicable to acquirers and not to promoters, that the Adjudicating Officer has failed to put forward any reasons justifying his finding that the instant acquisition attracted the provisions of regulation 11(2). Shri Kinikar submitted that the said regulations have to take into account (i) the acquisition of shares/voting rights, (ii) the existing entitlement and (iii) the threshold, that it is the way the provisions of the regulations are structured that makes the difference....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hri Kinikar submitted that the use of the word 'which' makes the regulation acquisition oriented, that it is applicable to acquisition and the acquisition together with the existing holding must entitle the acquirer to exercise more than 51 per cent of the voting rights. According to the learned representative in order to make the regulation 11 (2) applicable, in the first instance there has to be acquisition, the acquisition together with the entitlement has to cross the threshold of 51 per cent, that in the instant case, the said 51 per cent benchmark had crossed before 15-9-1997. He submitted that as a result of further acquisition of 18.82 per cent shares on 15-9-1997 the appellants have not become entitled to voting rights 'more than 51 per cent' as the acquisition of 18.82 per cent has resulted only in augmenting the existing voting rights from 52.95 per cent (i.e., more than 51 percent) to 71.77 percent, that the status of 'holding more than 51 per cent' can come only once, when the threshold of 51 per cent is crossed for the first time. According to the learned representative in a case if the existing entitlement is 'more than 51 per cent', f....
X X X X Extracts X X X X
X X X X Extracts X X X X
....very purpose to reach at a pre-mediated conclusion. In this context he also cited the Supreme Court decision in Raja Satyendra Narayan Singh v. State of Bihar AIR 1987 SC 1390 to emphasise the need for giving plain meaning to the statutory provisions while interpreting the same. According to the learned representative, no person is a person acting in concert, bereft of the common objective or purpose as stipulated in the regulation. He submitted that in the instant case, the purpose of acquiring shares was to infuse funds, which purpose is not stipulated in the definition of 'person acting in concert', that none of the appellants, therefore, can be considered as person acting in concert and their collective shareholding cannot be accounted for the purpose. He further submitted that since none of them has acquired 10 per cent or more shares or voting rights individually, the provisions of regulation 3(4) are not attracted as the same applies only to acquisition which taken together with shares or voting rights, if any held by the acquirer or person acting in concert with him would entitle the acquirer to exercise 10 per cent or more of the voting rights in a company. In the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ve and magnitude of the offence. In this context he cited Supreme Court decision in Adamji Umar v. State of Bombay AIR 1952 SC 14 and Modi Ram v. State of MP AIR 1972 SC 2438. 11. Shri Ananta Barua, representing the respondent, in his attempt to defend the impugned order, made the following submissions. Since the appellants acquired 18.82 per cent equity, over and above their holding of 52.95 per cent in a preferential allotment made on 15-9-1997, they were required to submit a report to the SEBI within 21 days from the date of such regulation under regulation 3(4) alongwith the fee prescribed in regulation 3(5), that having failed to do so, the penal provisions contained in section 15A, are applicable to them. Shri Barua explained the requirements of regulations 3(3), 3(4) and 3(5). He submitted that the regulation 10 requires any acquirer who acquires shares or voting rights which entitles him to exercise more than 10 per cent (as it was then) of voting rights in the target company to make a public announcement, unless the acquisition passes through any one or more of the categories exempted vide regulation 3. Regulation 11 (2) requires the acquirer to make a public offer when....
