TMI Blog2013 (6) TMI 917X X X X Extracts X X X X X X X X Extracts X X X X ..... der , 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 a combined public announcement to acquire shares of the Company in terms of regulations 10 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 strategic investors. The promoter group, consisting of the four Appellants, did not participate in this all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Regulations, 1997. The point being emphasized by the Appellants is that the SAST Regulations, 2011 are not applicable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 inordinate delay of more than five years in initiating the proceedings in question against the Appellants. Lastly, it is also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 for the words and figures 'seventy-five per cent (75%)', the words and figures 'ninety per cent (90%)' were substituted. (3) Notwithstanding anything conta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ho, 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 associates; (iv) mutual fund with sponsor or trustee or asset management company; (v) foreign institutional investors with sub-account(s); (vi) merchant bankers with their client(s) as acquirer; (vii) portfolio managers with their client(s) as acquirer; (viii) ven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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 these regulations, to pay to the shareholders, whose shares have been accepted in the public offer made after the delay, the consideration amount alongwith interest at the rate not less than the applicable rate of interest payable by banks on fixed deposits. Penalties for non-compliance. 45. (1) Any person violating any provisions of the regulations shall be liable for action in terms of the regulat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 and the securities market. However, Section 11(2)(h) provides as under :- (2) Without prejudice to the generality of the foregoing provisions, the measures referred to therein may provide for - (h)Regulating substantial acquisition of shares and take-over of companies; 18. At this stage, it is necessary to revert to the provisions of the amended SAST Regulations, 2011 relied upon by the learned WTM in the Impugned Order are as under:- SAST Regulations, 2011:- Section 3 which deals with substantial acquisition or voting righ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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 section 11 or section 11B or section 11D of the Act, including, -- (a) directing divestment of shares acquired in violation of these regulations, whether through public auction or in the open market, or through an offer for sale under the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009, and directing the appointment of a merchant banker for such divestiture; (b) directing transfer of the shares, or any proceeds of a directed sale of shares acquired in violation of these regulations to the Investor Protection and Education Fund established under the Securities and Exchange Board ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny 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 provisions of regulation 10 read with regulation 14(1) of the SAST Regulations, 1997 within 4 working days from March 12, 2007. Thus, it is alleged that KLL, individually, failed to make the said public announcement within 4 working days from March 12, 2007 in violation of regulation 10 of the SAST Regulations, 1997. ii. Since, as a result of the acquisition, the collective shareholding of the promoter group (including the acquirers) increased from 25.83% to 34.21%, the acquirers, collectively, were required to make a public announcement in accordance with the provisions of regulation 11(1) read with regulation 14(1) of SAST Regulations, 1997 within 4 working days from March 12, 2007. Thus, it is alleged that the acquir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uires 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 third ingredient the Appellants have contended that regulation 11(1) provides that any incremental increase in the acquirer's percentage shareholding has to be reckoned as of the end of the financial year ending on March 31. With respect to this contention of the Appellants the Respondent states that prior to the amendment of regulation 11(1) as drafted on the basis of the recommendations of the Justice Bhagwati Committee Report of 1997, creeping acquisition in any period of 12 months was permitted without incurring the obligation of making a public offer. The reference period provided therein being vague, SEBI brought about the amendment of regulations on the basis of the following recommendation of the Justice P.N. Bhagwati Committee Report of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the threshold of 5% thereby triggering the obligation of the Appellants to make the public announcement. 25. After hearing both the learned senior counsel for the parties at length and perusing the documents and various Regulations of the SAST Regulations of 1997 and those of 2011, including certain provisions of the SEBI Act, 1992, mainly two issues arise in the matter. Firstly, whether the four Appellants should be treated as a single unit/group for the purpose of attracting the provisions of regulation 10 of the SAST Regulations, 1997 or should they be individually seen in the matter of acquisition of additional shares and their respective shareholdings for invoking regulation 10 for determining the crossing of the threshold laid down ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting 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 holding of the entire unit which would be the benchmark for identifying the increase in shareholding and not KLL's shareholding as an individual. Once an individual becomes part of a group acting in concert with the intention of acquiring shares, it loses its identity as an individual and takes on the identity of the group as a whole. The individual is no longer regarded as a separate entity independent of the group, but a part of the entire unit as one cohesive structure. This is the logical inference since all the Appellants acting in concert with each other agreed to pull their holdings together in respect of the Company in a common basket and, hence, all the four Appellants in our opinion have acted as a unit/group and not in their individual c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cussion 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 1997, which deals with the concept of creeping acquisition it may be noted that an acquirer together with persons acting in concert with him is entitled to acquire shares in the range of 15% to 55% of the shares/voting rights in a Company. Thus, the consolidation of holdings is permitted by law itself subject to certain limitations, one of them being that there is a clear bar against acquisition of more than 5% in one year beginning on April 1 and ending on March 31. Regulation 11(1) clearly provides that no acquirer shall, with persons acting in concert, acquire either by himself or through persons acting in concert with him, additional shares/voting rights entitling him or them to exercise more than 5% of the voting rights in any financial year w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting 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 object of Regulation 10 is to give the other shareholders an opportunity to exit in case of a change in control. In this case there was no substantial change in the shareholding pattern which would have been the issue had a non-promoter acquired a sizeable chunk of the shares of the target company. This Tribunal, consequently, while holding that Regulation 10 had been violated, albeit in a technical sense, reduced the penalty imposed by the adjudicating officer to Rs. 5 lac. 34. In the instant case too, as a matter of undisputed fact, the promoter group has been in control of the Company since its very establishment in the year 1975. The Appellants seem to have been aware of the implication of the limit of creeping acquisition of 5% and, hence, did ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Appellants, the Impugned Order came to be passed only on December 31, 2012. We note that there is an inordinate delay of about 5 years even in issuing the show cause notice and no explanation has been offered for the same. The Respondent was kept duly informed by the Appellants of all the transactions/acquisitions in the year 2006-2007 along with information to other concerned authorities like various stock exchanges but no action was taken for the alleged violation for years together. Also, the point to be borne in mind while modifying the penalty imposed upon the Appellants is that the securities market is a volatile and pulsating structure wherein events unfold at a staggeringly fast pace. We feel that to compel the Appellants to make a combine ..... X X X X Extracts X X X X X X X X Extracts X X X X
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