X X X X Extracts X X X X
X X X X Extracts X X X X
....de promoters from its purview. Shri Barua stated that though promoter and acquirer are two distinct entities under the definitions, the two terms are mutually exclusive to the extent, that it is possible that a promoter can also be an acquirer. He further submitted that the act of acquisition of shares or control of the target company or entering into an agreement for the purpose would be the sole criterion for identifying the acquirer, that a promoter could also be deemed to be an acquirer in the event of acquiring shares or voting rights or control of a company in excess of the specified limits by him. He submitted that objective or intention of acquisition does not have any relevance and what matters is the act of the acquisition. Therefore, the appellants' contention that it was not their intention to acquire the shares as an investing proposition and ultimately to gain control, but to infuse funds in the company, cannot be a ground to take them out of the scope of regulation 11(2). Shri Barua submitted that regulation 11(2) brings within its ambit any further acquisition by an acquirer who holds 51 per cent or more of the voting rights in the target company and, therefore,....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., and thereafter on receipt of the reply, an opportunity for hearing is also given, to the affected parties and in the event of a prima facie case of a violation is made out for levy of monetary penalty, an order is issued for adjudication. The Adjudicating Officer in turn initiates proceedings again by issuing a SCN to the persons concerned to explain their view point in the matter, that in the instant case also the same procedure was followed. Shri Barua staled that the appellants were given enough opportunities to make written and oral submissions in the proceedings and the Adjudicating Officer has dealt with their submissions in detail in the impugned order and a reasoned order based on the findings has been passed, that it cannot be said that the Adjudicating Officer passed the order without following the principles of natural justice. Shri Barua, referring to the appellants statement that there was gain to the investing public due to acquisition and loss to the appellants, stated that increase in the stake of promoter in the company means lesser role for the public shareholders, and non-disclosure of material facts virtually amounts to denial of information to the public shar....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ee also recognised that the process of take over is complex and is inter-related to the dynamics of the market place. It would therefore 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. Instead there should be a set of General Principles which should guide the interpretation and operation of the Regulations, especially in circumstances which are not explicitly covered by the Regulations. These principles are : (i) Equality of treatment and opportunity to all the shareholders (ii) Protection of interests of shareholders" The Committee further stated that "in the event of any ambiguity or doubt as to the interpretation of the regulation, the concerned authority shall pay adequate attention to and be guided by any one or more of the aforesaid general principles having a bearing on the matter". 17. After taking into consideration the recommendations of the Committee a new set of regulations, namely, Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 was brought in position wi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ugned order. Shri Kinikar authorised representative of the appellants made very exhaustive submissions in support of the appellants stand. It was really enlightening. However, for the limited purpose of deciding the present appeal, the basic question that need be answered is as to whether the acquisition under consideration is beyond the purview of the Regulation. 20. The appellants' version that they are only promoters and not acquirers need be examined first. In this context it is also pertinent to mention that according to the Adjudicating Officer, the provisions of regulation 11(2) are attracted to the case. There cannot be two opinion on the issue that regulation 3 has no application to an acquisition not covered under regulation 10 or 11 or 12. Exemption provided under regulation 3 is from the applicability of the provisions of the said regulation. To be more precise exemption is from the compliance of the requirements of making public offer required thereunder. It is to be noted that regulation 11(2) was drastically amended in 1998 (with effect from 28-10-1998). Since the preferential allotment was made on 15-9-1997, the applicable provision to the instant case is the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e or purpose of substantial acquisition of shares or voting rights or gaining control over the target company, pursuant loan 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 of 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 persons 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 associates; (iv) mutual fund with sponsor or trustee or asset management company; (v) foreign institution investors with sub account(s); (vi) merchant bankers with their client(s) as acquirer; (vii) portfolio managers with their client(s) as ac....
X X X X Extracts X X X X
X X X X Extracts X X X X
....arcener or a combination thereof, (ii) any company in which a company specified in (i) above, holds 10 per cent or more of the share capital, or (iii) any HUF or firm in which the aggregate share of the promoter and his relatives is equal to or more than 10 per cent of the total;" 'Target company' as per regulation 2(1)(o) means "(o) ... a listed company whose shares or voting rights or control is directly or indirectly acquired or is being acquired". 23. On a perusal of the definition of the expression 'acquirer' extracted above it is clear that any person who acquires or agrees to acquire shares or voting rights/control of the target company is an acquirer. The expression 'any person' is of wide amplitude. A person becomes an acquirer by virtue of his action - who acquires or agrees to acquire shares etc. Therefore, it is difficult to agree with the appellants' contention that a promoter can never be an acquirer. A promoter could be considered as an acquirer or not would depend on the question as to whether he is a person who acquires or agrees to acquire shares etc. Identification is thus action related. In the i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ity of interests which could be acquisition of shares or voting rights beyond the threshold limit or gaining control over the company and this act of acquiring shares or voting rights in a company must serve this common objective. Implicit in the concerted action of these persons must be an element of co-operation" (para 2.22 of the report). In the instant case there is no dispute as to whether there was an element of co-operation among the appellants to acquire shares of the company. It is also evident that they had a commonality of objectives' and community of interest in as much as they had decided to subscribe to the preferential allotment made by the company. The object of subscribing to the preferential allotment may not be to acquire control but to infuse funds. But the fact remains that the appellants had acquired shares following the common objective of acquiring shares. Therefore, in the light of the undisputed facts before me, I have no hesitation to hold that the appellants are acquirers in terms of regulation 2(1)(b), read with regulation 2(1)(e). Now comes the question raised by the appellants that since they are promoters and in control of the company how can the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....be proper to consider him as a person acting in concert with the acquirer." ** ** ** "The expression 'acquirer' and the 'person acting in concert with the acquirer' have been defined in the regulation. There is no hard and fast rule that a promoter can never be an acquirer or person acting in concert. If a promoter acquires or agrees to acquire shares or voting rights or gains -control over the target company he can be safely considered as an acquirer who in turn would be subject to the provisions of regulation 11. Likewise a promoter can be a person acting in concert provided he is found to cover within the scope of the definition under regulation 2(1)(e). Whether a promoter is also an acquirer or person acting in concert would depend on the facts of each case. It is to be noted that there is no blanket prohibition on the promoters acquiring shares etc. in the company." I find no reason to take a different view in this case. 26. In the light of the factual and the legal position discussed above, I am of the view that the appellants are acquirers. In this context the next question to be considered is as to whether the acquisition of additiona....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to acquire share of such company in accordance with the regulations." 28. On a perusal of the text of the said two regulations, it is seen that these regulations, but for the quantum of threshold limit, are identical. However, it does not stand to reason to believe that regulation 11(2) is redundant or superfluous in view of the provisions of regulation 10 that a case to which regulation 10 is not attracted regulation 11(2) also would not attract. In this context it is necessary to find out the object of incorporating these two regulations. It is not proper or possible to jump to the conclusion that framers of the regulation had inadvertently put a regulation over looking the scope of another regulation. Attempt should be to find out the reason to incorporate those regulations rather than holding them redundant or superfluous. It is a settled principle of interpretations that the Court should adopt a construction which advances the policy of the legislation to extend the benefit rather than one which curtails the benefit--Union of India v. Pradeep Kumari [1995] 2 SCC 736. It is no body's case that the provision for making public offer in the cases of substantial acquisition ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (4) The courts have also to keep in mind that an interpretation which reduces one of the provisions as a "dead letter" or "useless lumber' is not harmonious construction. (5) To harmonise is not to destroy any statutory provision or to render it otiose," Keeping in mind the above observations of the Apex Court one has to see the relevance of regulations 10 and 11 (2). Regulation 10 is on acquisition of shares beyond the benchmark of 10 per cent stated therein. Said regulation 10 provides the threshold limit for public offer. Justice Bhagwati Committee has discussed at length the background in which the said regulation 10 was considered necessary to be put in the Regulations. The Committee has stated that "it was felt that under Indian conditions hardly any person as investor would invest in more than 10 per cent in any company unless he has an intention of taking over the company at some point of time and the committee therefore decided to retain the existing threshold limit of 10 per cent". Thus regulation 10 is on the "beginning of the beginning'. Regulation 11 is for a different purpose. It is on consolidation of holdings. In this context the clarifica....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... not be applicable to any person who holds 50 per cent or more. But reservations were expressed from some quarters about this exclusion clause on the ground that if the regulations are intended to safeguard shareholders interest even in the event of substantial acquisition of shares not involving a takeover, there is no justification for excluding substantial acquisition by acquirers holding more than 50 per cent. The question which arose in this regard is upto what point of time substantial acquisitions not involving takeovers need to be regulated. The committee decided that substantial acquisition till an acquirer gains absolute control lever of 75 per cent may be brought within the scope of the Regulations." 30. As already stated, the promoters were holding 52.95 per cent shares in the company. Acquisition of further shares was in effect consolidation of their holding. If financing the business activities of the company was their sole objective, the appellants would not have provided funds against the issue of shares in a preferential allotment. It would have been possible through other least risky and more remunerative modes. The argument that since the appellants were alrea....
X X X X Extracts X X X X
X X X X Extracts X X X X
....preferential allotment made by the company on 15-9-1997 attracted the provisions of regulation 11(2). 31. Having come to the conclusion that the appellants are acquirers and that the acquisition attracted the provisions of regulation 11(2), the next question is as to whether the appellants were required to comply with the requirements of regulations 3(4) and 3(5). 32. Regulation 3 enumerates certain categories of acquisitions exempted from the compliance of the requirement of regulations 10, 11 and 12. One of such exempted categories is acquisition of shares in a preferential, allotment made in pursuance of a resolution passed under section 81A of the Companies Act, 1956. The exemption is not automatic. It is subject to compliance of certain requirements. In any case it is an admitted fact that the instant acquisition was in a preferential allotment and the same enjoyed exemption under regulation 3. In this context it is to be noted that the acquisition enjoys exemption only from the compliance requirements of regulations 10, 11 and 12. They are not exempted from complying with the reporting requirements in terms of sub-regulations (3), (4) and (5) of regulation 3. The said s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ch would entitle such person to exercise 10 per cent or more of the voting rights. The appellants had advanced more or less the same argument as put forth with reference to the applicability of regulation 11(2) to them that their holding exceeded the prescribed limit even before the present acquisition, also in support of their contention that regulation 3(4), is not attracted. It has already been discussed at length in this order that the said argument is devoid of any merit. What is envisaged in regulation 3(4) is not a one time reporting, as is evident from the reason stated by the committee necessitating such reporting. Thus the contention that regulation 3(4) is not required to be complied with by the appellants who had crossed the benchmark before 15-9-1997 is of no sound fooling and I reject the same. 37. The appellants allegations that the respondent had issued two SCNs and that they were not given opportunity to explain their view point in the proceedings before the authorities, are baseless. The learned representative of the respondent has explained the procedure followed by the SEBI in the investigations/enquiries and the circumstances in which the said two SCNs were ....